As filed with the Securities and Exchange Commission on June 28, 1999.
Registration No. 333-75415
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 2 to
FORM S-4
REGISTRATION STATEMENT
Under
the Securities Act of 1933
----------------
AVALON CABLE LLC
(Exact name of registrant as specified in its charter)
Delaware 4813 13-4029965
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization) ----------------
AVALON CABLE HOLDINGS FINANCE, INC.
Delaware 4813 13-4029969
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
----------------
AVALON CABLE OF MICHIGAN HOLDINGS, INC.
Delaware 4813 04-3423309
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization) ----------------
AVALON CABLE OF MICHIGAN, INC.
Pennsylvania 4813 23-2566891
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
----------------
800 Third Avenue, Suite 3100
New York, New York 10022
Telephone: (212) 421-0600
(Address, including zip code, and telephone number, including area code, of
registrants' principal executive offices)
----------------
Copy to:
Joel C. Cohen Jill Sugar Factor
800 Third Avenue, Suite 3100 Kirkland & Ellis
New York, New York 10022 200 East Randolph Drive
Telephone: (212) 421-0600 Chicago, Illinois 60601
Telephone: (312) 861-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
----------------
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrants
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these notes until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these notes and it is not soliciting an offer to buy these +
+notes in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated June 28, 1999
Preliminary Prospectus
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Exchange Offer for
[LOGO] $196,000,000
11 7/8% Senior Discount Notes due 2008
of Avalon Cable LLC and
Avalon Cable Holdings Finance, Inc.
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Terms of the Exchange Offer
. This exchange offer expires at 5:00 p.m., New York City time, on , 1999,
unless extended.
. The terms of the notes to be issued in this exchange offer are substantially
identical to the outstanding notes, except for transfer restrictions and
registration rights that apply to the outstanding notes.
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We are not making an offer to exchange notes in any jurisdiction where the
offer is not permitted.
Before you tender your notes, you should consider carefully the "Risk
Factors" beginning on page of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these notes or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
We have not authorized any dealer, salesperson or other person to give any
information or represent anything to you other than the information contained
in this prospectus. You must not rely on unauthorized information or
representations.
TABLE OF CONTENTS
Page
----
Summary................................................................... 1
Risk Factors.............................................................. 13
The Company............................................................... 21
Use of Proceeds........................................................... 24
Capitalization............................................................ 25
Unaudited Pro Forma Combined Financial Data............................... 26
Selected Historical Financial and Other Data.............................. 37
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 46
Business.................................................................. 64
Regulation................................................................ 79
Management................................................................ 88
Certain Relationships and Related Transactions............................ 92
Security Ownership of Certain Beneficial Owners and Management............ 95
Description of Certain Debt............................................... 98
The Exchange Offer........................................................ 102
Description of the Notes.................................................. 112
Certain United States Federal Income Tax Consequences..................... 145
Plan of Distribution...................................................... 149
Legal Matters............................................................. 150
Available Information..................................................... 150
Experts................................................................... 150
Index to Financial Statements............................................. F-1
ii
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary may not contain all of the information you should consider before
tendering your notes for the notes offered hereby. We urge you to read this
entire prospectus carefully, including the "Risk Factors" described herein.
Avalon Cable
Our company was formed in 1997 to acquire, operate and develop cable
television systems in mid-sized markets we believe to be attractive. As of
March 31, 1999, on a pro forma basis giving effect to all our completed and
pending acquisitions:
. we were one of the leading cable system operators in the State of
Michigan;
. we were one of the 30 largest multiple system cable operators in the
United States;
. our systems would have passed approximately 400,100 homes; and
. our systems would have served approximately 242,900 basic subscribers, of
which approximately 217,100 are located in Michigan and approximately
25,900 are located in western New England and upstate New York.
Our Operating Clusters
We currently operate in two regional areas: the Michigan cluster and the New
England cluster.
Our Michigan Cluster. On November 6, 1998, we established our Michigan
cluster by completing our acquisition of Cable Michigan, Inc. In March 1999, we
acquired the approximately 38% of the shares of Mercom, Inc. that Cable
Michigan did not own at the time we acquired Cable Michigan. In addition, we
have acquired the following:
. cable television systems from Nova Cablevision, Inc., Nova Cablevision
VI, L.P. and Nova Cablevision VII, L.P.;
. cable television systems from Cross Country Cable TV, Inc.,
. assets of Novagate Communications Corp., an Internet service provider,
. cable system assets of R/COM, L.C., and
. assets of Traverse Internet, Inc., an Internet service provider.
We have also entered into an agreement to acquire certain cable system
assets of Galaxy American Communications.
Our New England Cluster. In mid-1998, we established our New England cluster
by acquiring cable system assets from AMRAC Clear View, A Limited Partnership,
and from Pegasus Cable Television, Inc. and Pegasus Cable Television of
Connecticut, Inc. This cluster provides services in western New England and
upstate New York.
Since we established our New England cluster, we have entered into
agreements to acquire cable system assets and related liabilities of Taconic
Technology Corporation and Hometown TV, Inc.
The principal executive offices of each of the issuers are located at 800
Third Avenue, Suite 3100, New York, NY 10022 and the telephone number of each
of the issuers is (212) 421-0600.
1
Business Strategy
Our objective is to increase operating cash flow and maximize the value of
our cable television systems through our expertise in acquiring and managing
cable systems. We seek to be the leading supplier of multi-channel television
services in our chosen markets. Our business strategy focuses on:
. targeting mid-sized suburban and exurban markets, which we believe offer
an attractive customer base and reduced competition from other cable
television providers;
. building regional clusters to achieve operating efficiencies while having
geographic diversity for our company as a whole;
. growing through strategic and opportunistic acquisitions at attractive
prices;
. upgrading our systems and prudently deploying capital to maintain, expand
and upgrade our cable plant to improve our cable television services and
facilitate our ability to explore new services such as Internet access;
. focusing on our customers by improving the level of customer service,
improving technical reliability and expanding program offerings; and
. pursuing aggressive marketing to increase our customer base and the
services purchased by our customers.
Recent Developments
On May 13, 1999, we signed an agreement with Charter Communications, Inc.
under which Charter Communications agreed to purchase all of the equity
interests in our company and assume or repay our outstanding debt. The
acquisition by Charter Communications requires many regulatory approvals. We
expect to consummate this transaction in the fourth quarter of 1999, subject to
obtaining the required regulatory approvals. There can be no assurance,
however, whether or when this acquisition will occur. The acquisition, if
completed, will give rise to an obligation to make an offer to purchase the
notes to be issued in this exchange offer at 101% of their accreted value. For
more information on this offer, see "Description of the Notes--Repurchase at
the Option of Holders--Change of Control."
Charter Communications is among the leading broadband communications
companies in the United States. Charter Communications currently provides cable
television, high speed Internet access, advanced digital video programming and
paging services to customers.
The Operating Subsidiaries
At the same time that we issued the currently outstanding senior discount
notes, $150,000,000 principal amount of senior subordinated notes were issued
in a private placement by our operating subsidiaries. We are holding companies
with no separate operations. These operating subsidiaries carry on our
business. As a result, the provisions of the indenture governing the senior
subordinated notes are important to us as well. The senior subordinated notes
are the subject of a separate exchange offer being conducted substantially
concurrently with this exchange offer.
2
The Exchange Offer
The Exchange Offer........ The issuers are offering to exchange $196,000,000
aggregate principal amount at maturity of 11 7/8%
senior discount notes which have been registered
under the Securities Act of 1933 for $196,000,000
aggregate principal amount at maturity of their
outstanding 11 7/8% senior discount notes due 2008
which were issued in December 1998.
The new notes are substantially identical to the
old notes, except that some of the transfer
restrictions and registration rights relating to
the old notes do not apply to the new notes.
Expiration Date........... The exchange offer will expire at 5:00 p.m., New
York City time, on , 1999, unless we
extend it.
Withdrawal Rights......... You may withdraw your tender of your notes at any
time before 5:00 p.m., New York City time, on the
expiration date of the exchange offer.
Conditions of the The exchange offer is subject to customary
Exchange Offer............ conditions, which the issuers may waive. Please
read "The Exchange Offer--Conditions" section of
this prospectus for more information regarding
conditions of the exchange offer.
Procedures for Tendering
Old Notes.................
If you are a holder of old notes and wish to accept
the exchange offer, you must either:
(a) complete, sign and date the accompanying letter
of transmittal, or a facsimile thereof and mail
or otherwise deliver the documentation,
together with your old notes, to the exchange
agent at the address shown under "The Exchange
Offer--Exchange Agent;" or
(b) arrange for The Depository Trust Company to
transmit the required information to the
exchange agent for this exchange offer in
connection with a book-entry transfer.
Certain United States
Federal Income Tax
Consequences.............. Your exchange of old notes for new notes in the
exchange offer will not result in any gain or loss
to you for federal income tax purposes. See the
"Certain United States Federal Income Tax
Consequences" section of this prospectus.
Consequences of Failure
to Exchange...............
Old notes that are not exchanged will continue to
be subject to the existing transfer restrictions
after the exchange offer. The issuers will have no
further obligation to register the old notes. If
you do not participate in the exchange offer, the
liquidity of your notes could be adversely
affected.
Procedures for Beneficial If you are the beneficial owner of old notes
Owners.................... registered in the name of a broker, dealer or other
nominee and you wish to tender your notes, you
should contact the person in whose name your notes
are registered and promptly instruct the person to
tender on your behalf.
3
Guaranty Delivery If you wish to tender your old notes and time will
Procedures................ not permit your required documents to reach the
exchange agent by the expiration date, or the
procedure for book-entry transfer cannot be
completed on time, you may tender your notes
according to the guaranteed delivery procedures.
See "The Exchange Offer--Guaranteed Delivery
Procedures."
Acceptance of Old Notes;
Delivery of New Notes.....
Subject to certain conditions, the issuers will
accept old notes which are properly tendered in the
exchange offer and not withdrawn, before 5:00 p.m.,
New York City time, on the expiration date of the
exchange offer. The new notes will be delivered as
promptly as practicable following the expiration
date.
Use of Proceeds........... The issuers will receive no proceeds from the
exchange offer.
Exchange Agent............ The Bank of New York is the exchange agent for the
exchange offer.
Summary of the New Notes
Issuers................... Avalon Cable LLC and Avalon Cable Holdings Finance,
Inc.
Yield and Interest........ Before December 1, 2003, there will be no current
payments of cash interest on the new notes. The new
notes will accrete in value at a rate of 11 7/8%
per annum, compounded semi-annually, to an
aggregate principal amount of $196,000,000 on
December 1, 2003, assuming all old notes are
exchanged for new notes. After December 1, 2003,
cash interest on the new notes:
. will accrue at the rate of 11 7/8% per annum on
the principal amount at maturity of the new
notes, and
. will be payable semi-annually in arrears on June
1 and December 1 of each year, commencing June 1,
2004.
Original Issue Discount... The new notes:
. will be treated for U.S. federal income tax
purposes as having been issued at a substantial
discount to their principal amount at maturity,
and
. will bear original issue discount for U.S.
federal income tax purposes.
Original issue discount will accrue from the issue
date of the new notes and will be included as
interest income periodically, including for periods
ending prior to December 1, 2003, in a holder's
gross income for U.S. federal income tax purposes
in advance of receipt of the cash payments to which
the income is attributable. See "Certain United
States Federal Income Tax Considerations."
Mandatory Payment of
Accrued Interest..........
On December 1, 2003, the issuers will be required
to redeem an amount equal to $369.79 per $1,000
principal amount at maturity of each new note and
each old note not exchanged for a new note then
outstanding, which we refer to as the Accreted
Interest Redemption
4
Amount, on a pro rata basis at a redemption price
of 100% of the principal amount at maturity of the
notes so redeemed. Assuming all of the new notes
and all of the old notes not exchanged for new
notes remain outstanding on such date, this amount
would be $72,479,000 in aggregate principal amount
at maturity of the notes. This amount represents:
. the excess of the aggregate accreted principal
amount of all notes outstanding on December 1,
2003 over the aggregate issue price thereof,
. less an amount equal to one year's simple
uncompounded interest on the aggregate issue
price of such notes at a rate per annum equal to
the stated interest rate on the notes.
Maturity Date............. December 1, 2008.
Optional Redemption....... On or after December 1, 2003, the issuers may
redeem the new notes, in whole or in part. Before
December 1, 2001, the issuers may redeem up to 35%
of the aggregate principal amount at maturity of
the notes originally issued:
. only with the proceeds of one or more equity
offerings and/or strategic equity investments;
and
. only if at least 65% of the aggregate principal
amount at maturity of the notes originally issued
remains outstanding after each redemption.
The prices for the above optional redemptions are
set forth in the "Description of the Notes--
Optional Redemption" section of this prospectus.
Change of Control......... If we sell certain assets or if we experience
specific kinds of changes of control, holders of
the new notes will have the opportunity to sell
their new notes to the issuers at 101% of (a) the
accreted value of the new notes in the case of
repurchases of new notes prior to December 1, 2003
or (b) the aggregate principal amount thereof in
the case of repurchases of new notes on or after
December 1, 2003, plus accrued and unpaid interest
and liquidated damages, if any, to the date of
purchase.
Ranking................... The new notes:
. will be general unsecured obligations of the
issuers,
. will be subordinate in right of payment to all
existing and future senior indebtedness of the
issuers,
. will be effectively subordinated to all
indebtedness and other liabilities and
commitments of the issuers' subsidiaries,
including their credit facility and their senior
subordinated notes,
. will rank on the same level, or "pari passu,"
with any existing and future senior indebtedness
of the issuers, and
. will rank senior to all subordinated obligations
of the issuers.
5
The indenture governing the new notes permits the
issuers and their subsidiaries, Avalon Cable of
Michigan LLC and Avalon Cable of New England LLC,
which are subsidiaries of Avalon Cable LLC, and
Avalon Cable Finance, Inc., which is a subsidiary
of Avalon Cable Holdings Finance, Inc., to incur
additional indebtedness subject to certain
limitations. We refer to these subsidiaries of the
issuers as the operating subsidiaries. As of March
31, 1999, on a pro forma basis:
. the issuers would have had no outstanding
indebtedness other than the existing notes and
the debt of their subsidiaries, and
. the outstanding senior indebtedness of the
issuers' operating subsidiaries on a combined
basis would have been $328.5 million.
Certain Covenants........ The indenture governing the new notes limits the
activities of the issuers and their restricted
subsidiaries. The provisions of the new note
indenture limit their ability to:
. incur additional indebtedness,
. pay dividends or make certain other restricted
payments,
. enter into transactions with affiliates,
. sell assets or subsidiary stock,
. create liens,
. restrict dividends or other payments from
restricted subsidiaries,
. merge, consolidate or sell all or substantially
all of their combined assets, and
. with respect to restricted subsidiaries, issue
capital stock.
Guarantors............... Avalon Cable of Michigan, Inc., an equity holder in
Avalon Cable LLC, and its sole stockholder, Avalon
Cable of Michigan Holdings, Inc. will guarantee the
obligations of Avalon Cable LLC under the new
notes. However, neither Avalon Cable of Michigan
Holdings, Inc. nor Avalon Cable of Michigan, Inc.
has any significant assets other than its equity
interest in Avalon Cable LLC and Avalon Cable of
Michigan Inc., respectively. Thus, holders should
not expect the guarantors to have any assets
available to make principal and interest payments
on the new notes. For a description of the
relationship of the guarantors to the issuers, see
"The Company--Structure After the Reorganization."
For more information about the new notes, see the "Description of the Notes"
section of this prospectus.
Summary Unaudited Pro Forma Financial and Operating Data
The following table shows for the periods indicated certain financial and
operating data for Avalon Cable LLC, its predecessors, entities that we have
acquired in completed acquisitions and Taconic Technology Corporation, which is
a pending acquisition. The following summary unaudited pro forma combined
financial and operating data are based on the historical financial statements
of Avalon Cable LLC, Cable Michigan, Inc., AMRAC Clear View, the predecessor to
Avalon Cable LLC, Pegasus Cable Television, Inc., Pegasus Cable Television of
Connecticut, Inc., and Taconic Technology Corporation and the assumptions and
adjustments described in the notes thereto
6
included elsewhere in this prospectus. The data for Avalon Cable LLC and Cable
Michigan include 100% of Mercom for all periods presented. The summary
unaudited pro forma financial and operating data gives effect to our completed
acquisitions and our pending acquisitions, the issuance of the old notes, the
issuance of the senior subordinated notes by the issuers' operating
subsidiaries, the incurrence of debt under our secured credit facility and the
reorganization transactions described herein, as if they had occurred on
January 1, 1999 for pro forma information for the period ended March 31, 1999
and January 1, 1998 for the pro forma information for the period ended December
31, 1998. In the following table and the related notes, we refer to:
. Avalon Cable of New England LLC as Avalon New England,
. AMRAC Clear View as Amrac,
. Pegasus Cable Television, Inc. and Pegasus Cable Television of
Connecticut, Inc., collectively as Pegasus,
. the assets and related liabilities that we will acquire from Taconic
Technology Corporation as Taconic,
. Avalon Cable of Michigan LLC as Avalon Michigan LLC.
The summary unaudited pro forma financial and operating data do not purport
to represent what the issuers' results of operations actually would have been
if the completed and pending acquisitions had occurred as of the date indicated
or what such results will be for future periods. Among other things, this data
do not give effect to certain non-recurring charges or cost savings expected to
result from the completed and pending acquisitions. This summary and
accompanying notes are provided for informational purposes only and do not
necessarily indicate what our operating results would have been had the
completed and pending acquisitions been consummated on January 1, 1999 or 1998,
nor do they necessarily indicate the issuers' future results of operations or
financial position. The operating results for the three months ended March 31,
1999 are not necessarily indicative of results to be expected for the year
ending December 31, 1999.
Management believes that the summary unaudited pro forma financial and
operating data is a meaningful presentation because the issuers had no
operations as of December 31, 1997 and only had significant operations for a
short period of time as of December 31, 1998, and their ability to satisfy debt
and other obligations is dependent upon cash flow from the completed and
pending acquisitions. The following information is qualified by reference to
and should be read in conjunction with the "Capitalization," "Selected
Historical Financial and Other Data," and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" sections of this prospectus
and the financial statements and notes thereto included elsewhere in this
prospectus.
The summary unaudited pro forma financial and operating data should be read
in conjunction with the financial statements of Avalon Cable LLC, Cable
Michigan, Amrac, Pegasus, and Taconic and the accompanying notes thereto
included elsewhere in this prospectus.
Prior to July 21, 1998, Pegasus was operated as part of Pegasus
Communications Corporation. This table below sets forth selected historical
combined data for Pegasus for periods during which they did not operate as a
separate independent company and, accordingly, certain allocations were made in
preparing such financial data. Therefore, such data may not reflect the results
of operations or the financial condition which would have resulted if Pegasus
had operated as a separate independent company during such periods, and are not
necessarily indicative of the future results of operations or financial
position of Pegasus.
7
As of March 31, 1999, Taconic was being operated as part of Taconic
Technology Corporation. The table below sets forth selected historical data for
Taconic. The historical financial data presented below reflect periods during
which Taconic did not operate as an independent company and, accordingly,
certain allocations were made in preparing such financial data. Therefore, such
data may not reflect the results of operations or the financial condition which
would have resulted if Taconic had operated as a separate independent company
during such periods, and are not necessarily indicative of Taconic's future
results of operations or financial position.
Summary Unaudited Pro Forma Financial and Operating Data
For the Three Months Ended March 31, 1999
Probable Unaudited
Avalon Transaction Pro Forma Pro Forma
Cable LLC(1) Taconic(2) Adjustments(3) Combined
------------ ----------- -------------- ---------
(dollars in thousands)
Statement of operations
data
Revenue................. $ 24,577 $ 523 $ 949 $ 26,049
Costs and expenses...... 13,034 340 728 14,102
Corporate overhead...... 787 6 17 810
Depreciation and
amortization........... 10,839 105 235 11,179
Non-recurring expenses.. -- -- -- --
-------- ------ -------- --------
Operating income (loss). (83) 72 (31) (42)
Interest expense, net... (11,431) -- (606) (12,037)
Other income (expense),
net.................... 1,362 (28) (1,334) --
-------- ------ -------- --------
Net-income (loss)....... $(10,152) $ 44 $ (1,971) $(12,079)
======== ====== ======== ========
Other financial data
Cash flow from
operations............. $ 10,599 $ 19 $ -- $ 10,618
Cash flows from
investing activities... (39,819) (19) (12,200) (52,038)
Cash flows from
financing activities... 33,159 -- -- 33,159
EBITDA before seller
expenses(10)........... $ 10,756 $ 177 $ 204 $ 11,137
Adjusted EBITDA(11)..... 11,270
Adjusted EBITDA
margin(12)............. 43.3%
Ratio of debt to
adjusted EBITDA(13) 9.8x
Capital expenditures.... $ 3,021 $ 19 $ -- $ 4,288
Ratio of earnings to
fixed charges.......... 4.0x 1.0x
Deficiency of earnings
to fixed charges....... 83
Other operating data
(end of period)
Homes passed(14)........ 389,049 7,200 3,900 400,149
Basic subscribers(15)... 236,988 5,000 950 242,938
Basic penetration(16)... 60.9% 69.4% 24.4% 60.7%
Premium units(17)....... 60,840 1,200 237 62,277
Premium penetration(18). 25.7% 24.0% 24.9% 25.6%
Average monthly revenue
per basic
subscriber(19)......... $ 36.08 $34.67 $ 28.52 $ 34.72
(See Notes to Summary Unaudited Pro Forma Financial and Operating Data)
8
Summary Unaudited Pro Forma Financial and Operating Data
For the Year Ended December 31, 1998
Probable
Avalon Transaction Unaudited
Cable Cable ----------- Pro Forma Pro Forma
LLC(5) Michigan(4) Amrac(6) Pegasus(7) Taconic(8) Adjustments(9) Combined
-------- ----------- -------- ---------- ----------- -------------- ---------
(dollars in thousands)
Statement of operations
data
Revenue................. $ 18,187 $ 74,521 $779 $3,277 $2,086 $ 6,061 $104,911
Costs and expenses...... 10,067 38,621 443 1,693 1,378 4,036 56,238
Corporate overhead...... 655 6,087 42 97 22 97 7,000
Depreciation and
amortization........... 8,183 28,098 47 835 426 7,239 44,828
Non-recurring expenses.. -- 5,764 -- -- -- -- 5,764
-------- -------- ---- ------ ------ -------- --------
Operating income (loss). (718) (4,049) 247 652 260 (5,311) (8,919)
Interest expense, net... (8,050) (7,382) -- (938) (17) (29,120) (45,507)
Other income (expense),
net.................... (6,614) 897 -- (22) (97) (1,807) (7,643)
-------- -------- ---- ------ ------ -------- --------
Net income (loss)....... $(15,382) $(10,534) $247 $ (308) $ 146 $(36,238) $(62,069)
======== ======== ==== ====== ====== ======== ========
Other financial data
Cash flow from
operations............. 7,296 15,028 276 1,705 104 (7,454) 16,955
Cash flows from
investing activities... (565,870) (18,697) (61) (117) (81) (32,116) (616,942)
Cash flows from
financing activities... 567,862 (7,457) (561) (971) (23) 30,342 589,192
EBITDA before seller
expenses(10)........... $ 7,465 $ 29,813 $294 $1,487 $ 686 $ 1,928 $ 41,673
Adjusted EBITDA(11)..... 48,719
Adjusted EBITDA
margin(12)............. 46.4%
Ratio of debt to
adjusted EBITDA(13) 9.1x
Capital expenditures.... $ 11,468 $ 18,697 $ 61 $ 114 $ 81 $ 165 $ 30,586
Ratio of earnings of
fixed charges.......... -- -- 44.4x -- 3.4x -- --
Deficiency of earnings
to fixed charges....... 718 12,368 -- 303 8,919
Other operating data
(end of period)
Homes passed(14)........ 28,350 7,200 18,864 403,576
Basic subscribers(15)... 20,604 5,100 10,084 247,325
Basic penetration(16)... 72.7% 70.8% 53.5% 61.3%
Premium units(17)....... 4,912 1,225 2,513 64,200
Premium penetration(18). 23.8% 24.0% 24.9% 26.0%
Average monthly revenue
per basic
subscriber(19)......... $ 34.22 $34.67 $ 28.52 $ 34.57
(See Notes to Summary Unaudited Pro Forma Financial and Operating Data)
9
Notes to Summary Unaudited Pro Forma Financial and Operating Data
For the Three Months Ended March 31, 1999 and the Year Ended December 31, 1998
(1) Avalon Cable LLC's results of operations include its results of operations
for the three months ended March 31, 1999, the results of its wholly-owned
subsidiaries, Holdings Finance, Avalon Michigan LLC and Avalon New England
for the period ended March 31, 1999.
(2) Taconic's results of operations includes the actual historical results of
operations for the period from January 1, 1999 through March 31, 1999.
(3) Pro forma adjustments represent those adjustments necessary to present
operating results as if all pending and completed acquisitions and the
financings occurred on January 1, 1999. These adjustments include in each
case, the following:
(a) Adjustments to reflect the full year impact of the acquisitions of Nova
Cablevision, Cross Country Cable TV, Traverse Internet, Galaxy American
Communications, R/COM, Hometown TV and Novagate Communications.
(b) Increased depreciation and amortization expense due to excess of fair
value over historical cost generated from the completed and pending
acquisitions.
(c) The removal of tax benefits, net, since after the reorganization
transactions and completion of the acquisitions described herein, all
entities will be treated as partnerships for federal income tax
purposes.
(d) Increased interest expense due to the financings for completed
acquisitions during the first three months ended March 31, 1999.
See Notes to the Unaudited Pro Forma Statements of Operations for a further
explanation of these pro forma adjustments.
(4) Cable Michigan's results of operations includes the actual historical
results of operations of Cable Michigan for the period from January 1, 1998
through November 5, 1998.
(5) Avalon Cable LLC results of operations include its results of operations
from its inception (October 21, 1998) through December 31, 1998, the
results of operations of Holdings Finance from its inception (October 21,
1998) through December 31, 1998, the results of Avalon Michigan LLC
operations for the period from acquisition through December 31, 1998 and
the results of operations of Avalon New England from January 1, 1998
through December 31, 1998. On May 29, 1998, Avalon New England acquired
Amrac, the predecessor entity. On June 30, 1998, Avalon New England
acquired Pegasus. Prior to these acquisitions, Avalon New England did not
have any operations.
(6) Amrac's results of operations includes the actual historical results of
operations for the period from January 1, 1998 through May 28, 1998.
(7) Pegasus' combined results of operations includes the actual historical
results of operations for the period from January 1, 1998 through June 30,
1998.
(8) Taconic's results of operations includes the actual historical results of
operations of Taconic for the year ended December 31, 1998.
(9) Pro forma adjustments represent those adjustments necessary to present
operating results as if all pending and completed acquisitions and the
related financing transactions and the reorganization occurred on January
1, 1998. These adjustments include in each case, the following:
(a) Adjustments to reflect the full year impact of the acquisitions of Nova
Cablevision, Cross Country Cable TV, Traverse Internet, Galaxy American
Communications, R/COM, Hometown TV and Novagate Communications.
(b) Increased depreciation and amortization expense due to excess of fair
value over historical cost generated from the completed and pending
acquisitions.
(c) Increased interest expense due to borrowings under our senior credit
facility and the issuance of the old notes.
10
Notes to Summary Unaudited Pro Forma Financial and Operating Data--(Continued)
For the Three Months Ended March 31, 1999 and the Year Ended December 31, 1998
(d) The removal of tax benefits, net, since after the reorganization
transactions and the completion of the acquisitions described herein,
all entities will be treated as partnerships for federal income tax
purposes.
(e) Elimination of minority interest in loss of Mercom due to the
acquisition of the remaining 38% of the outstanding stock of Mercom.
Results for Mercom are included in the results of Avalon Michigan Inc.
and Cable Michigan.
See Notes to Unaudited Pro Forma Statements of Operations for a further
explanation of these pro forma adjustments.
(10) Represents net income before depreciation and amortization, interest
income (expense), net, income taxes, other expenses, net, gain or loss
from the sale of assets, nonrecurring items and non-cash expenses. For the
period from January 1, 1998 through November 5, 1998, EBITDA before seller
expenses excludes $5,764 of non-recurring seller transaction costs
incurred by Cable Michigan in connection with the merger with and into
Avalon Cable of Michigan Inc. Management believes that EBITDA before
seller expenses is a meaningful measure of performance and it is commonly
used in the cable television industry to analyze and compare cable
television companies on the basis of operating performance, leverage and
liquidity. However, EBITDA before seller expenses is not intended to be a
performance measure that should be regarded as an alternative to, or more
meaningful than, either operating income or net income as an indicator of
operating performance or cash flows as a measure of liquidity, as
determined in accordance with generally accepted accounting principles.
EBITDA before seller expenses, as computed by management, is not
necessarily comparable to similarly titled amounts of other companies. See
financial statements, including statements of cash flows, included
elsewhere herein.
(11) Represents EBITDA, adjusted for the elimination of non-recurring expenses,
non-recurring costs and net cost-reductions arising from acquisitions as
set forth in the definition of "Leverage Ratio" in the indenture governing
the old notes and the new notes. This definition is used in determining
compliance with the debt incurrence covenant in the indenture. See
"Description of the Notes--Certain Definitions." However, Adjusted EBITDA
is not intended to be a performance measure that should be regarded as an
alternative to, or more meaningful than, either operating income or net
income as an indicator of operating performance or cash flows as a measure
of liquidity, as determined in accordance with GAAP. Adjusted EBITDA, as
computed by management, is not necessarily comparable to similarly titled
amounts of other companies. See the financial statements, including
statements of cash flows, included elsewhere herein.
11
Notes to Summary Unaudited Pro Forma Financial and Operating Data--(Continued)
For the Three Months Ended March 31, 1999 and the Year Ended December 31, 1998
The following table reflects the calculation of Adjusted EBITDA (dollars
in thousands):
Three Months
Year Ended Ended
December 31, March 31,
1998 1999
------------ ------------
EBITDA before seller expenses........................ $41,673 $11,137
------- -------
Adjustments:
Cable Michigan management fee...................... 3,156 --
Cable Michigan corporate overhead expenses......... 1,171 --
Amrac and Pegasus management fees and corporate
overhead expenses................................. 140 --
Completed acquisitions corporate overhead expenses. 508 --
Taconic corporate overhead expenses................ 641 73
Pending acquisitions corporate overhead expenses... 170 140
Public company expenses of Cable Michigan and
Mercom............................................ 393 --
Non-recurring expenses(a).......................... 1,908 (80)
Avalon corporate overhead expenses................. (1,041) --
------- -------
Total adjustments................................ 7,046 133
------- -------
Adjusted EBITDA ................................... $48,719 $11,270
======= =======
- --------
(a) For the year ended December 31, 1998, these amounts reflect the
elimination of non-recurring expenses such as (a) litigation expenses,
(b) expenses associated with a May 1998 storm in Grand Rapids (c)
expenses related to the relocation of the customer service call center
to Michigan and (d) one-time costs associated with special promotions.
For the quarter ended March 31, 1999, these amounts reflect a non-
recurring insurance adjustment associated with the May 1998 storm in
Grand Rapids.
(12) Represents Adjusted EBITDA as a percentage of revenues.
(13) Represents total pro forma debt outstanding as of March 31, 1999 and
December 31, 1998 divided by an amount equal to Adjusted EBITDA for the
three months ended March 31, 1999 and December 31, 1998, respectively,
(see note 15) multiplied by four, as specified in the indenture for the
old notes and new notes in determining compliance with the debt incurrence
covenant. See "Description of the Notes--Certain Definitions--Leverage
Ratio."
(14) The number of dwelling units in a particular community that management
estimates can be connected to Avalon Cable LLC's cable system.
(15) A home with one or more televisions connected to a cable system is counted
as one basic subscriber. Bulk accounts are included on an equivalent basic
unit basis by dividing the total monthly bill for the account by the basic
monthly charge for a single outlet in the area.
(16) Calculated as basic subscribers as a percentage of homes passed.
(17) Includes only single channel services offered for a monthly fee per
channel and does not include tiers of channels as a package for a single
monthly fee. A subscriber may purchase more than one premium service, each
of which is counted as a separate premium service unit.
(18) Calculated as premium units as a percentage of basic subscribers.
(19) Represents revenues during the respective period divided by the number of
months in the period divided by the average number of basic subscribers
(beginning of period plus end of period divided by two) for such period.
12
RISK FACTORS
You should carefully consider each of the following factors and all of the
other information in this prospectus before tendering your old notes for new
notes.
If you do not participate in the exchange offer your ability to sell your notes
will be more limited.
If you do not exchange your old notes in the exchange offer, you will
continue to be subject to restrictions on transfer on your old notes. We did
not register the old notes under the federal or any state securities laws, and
we do not intend to register them following the exchange offer. As a result,
the old notes may only be transferred in limited circumstances under the
securities laws. In addition, to the extent initial notes are tendered and
accepted in the exchange offer, the trading market, if any, for the old notes
would be adversely affected. As a result, after the exchange offer, you may
have difficulty selling your old notes.
If you do not follow the exchange offer procedures carefully you will not
receive the new notes.
If you do not follow the procedures described herein, you will not receive
new notes. The new notes will be issued to you in exchange for your old notes
only after timely receipt by the exchange agent of:
. your old notes and
either:
. a properly completed and executed letter of transmittal and all other
required documentation or
. a book-entry delivery by transmittal of an agent's message through
The Depository Trust Company.
If you want to tender your old notes in exchange for new notes, you should
allow sufficient time to ensure timely delivery. No one is under any duty to
give you notification of defects or irregularities with respect to tenders of
old notes for exchange. For additional information, please refer to "The
Exchange Offer" and "Plan of Distribution" sections of this prospectus.
Our substantial indebtedness could make us unable to service our indebtedness
and meet our other requirements and could adversely affect our operations and
financial health.
The issuers have a substantial amount of debt outstanding. This high level
of debt and the related need to devote a significant portion of our cash flow
to meeting debt service and other fixed charges could adversely affect our
operations and financial condition. As of March 31, 1999, on a pro forma basis,
the issuers would have had on a combined basis outstanding long-term
indebtedness of approximately $442.7 million and shareholders' equity of
approximately $141.1 million. In addition, on a pro forma basis, combined
interest expense for the issuers would have been $12.0 million for the quarter
ended March 31, 1999 and $45.5 million for the year ended December 31, 1998. On
a pro forma basis, the combined earnings of the issuers would have been
insufficient to cover their fixed charges by approximately $0.0 million for the
quarter ended March 31, 1999 and $8.9 million for the year ended December 31,
1998. In these periods, however, earnings are reduced by substantial non-cash
charges, principally consisting of depreciation and amortization of $11.2
million and $44.8 million and accreted interest of $3.3 million and $15.0
million for the quarter ended March 31, 1999 and for the year ended December
31, 1998, respectively. Subject to the restrictions in the indenture governing
the old notes and the new notes and other applicable agreements, the issuers
and their subsidiaries may incur additional indebtedness, from time to time,
which could result in greater interest expense and fixed charges.
The amount of debt and debt service obligations of the issuers could have
important consequences to you, including the following:
. the issuers may have limited ability to obtain additional financing for
working capital, capital expenditures or acquisitions in the future;
13
. the issuers and their operating subsidiaries will be dedicating a
substantial portion of their cash flow from operations to the payment of
the principal of and interest on their debt, thereby reducing funds
available for future operations and our plans to expand and upgrade our
cable plant;
. all borrowings by the issuers' operating subsidiaries under their senior
credit facility and certain other borrowings are subject to variable
rates of interest, which expose the issuers to the risk of increased
interest rates; and
. the issuers may be more vulnerable to economic downturns and be limited
in their ability to withstand competitive pressures.
For additional information, please refer to the "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" section of this prospectus.
Covenants in our debt agreements restrict our business in many ways.
The indenture governing the old notes and the new notes, and the senior
secured credit facility and the indenture governing the senior subordinated
notes issued by the issuers' operating subsidiaries contain numerous
restrictive covenants. These covenants place significant restrictions on, among
other things, the ability of the issuers and the operating subsidiaries to:
. incur additional indebtedness,
. create liens and other encumbrances,
. pay dividends and make certain other payments, investments, loans and
guarantees,
. enter into transactions with affiliates and
. sell or otherwise dispose of assets and merge or consolidate with another
entity.
The credit facility also contains a number of financial covenants that
require the issuers' operating subsidiaries to meet specified financial ratios
and tests. Events beyond the control of the issuers' operating subsidiaries may
affect their ability to meet these ratios and tests. We cannot assure you that
the issuers' operating subsidiaries will meet these ratios or these tests. In
addition, the issuers and their subsidiaries may incur other debt in the future
that may contain more restrictive covenants than those currently applicable.
If our debt obligations are accelerated as a result of a failure to comply with
our debt agreements, we may not be able to repay the new notes.
A failure to comply with the obligations in our debt agreements, including
those of our operating subsidiaries, could result in an event of default under
such agreements. An event of default could permit acceleration of the related
debt and could also permit the acceleration of debt under other instruments
that may contain cross-acceleration or cross-default provisions. In this event,
lenders under these instruments could declare all amounts outstanding to be
immediately due and payable. In addition, in the case of the credit facility
and any other secured debt, the lenders thereunder could foreclose upon the
secured assets. We cannot assure you that the assets of the issuers and their
operating subsidiaries would be sufficient to repay the debt of the issuers and
their operating subsidiaries, including the new notes and the senior
subordinated notes, if the lenders under the credit facility accelerated their
debt.
The new notes are effectively subordinated to all debt and other liabilities of
our operating subsidiaries.
The issuers are holding companies with no significant assets other than
their direct and indirect investments in their operating subsidiaries.
Therefore, the new notes will be effectively subordinated to all debt and other
liabilities of the issuers' subsidiaries. Claims of creditors of the issuers'
subsidiaries, including general trade creditors, will generally have priority
as to the assets of the issuers' subsidiaries over the claims of the issuers
and the holders of the new notes. As of March 31, 1999, on a pro forma basis,
the issuer's subsidiaries would have had $328.5 million of debt outstanding,
including debt under the senior subordinated notes and the credit facility, and
$21.0 million of trade payables and other liabilities outstanding.
14
Our subsidiaries may be prohibited from paying dividends or making other
payments to us, which payments are our sole source of operating funds to pay
amounts due under the new notes.
The issuers will rely on dividends and other advances and transfers of funds
from their subsidiaries to meet their debt service obligations under the new
notes. The ability of the issuers' subsidiaries to make payments to the issuers
will be subject to applicable state laws restricting the payment of dividends
and to restrictions in the agreements governing indebtedness of the issuers'
subsidiaries. Subject to certain conditions, our current credit facility and
the indenture governing the senior subordinated notes permit the issuers'
subsidiaries to make distributions to the issuers in amounts sufficient for the
issuers to pay interest, including the Accreted Interest Redemption Amount,
when due on the new notes. We cannot assure you that such conditions will be
satisfied at the time the Accreted Interest Redemption Amount or other interest
payments under the new notes are payable. See "Description of Certain Debt."
We can only provide you with limited information about the performance of our
company under current management on which to make your investment decision.
Our company was formed in 1997 and has grown principally through
acquisitions. We acquired a substantial portion of our operations in early
November 1998 in the Cable Michigan transaction. Accordingly, you have limited
information about our combined operations and the results that we can achieve
through our management. We cannot assure you that the past operating history of
any or all of the entities that we have acquired will be indicative of results
under our management.
Our operating strategy depends on completing and integrating acquisitions,
which we may not be able to do for a variety of reasons.
In pursuing our cluster strategy, we will continue to seek strategic
acquisitions at prices we believe to be attractive. A substantial part of our
future growth depends on these acquisitions. Our results of operations could be
materially affected if we do not complete or successfully integrate new
businesses into our existing businesses. We cannot assure you that we will find
attractive acquisition candidates at suitable prices, be able to finance those
acquisitions on satisfactory terms, successfully acquire those candidates, or
effectively manage the integration of acquired businesses into our existing
business. In addition, acquisitions of cable systems are frequently subject to
approval from local franchising authorities and other governmental agencies.
Our agreement with Charter Communications also limits our ability to make
acquisitions.
Significant competition in providing entertainment, news and information could
reduce the demand for and profitability of our services.
Our industry is very competitive. The nature and level of the competition
affects, among other things, how much we must spend to maintain and upgrade our
cable systems, how much we must spend on marketing and promotions and the
prices we can charge. We cannot assure you that we will have the resources to
compete effectively. Many of our present and potential competitors have
substantially greater resources than we do. Also, some of our competitors may
use technology that customers may find superior to ours. We face competition
from:
. companies with alternative methods of receiving and distributing single
and/or multiple channels of video programming, such as direct-to-the-home
satellite programming companies and off-air television broadcast
programming companies;
. other sources of news, information and entertainment, such as newspapers,
movie theaters, live sporting events, interactive online computer
services and home video products, including videotape cassette recorders;
. potentially, other operators of cable television systems in our
communities, including systems operated by local governmental
authorities; and
. other distribution systems capable of delivering programing to homes and
businesses including direct broadcast satellite systems, private
satellite master antenna television systems and wireless terrestrial
program distribution services such as multipoint, multichannel
distribution service.
15
In recent years, the number of subscribers to direct broadcast satellite
services has grown significantly on a national basis. Additionally, Congress
and the FCC have recently proposed regulations that could make it easier for
direct broadcast satellite providers to legally deliver certain distant and
local broadcast signals. Recent changes in federal law and recent
administrative and judicial decisions have also removed certain restrictions
that have limited entry into the cable television business by potential
competitors such as telephone companies, registered utility holding companies
and their subsidiaries. Such developments will enable local telephone companies
to provide a wide variety of video services in the telephone company's service
area which will be directly competitive with services provided by cable
television systems. We cannot predict the extent to which competition will
materialize in our franchise areas from other cable television operators, other
video programming distribution systems and other broadband telecommunications
services to the home. We also cannot predict whether we will face new
competitors or their impact on us. For additional information, please refer to
"Business--Competition" and "Regulation" sections of this prospectus.
We will be unable to continue to provide services in areas where our franchises
are not renewed or are terminated, which will adversely affect our business and
financial results.
We operate under limited term franchises granted by state and local
authorities. We cannot assure you that we will be able to retain or renew
franchises or that any renewals will be on terms as favorable to us as the
existing terms. A franchise is generally granted for a fixed term ranging from
five to 15 years but is often terminable if the franchisee fails to comply with
any material provisions of the franchise agreement. Our franchises typically
impose conditions relating to the use and operation of the cable television
system, including requirements relating to payment of fees, system bandwidth
capacity and customer service requirements. The non-renewal or termination of
franchises relating to a significant portion of our subscribers could have a
material adverse effect on our results of operations as we would no longer be
able to offer services to affected customers. In addition, a change in the
conditions of a franchise could make it more expensive for us to operate the
related cable system, which could adversely affect our business. For additional
information, please refer to "Business--Franchises" section of this prospectus.
Extensive government regulation of the cable industry can increase our expenses
and slow our growth.
The extensive regulation of our industry by federal, state and local
governments results in increased costs, limits on our ability to offer new
services and change our prices and restricts our ability to make acquisitions.
As a result, our financial condition could be negatively affected and our
growth could be limited. The Cable Television Consumer Protection and
Competition Act of 1992 and the implementing rules of the Federal
Communications Commission generally have increased the administrative and
operational expenses of cable television systems and have resulted in
additional regulatory oversight by the Federal Communications Commission and
local and/or state franchise authorities. A number of states, including New
York, Connecticut, and Massachusetts, subject cable systems to the jurisdiction
of centralized state governmental agencies in addition to more local
regulation. Regulations cover, among other things:
. rates for certain services,
. mandatory carriage and retransmission consent requirements that require a
cable system under certain circumstances to carry a local broadcast
station or to obtain consent to carry a local or distant broadcast
station,
. rules for certain franchise renewals and all transfers, and
. other requirements covering a variety of operational areas, such as equal
employment opportunity, technical standards and customer service
requirements.
Changes in regulations can adversely affect our financial results and help our
competitors.
Our results of operations may be adversely impacted by changes in federal,
state and local regulations. For example, pending federal legislation would
make it easier for direct broadcast satellite services to provide local
programming in local markets. If passed, the legislation would make direct
broadcast satellite services more competitive with cable television, which is
not currently similarly limited with respect to local programming.
16
We cannot predict whether this legislation, or any other pending or future
legislation, will ultimately become law, if it does what its final provisions
will be and, consequently, what impact it would have on us.
We will not be able to remain competitive if we cannot keep up with
technological change.
The cable television industry is subject to rapid and significant changes in
technology. We plan to upgrade the technical quality of our cable plant to
expand our services, increase the number of channels that we offer to customers
and, if economically viable, provide new services. We cannot assure you,
however, that existing, proposed or yet undeveloped technologies will not
become dominant in the future or otherwise render cable television services
less profitable or less viable.
Our financial performance will be adversely affected if we cannot continue to
obtain programming on reasonable terms.
Our cable programming services are dependent upon our ability to obtain
attractive programming at reasonable rates. Although we believe that our
relations with our programming suppliers are generally good, the results of our
operations could suffer a material adverse effect if we lost key programming
contracts because the quality and amount of programming we offer affect the
prices we can charge and the attractiveness of our services to subscribers. We
also anticipate that the cost of obtaining programming will rise in the future.
If we were unable to pass on these increases to our customers, these increases
could have a material adverse effect on our results of operations. For
additional information, please refer to the "Business--Programming" section of
this prospectus.
Your investment may be adversely affected due to conflicts of interest between
noteholders and our controlling equityholder.
ABRY Broadcast Partners III, L.P. controls our total voting power and can
therefore direct our policies. In addition, it controls the selection of a
majority of the managers of Avalon Cable Holdings LLC and, indirectly, the
managers and the directors of the issuers. Certain changes in ABRY Broadcast
Partners III's beneficial ownership interest in the issuers would constitute a
change of control under the indenture governing the new notes and under other
agreements, including our secured credit facility, and could result in an event
of default or otherwise give rise to an obligation to make an immediate payment
under these agreements.
ABRY Broadcast Partners III and its affiliates are in the business of making
controlling investments in broadcast and other media businesses and in
businesses which support or enhance broadcast or media properties. They and
members of our management may from time to time own or control interests in
television, cable and related businesses other than through our company,
including interests in our competitors. They may make acquisitions of
television, cable and other broadcasting and related businesses that would be
complementary to our business but are not made available to us.
ABRY Broadcast Partners III, its affiliates and members of our management
may from time to time maintain interests which are in conflict with the
interests of the owners of the new notes. Some of these interests may result in
restrictions on our ability to engage in certain activities due to limitations
on common ownership, operation or control of certain businesses.
If a change of control occurs, there may not be sufficient assets to purchase
the new notes of all noteholders wishing to have their new notes purchased.
In the event there is a change of control of the issuers, the issuers must
make an offer to buy back the new notes at a price equal to 101% of (a) the
accreted value of the new notes in the case of repurchases of new notes prior
to December 1, 2003 or (b) the aggregate principal amount thereof in the case
of repurchases of new notes on or after December 1, 2003 together with accrued
and unpaid interest and liquidated damages, if any, as of the date of
repurchase. We cannot assure you that the issuers would have sufficient funds
to pay the
17
purchase price for all of the new notes in that event, in part because certain
events involving a change of control may also result in:
. an event of default under our credit facility or other applicable debt
agreements,
. an obligation of the issuers or their operating subsidiaries to make an
immediate payment under the credit facility or other debt agreements, or
. obligations to purchase, or offer to purchase, the related indebtedness,
including our subsidiaries' senior subordinated notes.
We also cannot assure you that the credit facility or other agreements to
which the issuers and their affiliates are then party would permit any of these
purchases. If a change of control occurs at a time when the issuers are
prohibited from purchasing the new notes, the issuers and their affiliates
could seek the consent of their lenders to purchase the new notes or could
attempt to refinance the borrowings that contain this prohibition. If the
issuers do not obtain consent or repay the borrowings, the issuers would remain
prohibited from purchasing the new notes. In this case, the issuers' failure to
purchase tendered new notes would constitute an event of default under the
indenture governing the new notes. For additional information, please refer to
the "Description of the Notes" section of this prospectus.
Our performance could be adversely affected if we lose our key personnel.
David Unger, our Chairman, and Joel Cohen, our President and Chief Executive
Officer, while having extensive experience in the industry, do not have
extensive experience with our company or any of our operations, including Cable
Michigan. Therefore, we cannot assure you of our performance under their
management. Our business is substantially dependent upon the performance of
certain key individuals, including Mr. Unger and Mr. Cohen. Although we intend
to maintain a strong management team, the loss of the services of Mr. Unger or
Mr. Cohen could have a material adverse effect on us. Under the terms of his
employment agreement, Mr. Unger is permitted to engage in other business
activities in addition to his duties to our company. For additional
information, please refer to the "Management" section of this prospectus.
Our financial position may be adversely affected if we are responsible for
certain liabilities related to the separation of Cable Michigan from
Commonwealth Telephone Enterprises, Inc.
Cable Michigan, Inc., which we acquired in November 1998, became a separate,
public company on September 30, 1997. Prior to that time, its operations were
part of Commonwealth Telephone Enterprises, Inc. Under the agreements governing
the separation of Cable Michigan from Commonwealth Telephone Enterprises, we
could be responsible for liabilities resulting from the joint operations of
Cable Michigan, Commonwealth Telephone Enterprises and RCN Corporation, which
was separated from Commonwealth Telephone Enterprises at the same time as Cable
Michigan, including liabilities related to taxes and employee benefits. If we
were so liable, it could have a material adverse effect on our financial
position.
Failure of our year 2000 efforts could adversely affect our results of
operations.
We are in the process of reviewing our financial, administrative and
operational systems and analyzing the extent to which we face a year 2000
problem. We also are in the process of reviewing systems provided to us by
third parties, including billing systems. Our most reasonably likely worst case
Year 2000 scenario involves the complete failure of our third party billing and
customer support system. Although we have not yet made a final determination,
we believe that any year 2000 problem, if it arises in the future, should not
be material to our liquidity, financial position or results of operations.
However, we cannot assure you as to the extent of any costs we may incur or if
we will lose any subscribers due to interruptions in our customer support
system.
Your notes could be voided or subordinated to our other debt if the issuance of
the notes constituted a fraudulent conveyance.
Under federal or state fraudulent transfer laws, if a court found that at
the time the issuers issued the old notes or the new notes, any of the issuers:
(1) incurred the debt with the intent of hindering, delaying or
defrauding current or future creditors; or
18
(2) received less than fair consideration or reasonably equivalent value
for incurring the debt and
. was insolvent or was rendered insolvent by reason of the incurrence
of the debt,
. was engaged, or about to engage, in a business or transaction for
which its remaining assets were unreasonably small or
. intended to incur, believed or should have believed, it would incur
debts beyond its ability to pay as the debts mature,
then, in each case, a court could void all or a portion of the issuer's
obligations to you as a holder of the new notes, or subordinate the issuer's
obligations to the holders to other debt of the issuer, as the case may be.
This result would entitle other creditors to be paid in full before any payment
could be made on your notes, and possibly allow other creditors to invalidate
your notes. In that event, we could not assure you that you would ever recover
any repayment on your notes.
The definition of insolvency for purposes of the foregoing will vary
depending upon the law applied. Generally, however, an issuer would be
considered insolvent if:
. the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets; or
. the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
. it could not pay its debts as they mature.
We believe that, for the above purposes, the old notes were issued and are
being exchanged without the intent to hinder, delay or defraud creditors, and
for proper purposes and in good faith. We also believe that after the issuance
and exchange of the notes and the application of their proceeds, the issuers
will be solvent, will have sufficient capital for carrying on their business
and will be able to pay their debts as they mature. We can give no assurance,
however, what standard a court would apply in reviewing the transactions or
that a court would agree with our conclusion.
We do not maintain insurance on our underground cable plant and thus damage to
our cable plant could have a material adverse effect on our operations and our
financial condition.
As is typical in the cable television industry, we do not maintain insurance
covering our underground cable plant. Therefore, the loss of or damage to a
significant portion of our cable plant or other uninsured properties could
result in significant expenses to restore our cable plant and possible loss of
revenue if service to our customers is interrupted.
Because the new notes will bear original issue discount, holders generally will
have taxable income arising from the new notes in advance of receiving related
cash payments.
The new notes will bear original issue discount for federal income tax
purposes. Consequently, holders of the new notes generally will be required to
include amounts in gross income for federal income tax purposes in advance of
receipt of the cash payments to which the income is attributable. Please see
the "Certain United States Federal Income Tax Considerations" section of this
prospectus for a more detailed discussion of the federal income tax
consequences of the purchase, ownership and disposition of the new notes.
If the issuers cannot deduct some of the interest on the new notes, there could
be a material adverse effect on our financial condition due to the additional
taxes payable.
Although unlikely, it is possible that the new notes will constitute
"applicable high yield discount obligations" for federal income tax purposes.
Should the new notes be applicable high yield discount obligations, the issuers
would not be entitled to claim a deduction for original issue discount that
accrued with
19
respect to the new notes until amounts attributable to such original issue
discount were actually paid. In addition, to the extent that the yield to
maturity of the new notes exceeded the sum of the relevant applicable federal
rate plus six percentage points, any deduction that was attributable to this
portion of the new notes would be permanently disallowed. As a result, the
issuers could be responsible for more taxes, which could have a material
adverse effect on the financial condition of the issuers.
The new notes would be applicable high yield discount obligations if:
. the yield to maturity on the new notes is equal to or greater than the
sum of the relevant applicable federal rate plus five percentage points
and
. the new notes bear significant original issue discount.
A debt instrument bears significant original issue discount for this purpose
if, as of the close of any accrual period ending more than five years after
issuance, the total amount of income includible by a holder with respect to the
debt instrument exceeds the sum of:
. interest paid to the holder in cash or, generally, in property other than
debt instruments or stock of the issuer or a related person and
. an amount equal to the issue price of the debt instrument multiplied by
its yield to maturity.
For purposes of this discussion, the date of issuance refers to the date of
issuance of the old notes.
Although the law is unclear in certain respects and the issue is therefore
not free from doubt, the new notes should not constitute applicable high yield
discount obligations because they should not bear significant original issue
discount because, by the close of the first accrual period ending more than
five years after issuance, the issuers are required by the terms of the new
notes to pay, in cash, an amount at least equal to the excess of all original
issue discount accrued to that date since the date of issuance of the old notes
over an amount equal to one year's simple uncompounded interest on the
aggregate issue price of the old notes at a rate per annum equal to the stated
interest rate on the old notes; thereafter, cash interest is required to be
paid semiannually.
In a bankruptcy proceeding involving the issuers, holders of new notes may not
have claims for the full principal amount of their notes.
If a bankruptcy case is commenced by or against any of the issuers under
federal bankruptcy law after the issuance of the new notes, the claim of a
holder of the new notes with respect to the principal amount of those notes may
be limited to the sum of:
. the initial public offering price of the new notes, and
. that portion of the original issue discount which is not deemed to
constitute "unmatured interest" for purposes of federal bankruptcy law.
Any original issue discount that was not amortized as of any such bankruptcy
filing would constitute "unmatured interest."
Actual results of our operations may differ from those contained in forward-
looking statements.
We make forward-looking statements throughout this prospectus. Whenever you
read a statement that is not simply a statement of historical fact, such as
when we describe what we believe, expect or anticipate will occur, and other
similar statements, you must remember that our expectations may not be correct,
even though we believe they are reasonable. You should read this prospectus
completely and with the understanding that actual future results may be
materially different from what we expect as a result of certain factors,
including the risks faced by us described in the "Risk Factors" section and
elsewhere in this prospectus. We will not update these forward-looking
statements, even though our situation will change in the future.
20
AVALON CABLE
Overview
Set forth below are charts showing our corporate structure at the time we
issued the old notes and after giving effect to a reorganization that we
completed in March 1999. These charts should be read in light of the following
facts:
. Avalon Cable Holdings, LLC controls each of the issuers and each of their
operating subsidiaries.
. Each of the subsidiaries of Avalon Cable Holdings, LLC was organized in
connection with a particular acquisition or the financing thereof.
. In the initial structure, Avalon Cable of Michigan, Inc., Mercom, Inc.
and Avalon Cable of New England LLC are the only companies with
substantial operations. The rest are primarily holding companies, holding
only equity interests in the indicated companies and incurring and/or
guaranteeing debt.
. In the structure after the reorganization, Avalon Cable of Michigan LLC
and Avalon Cable of New England LLC are the only companies with
substantial operations. The rest are primarily holding companies, holding
only equity interests in the indicated companies and incurring and/or
guaranteeing debt.
. The controlling equityholder in Avalon Cable Holdings, LLC is ABRY
Broadcast Partners III, L.P., an investment fund. It is managed by ABRY
Partners, Inc., which manages $825 million of private equity funds and is
one of the largest private equity investment firms in North America
dedicated solely to investments in media businesses. For more
information, see "Security Ownership of Certain Beneficial Owners and
Management."
. Members of management are also equityholders in Avalon Cable Holdings,
LLC.
. Avalon Investors L.L.C. was organized by a private investor in order to
invest in our company. It does not have any voting rights with respect to
the management or operations of Avalon Cable LLC or any of its
subsidiaries.
. The senior subordinated notes of the issuers' operating subsidiaries were
privately placed at the same time as the old notes and are currently the
subject of a separate exchange offer which is registered with the
Securities and Exchange Commission on a separate registration statement.
21
Initial Structure
The following chart sets forth our corporate structure as of the time of the
old note offering. Originally, the issuers under the old notes were Avalon
Cable LLC, Avalon Cable of Michigan Holdings, Inc. and Avalon Cable Holdings
Finance, Inc. At that time, Avalon Cable of Michigan, Inc. operated the cable
systems located in our Michigan cluster. Avalon Cable of New England LLC
operates the cable systems located in our New England cluster. Avalon Cable of
Michigan, Inc. is a wholly owned subsidiary of Avalon Cable of Michigan
Holdings, Inc., Avalon Cable of New England LLC is a wholly owned subsidiary of
Avalon Cable LLC and Avalon Cable Finance, Inc. is a wholly owned subsidiary of
Avalon Cable Holdings Finance, Inc. Each of Avalon Cable Holdings Finance, Inc.
and Avalon Cable Finance, Inc. was organized for purposes of facilitating the
initial financing and other financings and conducts no activities other than in
connection with those financings.
[CHART SHOWS CORPORATE STRUCTURE IMMEDIATELY AFTER GIVING EFFECT
TO THE REORGANIZATION]
- --------
(a) Issuer of old notes.
(b) Issuer under senior subordinated notes and borrower under the credit
facility.
(c) In the Cable Michigan acquisition, Avalon Cable of Michigan, Inc. acquired
the approximately 62% of Mercom, Inc.'s outstanding common stock owned by
Cable Michigan. Subsequently, Avalon Cable of Michigan, Inc. acquired the
remaining shares.
Structure After the Reorganization
In order to facilitate certain aspects of our financing, in March 1999,
after the acquisition of the approximately 38% of Mercom, Inc. that we did not
own through a merger of Mercom, Inc. into Avalon Cable of Michigan, Inc., we
completed a series of transactions we refer to as the "reorganization:"
. Avalon Cable of Michigan, Inc. transferred substantially all of its
assets and liabilities to Avalon Cable LLC, which then transferred these
assets and liabilities to Avalon Cable of Michigan LLC and, as a result,
Avalon Cable of Michigan LLC now operates our Michigan cluster;
. Avalon Cable of Michigan Holdings, Inc. ceased to be an obligor on the
old notes and together with Avalon Cable of Michigan, Inc. became a
guarantor of the obligations of Avalon Cable LLC under the old notes;
22
. Avalon Cable of Michigan LLC became an additional obligor on the senior
subordinated notes of the issuers' operating subsidiaries; and
. Avalon Cable of Michigan, Inc. ceased to be an obligor on the senior
subordinated notes and the credit facility and became a guarantor of all
of the obligations of Avalon Cable of Michigan LLC under the senior
subordinated notes and the credit facility.
Neither Avalon Cable of Michigan Holdings, Inc. nor Avalon Cable of
Michigan, Inc. has any significant assets other than its equity interests in
Avalon Cable of Michigan, Inc. and Avalon Cable LLC, respectively. As a
result, you should not expect Avalon Cable of Michigan Holdings, Inc. and
Avalon Cable of Michigan, Inc., as guarantors, to have any assets available to
make interest and principal payments on the new notes.
The following chart sets forth our corporate structure immediately after
giving effect to the reorganization.
[CHART SHOWS CORPORATE STRUCTURE IMMEDIATELY AFTER GIVING EFFECT
TO THE REORGANIZATION]
- --------
(a) Issuer of old notes.
(b) Issuer of senior subordinated notes and borrower under the credit
facility.
(c) Guarantor of Avalon Cable LLC's obligations under the old notes and new
notes.
(d) Guarantor of Avalon Cable of Michigan LLC's obligations under the senior
subordinated notes and the credit facility.
23
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes. We
used the proceeds of approximately $110.4 million from the offering of the old
notes and approximately $150.0 million from the offering of the senior
subordinated notes, which occurred at the same time, principally to:
. repay approximately $125.0 million under our senior credit facility,
together with accrued interest,
. repay approximately $105.0 million of borrowings under the bridge credit
facility described below, together with accrued interest,
. repay approximately $18.0 million of borrowings under the subordinated
bridge facility described below, together with accrued interest,
. pay approximately $9.4 million of financing costs and certain fees and
expenses, and
. pay approximately $3.0 million of accrued interest and for other working
capital needs.
As a result, the bridge credit facility was terminated and no amounts were
outstanding under the subordinated bridge facility. The credit facility, the
bridge credit facility and the subordinated bridge facility were all entered
into in connection with the closing of the acquisition of Cable Michigan in
November 1998. At that time, borrowings under the bridge credit facility and
the subordinated bridge facility, together with the funds received under the
credit facility and as a result of equity investments, were used to finance the
net consideration paid to acquire Cable Michigan, to repay existing Cable
Michigan indebtedness, to repay indebtedness incurred in connection with prior
acquisitions by Avalon Cable of New England and to pay financing costs and fees
and expenses.
Borrowings under the bridge credit agreement, dated as of November 5, 1998,
among the issuers, the lenders named therein, Lehman Brothers Inc. and Lehman
Commercial Paper Inc., bore interest, at the time of repayment, at
approximately 11.3% per annum. The bridge credit facility would have become due
and payable on November 6, 1999 unless converted into term loans as provided
therein, in which case these principal amounts would have become due and
payable on November 6, 2007.
The subordinated bridge facility bore interest, at the time of repayment, at
approximately 12.3% per annum. Interest under this facility was not currently
payable in cash; rather, interest due and payable could be added to the
principal amount outstanding thereunder. For a description of this facility,
see the definition of "ABRY Subordinated Debt" under "Description of the
Notes."
24
CAPITALIZATION
The following table sets forth:
. the unaudited capitalization as of March 31, 1999 of Avalon Cable LLC,
and
. the pro forma combined capitalization of Avalon Cable LLC as of March 31,
1999, giving effect to the pending acquisitions, the exchange offer and
other matters described herein.
Avalon Cable Holdings Finance, Inc. does not have operations and is
consolidated into Avalon Cable LLC and accordingly, separate financial
information is not presented.
The information in the following table should be read in conjunction with
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus and the financial statements and the
notes thereto which you can find elsewhere in this prospectus.
Unaudited
March 31, 1999
----------------
Unaudited
Pro Forma
March 31,
Avalon Cable LLC 1999
---------------- ---------
(dollars in thousands)
Credit facility................................. $177,375 $177,375
Senior subordinated notes....................... 150,000 150,000
New notes....................................... -- 114,772(1)
Old notes....................................... 114,772 -- (1)
Other........................................... 580 580
-------- --------
Total debt.................................... 442,727 442,727
Issuers' equity................................. 141,100 141,100
-------- --------
Total capitalization.......................... $583,827 $583,827
======== ========
(1) To reflect the exchange of old notes for new notes, assuming all notes
are exchanged.
25
UNAUDITED PRO FORMA FINANCIAL DATA
The Unaudited Pro Forma Financial Data for each issuer or guarantor is based
on the historical financial statements and the assumptions and adjustments
described in the accompanying notes.
Unaudited Pro Forma Financial Data is presented for each of the following:
. Avalon Cable LLC including AMRAC Clear View, the predecessor entity and
completed or pending acquisition of Cable Michigan, Pegasus Cable
Television, Inc., Pegasus Cable Television of Connecticut, Inc. and
Taconic Technology Corporation.
. Avalon Cable of Michigan, Inc., a guarantor of the old notes and new
notes,
. Avalon Cable of Michigan Holdings, Inc., a guarantor of the old notes
and new notes.
The results of Mercom are included in the results of Avalon Cable of
Michigan Holdings, Inc., Avalon Cable of Michigan, Inc. and Cable Michigan for
the reported periods. The following Unaudited Pro Forma Statements of
Operations for each issuer or guarantor gives effect to our completed and
pending acquisitions, the issuance of the old notes, the issuance of the senior
subordinated notes by the issuers' operating subsidiaries, the incurrence of
debt under our senior credit facility and the reorganization transactions
described herein, as if each had occurred on January 1, 1999 for pro forma
information for the period ending March 31, 1999 and January 1, 1998 for the
pro forma information for the period ended December 31, 1998. The Unaudited Pro
Forma Statements of Operations do not purport to represent what the issuers'
results of operations actually would have been if all completed and pending
acquisitions had occurred as of the date indicated or what the results will be
for future periods. Among other things, this data does not give effect to
certain non-recurring charges or cost savings expected to result from our
acquisitions. In the following table and the related notes, we refer to:
. Avalon Cable Holdings Finance, Inc. as Holdings Finance,
. the assets and related liabilities that we will acquire from Taconic
Technology Corporation as Taconic,
. Avalon Cable of Michigan Holdings, Inc. as Michigan Holdings,
. AMRAC Clear View as Amrac,
. Pegasus Cable Television, Inc. and Pegasus Cable Television of
Connecticut, Inc., collectively as Pegasus,
. Avalon Cable of Michigan, Inc. as Avalon Michigan Inc., and
The following Unaudited Pro Forma Balance Sheets as of March 31, 1999 were
prepared as if all of the completed and pending acquisitions and the
reorganization had occurred on this date. The Unaudited Pro Forma Balance
Sheets reflect the preliminary allocations of purchase price to the issuers'
tangible and intangible assets and liabilities. The final allocation of
purchase price, and the resulting depreciation and amortization expense in the
accompanying Unaudited Pro Forma Combined Statements of Operations, may differ
from the preliminary estimates due to the final allocation being based on (a)
actual closing date amounts of assets and liabilities and (b) actual appraised
values of property, plant and equipment and any identifiable intangible assets
for the pending acquisitions. For every $100,000 change in the allocation to
goodwill, amortization expense would increase or decrease accordingly by
approximately $6,700 on a yearly basis.
The Unaudited Pro Forma Financial Data and accompanying notes are provided
for informational purposes only and are not necessarily indicative of the
operating results that would have occurred had all completed and pending
acquisitions been consummated on the date indicated, nor are they necessarily
indicative of the Issuers' future results of operations or financial position.
The operating results for the three months ended March 31, 1999 are not
necessarily indicative of results to be expected for the year ended December
31, 1999.
26
The Unaudited Pro Forma Financial Data should be read in conjunction with
the financial statements of Michigan Holdings, Cable Michigan, Avalon Cable
LLC, Amrac, Pegasus, Taconic, Holdings Finance and Avalon Michigan Inc. and the
accompanying notes thereto included elsewhere in this prospectus.
Prior to July 21, 1998, Pegasus was operated as part of Pegasus
Communications Corporation. The table below sets forth selected historical
combined data for Pegasus. The historical combined financial data presented
below reflect periods during which Pegasus did not operate as an independent
company and, accordingly, certain
allocations were made in preparing the financial data. Therefore, this data may
not reflect the results of operations or the financial condition which would
have resulted if Pegasus had operated as a separate independent company during
these periods, and are not necessarily indicative of Pegasus' future results of
operations or financial position.
As of March 31, 1999, the assets and liabilities that we will acquire from
Taconic were owned by Taconic Technology. The table below sets forth selected
historical data for these assets and liabilities of Taconic. The historical
financial data presented below reflect periods during which these assets and
liabilities were part of Taconic and, accordingly, certain allocations were
made in preparing the financial data. Therefore, the data may not reflect the
results of operations or the financial condition which would have resulted if
these assets and liabilities were owned by a separate independent company
during these periods, and are not necessarily indicative of the future results
of operations or financial position of these assets and liabilities.
Avalon Holdings does not have operations and is consolidated into Avalon
Cable LLC and, accordingly, separate financial information is not presented.
27
AVALON CABLE LLC
UNAUDITED PRO FORMA BALANCE SHEET
March 31, 1999
(dollars in thousands)
Probable
Avalon Transaction Pro Forma Unaudited
Cable LLC Taconic Adjustments Pro Forma
--------- ----------- ----------- ---------
ASSETS
------
Current assets:
Cash............................ $ 13,227 $ -- $ (8,525)(a) $ 27
(3,675)(b)
(1,000)(c)
Accounts receivable--
afffiliates.................... -- -- -- --
Accounts receivable, net........ 6,210 32 -- 6,242
Prepaids and other current
assets......................... 741 626 -- 1,367
-------- ------ --------- --------
Total current assets.......... 20,178 658 (13,200) 7,636
Property, plant and equipment,
net............................ 115,200 1,713 1,612 (a) 118,675
150 (b)
Intangible assets, net.......... 473,323 -- 4,803 (a) 482,651
3,525 (b)
1,000 (c)
Note receivable--affiliate...... -- -- -- --
Other assets.................... 94 28 -- 122
-------- ------ --------- --------
Total assets.................. $608,795 $2,399 $ (2,110) $609,084
======== ====== ========= ========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Current portion of long-term
debt........................... $ 20 $ -- $ -- $ 20
Accounts payable and accrued
expenses....................... 18,197 289 -- 18,486
Accounts payable--affiliates.... 3,388 -- -- 3,388
Advance billings and customer
deposits....................... 3,363 -- -- 3,363
-------- ------ --------- --------
Total current liabilities..... 24,968 289 -- 25,257
Credit facility................. 177,375 -- -- 177,375
Old senior subordinated notes... 150,000 -- -- 150,000
New senior subordinated notes... -- -- 114,772 (d) 114,772
Long-term debt.................. 580 -- -- 580
Notes payable--affiliate........ -- -- -- --
Senior Discount Notes........... 114,772 -- (114,772)(d) --
Deferred credits and other...... -- 359 (359)(a) --
-------- ------ --------- --------
Total liabilities............. 467,695 648 (359) 467,984
Minority interest............... -- -- -- --
Equity, net..................... 141,100 1,751 (1,751)(a) 141,100
-------- ------ --------- --------
Total liabilities and equity,
net.......................... $608,795 $2,399 $ (2,110) $609,084
======== ====== ========= ========
(See Notes to Unaudited Pro Forma Balance Sheet)
28
AVALON CABLE OF MICHIGAN HOLDINGS, INC.
UNAUDITED PRO FORMA BALANCE SHEET
For the three months ended March 31, 1999
(dollars in thousands)
Probable
Michigan Transaction Pro Forma Unaudited
Holdings Taconic Adjustments Pro Forma
-------- ----------- ----------- ---------
ASSETS
------
Current assets:
Cash........................... $ 13,227 $ -- $ (8,525)(a) $ 27
(3,675)(b)
(1,000)(c)
Accounts receivable--affiliates.. -- -- -- --
Accounts receivable, net......... 6,210 32 -- 6,242
Prepaids and other current as-
sets............................ 1,447 626 -- 2,073
-------- ------ --------- --------
Total current assets........... 20,884 658 (13,200) 8,342
Property, plant and equipment,
net............................. 115,200 1,713 1,612 (a) 118,675
150 (b)
Intangible assets, net........... 473,323 -- 4,803 (a) 482,651
3,525 (b)
1,000 (c)
Note receivable--affiliate....... -- -- -- --
Other assets..................... 1,169 28 -- 1,197
-------- ------ --------- --------
Total assets................... $610,576 $2,399 $ (2,110) $610,865
======== ====== ========= ========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Current portion of long-term
debt............................ $ 20 $ -- $ -- $ 20
Accounts payable and accrued ex-
penses.......................... 20,669 289 -- 20,958
Accounts payable--affiliates 3,388 -- -- 3,388
Advance billings and customer de-
posits.......................... 3,363 -- -- 3,363
-------- ------ --------- --------
Total current liabilities...... 27,440 289 -- 27,729
Credit facility.................. 177,375 -- -- 177,375
Old senior subordinated notes.... 150,000 -- -- 150,000
New senior subordinated notes.... -- -- 114,772 (d) 114,772
Long-term debt................... 580 -- -- 580
Notes payable--affiliate......... -- -- -- --
Senior discount notes............ 114,772 -- (114,772)(d) --
Deferred credits and other....... 71,668 359 (359)(a) 71,668
-------- ------ --------- --------
Total liabilities.............. 541,835 648 (359) 542,124
Minority interest................ 46,840 -- -- 46,840
Equity, net...................... 21,901 1,751 (1,751)(a) 21,901
-------- ------ --------- --------
Total liabilities and equity,
net........................... $610,576 $2,399 $ (2,110) $610,865
======== ====== ========= ========
(See Notes to Unaudited Pro Forma Balance Sheet)
29
AVALON CABLE OF MICHIGAN, INC.
UNAUDITED PRO FORMA BALANCE SHEET
For the three months ended March 31, 1999
(dollars in thousands)
Probable
Transaction
Avalon
Michigan Pro Forma Unaudited
Inc. Taconic Adjustments Pro Forma
-------- ----------- ----------- ---------
Assets
Current assets:
Cash............................. $ 13,227 $ -- $ (8,525)(a) $ 27
(3,675)(b)
(1,000)(c)
Accounts receivable--affiliates.. -- -- -- --
Accounts receivable, net......... 6,210 32 -- 6,242
Prepaids and other current
assets.......................... 1,447 626 -- 2,073
-------- ------ --------- --------
Total current assets........... 20,884 658 (13,200) 8,342
Property, plant and equipment,
net............................. 115,200 1,713 1,612 (a) 118,675
150 (b)
Intangible assets, net........... 473,323 -- 4,803 (a) 482,651
3,525 (b)
1,000 (c)
Note receivable--affiliate....... -- -- -- --
Other assets..................... 1,169 28 -- 1,197
-------- ------ --------- --------
Total assets................... $610,576 $2,399 $ (2,110) $610,865
======== ====== ========= ========
Liabilities and Equity
Current liabilities:
Current portion of long-term
debt............................ $ 20 $ -- $ -- $ 20
Accounts payable and accrued
expenses........................ 20,669 289 -- 20,958
Accounts payable--affiliates..... 3,388 -- -- 3,388
Advance billings and customer
deposits........................ 3,363 -- -- 3,363
-------- ------ --------- --------
Total current liabilities...... 27,440 289 -- 27,729
Credit facility.................. 177,375 -- -- 177,375
Old senior subordinated notes.... 150,000 -- -- 150,000
New senior subordinated notes.... -- -- 114,772 (d) 114,772
Long-term debt................... 580 -- -- 580
Notes payable--affiliate......... -- -- -- --
Senior discount notes............ 114,772 (114,772)(d) --
Deferred credits and other....... 71,668 359 (359)(a) 71,668
-------- ------ --------- --------
Total liabilities.............. 541,835 648 (359) 542,124
Minority interest................ 46,840 -- -- 46,840
Equity, net...................... 21,901 1,751 (1,751)(a) 21,901
-------- ------ --------- --------
Total liabilities and equity,
net........................... $610,576 $2,399 $ (2,110) $610,865
======== ====== ========= ========
(See Notes to Unaudited Pro Forma Balance Sheet)
30
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
March 31, 1999
(dollars in thousands)
(a) To reflect the pending acquisition of Taconic Technology:
Cash paid......................................................... $8,525
======
To record purchase price adjustments:
Historical net book value, excluding debt....................... $1,751
Eliminate net (assets)/liabilities not acquired................. 359
------
Historical cost basis of net assets acquired.................. 2,110
Identified value of property and equipment in excess of
historical cost.............................................. 1,612
Goodwill and other intangibles................................ 4,803
------
Fair value of Taconic....................................... $8,525
======
(b) To reflect the acquisitions of Traverse Internet, Hometown TV and Galaxy
American Communications as if these acquisitions occurred on March 31,
1999:
Additional Acquisitions purchase price (1)........................ $3,675
------
To record purchase price adjustments:
Identified value of property, plant and equipment in excess of
historical cost.................................................. 150
Goodwill and other intangibles.................................... 3,525
------
Fair value of the Additional Acquisitions......................... $3,675
======
--------
(1) We acquired assets and liabilities of Traverse Internet as of
April 30, 1999 and Galaxy American Communications. We have signed
a definitive agreement to acquire assets of Hometown TV. These
acquisitions do not represent significant acquisitions by the
issuers and therefore do not require separate financial statement
information.
(c) To reflect deferred finance costs of $1,000 incurred in conjunction with
the exchange offering.
(d) To reflect the exchange of old notes for new notes.
31
AVALON CABLE OF MICHIGAN HOLDINGS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the three months ended March 31, 1999
(dollars in thousands)
Probable
Michigan Transaction Pro Forma Unaudited
Holdings (1) Taconic (3) Adjustments (4) Pro Forma
------------ ----------- --------------- ---------
Revenues.................... $ 24,577 $523 $ 949 (a) $ 26,049
Costs and expenses.......... 13,034 340 728 (a) 14,102
Corporate overhead.......... 787 6 17 (a) 810
Depreciation and
amortization............... 10,839 105 235 (b) 11,179
Non-recurring expenses...... -- -- -- --
-------- ---- ----- --------
Operating (loss) income..... (83) 72 (31) (42)
Interest expense, net....... (11,431) -- (606)(d) (12,037)
Other income (expense), net. 7,333 (28) -- 7,305
-------- ---- ----- --------
Net (loss) income........... $ (4,181) $ 44 $(637) $ (4,774)
======== ==== ===== ========
For the year ended December 31, 1998
(dollars in thousands)
Predecessor
---------------------- Probable
Michigan Cable Transaction Pro Forma Unaudited
Holdings (5) Michigan (6) Amrac (8) Pegasus (9) Taconic (10) Adjustments (11) Pro Forma
------------ ------------ --------- ----------- ------------ ---------------- ---------
Revenues................ $18,187 $ 74,521 $779 $3,277 $2,086 $ 6,061 (a) $104,911
Costs and expenses...... 10,067 38,621 443 1,693 1,378 4,036 (a) 56,238
Corporate overhead...... 655 6,087 42 97 22 97 (a) 7,000
Depreciation and
amortization........... 8,183 28,098 47 835 426 7,239 (b) 44,828
Non-recurring expenses.. -- 5,764 -- -- -- 5,764
------- -------- ---- ------ ------ -------- --------
Operating (loss) income. (718) (4,049) 247 652 260 (5,311) (8,919)
Interest expense, net... (8,050) (7,382) -- (938) (17) (29,120)(c) (45,507)
Other income (expense),
net.................... (150) 897 -- (22) (97) (1,807)(d),(e) (1,179)
------- -------- ---- ------ ------ -------- --------
Net (loss) income....... $(8,918) $(10,534) $247 $ (308) $ 146 $(36,238) $(55,605)
======= ======== ==== ====== ====== ======== ========
(See Notes to Unaudited Pro Forma Statement of Operations)
32
AVALON CABLE LLC
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the three months ended March 31, 1999
(dollars in thousands)
Probable
Transaction
Avalon Pro Forma Unaudited
Cable LLC (2) Taconic (3) Adjustments (4) Pro Forma
------------- ----------- --------------- ---------
Revenues.................. $ 24,577 $523 $ 949 (a) $ 26,049
Costs and expenses........ 13,034 340 728 (a) 14,102
Corporate overhead........ 787 6 17 (a) 810
Depreciation and
amortization............. 10,839 105 235 (b) 11,179
--------- ---- ------- ---------
Operating (loss) income... (83) 72 (31) (42)
Interest expense, net..... (11,431) -- (606)(d) (12,037)
Other income (expense),
net...................... 1,362 (28) (1,334)(c) --
--------- ---- ------- ---------
Net (loss) income......... $ (10,152) $ 44 $(1,971) $ (12,079)
========= ==== ======= =========
For the year ended December 31, 1998
(dollars in thousands)
Predecessor
---------------------
Avalon Probable Unaudited
Cable Cable Transaction Pro Forma Pro
LLC (7) Michigan (6) Amrac (8) Pegasus (9) Taconic (10) Adjustments(11) Forma
--------- ------------ -------- ---------- ------------ --------------- ---------
Revenues................ $ 18,187 $74,521 $779 $3,277 $2,086 $ 6,061 (a) $104,911
Costs and expenses...... 10,067 38,621 443 1,693 1,378 4,036 (a) 56,238
Corporate overhead...... 655 6,087 42 97 22 97 (a) 7,000
Depreciation and
amortization........... 8,183 28,098 47 835 426 7,239 (b) 44,828
Non-recurring expenses.. -- 5,764 -- -- -- -- 5,764
--------- ------- ---- ------ ------ --------- --------
Operating (loss) income. (718) (4,049) 247 652 260 (5,311) (8,919)
Interest expense,net.... (8,050) (7,382) -- (938) (17) (29,120)(c) (45,507)
Other income (expense),
net.................... (6,614) 897 -- (22) (97) (1,807)(d),(e) (7,643)
--------- ------- ---- ------ ------ --------- --------
Net (loss) income....... $ (15,382) (10,534) $247 $ (308) $ 146 $ (36,238) (62,069)
========= ======= ==== ====== ====== ========= ========
(See Notes to Unaudited Pro Forma Statements of Operations)
33
AVALON CABLE OF MICHIGAN, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the three months ended March 31, 1999
(dollars in thousands)
Avalon Probable
Michigan Transaction Pro Forma Unaudited
Inc. (1) Taconic (3) Adjustments (4) Pro Forma
-------- ----------- --------------- ---------
Revenues....................... $ 24,577 $523 $ 949 (a) $ 26,049
Costs and expenses............. 13,034 340 728 (a) 14,102
Corporate overhead............. 787 6 17 (a) 810
Depreciation and amortization.. 10,839 105 235 (b) 11,179
Non-recurring expenses......... -- -- -- --
-------- ---- ------ --------
Operating (loss) income........ (83) 72 (31) (42)
Interest expense, net.......... (11,431) -- (606)(d) (12,037)
Other income (expense), net.... 7,333 (28) -- 7,305
-------- ---- ------ --------
Net (loss) income.............. $ (4,181) $ 44 $ (637) $ (4,774)
======== ==== ====== ========
For the year ended December 31, 1998
(dollars in thousands)
Predecessor
----------------------
Avalon Probable
Michigan Cable Transaction Pro Forma Unaudited
Inc. (5) Michigan (6) Amrac (8) Pegasus (9) Taconic (10) Adjustments (11) Pro Forma
-------- ------------ --------- ----------- ------------ ---------------- ---------
Revenues................ $18,187 $ 74,521 $779 $3,277 $2,086 $ 6,061 (a) $104,911
Costs and expenses...... 10,067 38,621 443 1,693 1,378 4,036 (a) 56,238
Corporate overhead...... 655 6,087 42 97 22 97 (a) 7,000
Depreciation and
amortization........... 8,183 28,098 47 835 426 7,239 (b) 44,828
Non-recurring expenses.. -- 5,764 -- -- -- -- 5,764
------- -------- ---- ------ ------ -------- --------
Operating (loss) income. (718) (4,049) 247 652 260 (5,311) (8,919)
Interest expense, net... (8,050) (7,382) -- (938) (17) (29,120)(c) (45,507)
Other income (expense),
net.................... (150) 897 -- (22) (97) (1,807)(d),(e) (1,179)
------- -------- ---- ------ ------ -------- --------
Net (loss) income....... $(8,918) $(10,534) $247 $ (308) $ 146 $(36,238) $(55,605)
======= ======== ==== ====== ====== ======== ========
(See Notes to Unaudited Pro Forma Statement of Operations)
34
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1999 and the Year Ended December 31, 1998
(1) For the three months ended March 31, 1999, Michigan Holdings' results of
operations include the results of operations of its wholly-owned
subsidiary, Avalon Michigan, Inc. During this quarter, Avalon Michigan
Inc. was the majority-owner of Avalon Cable LLC.
(2) Avalon Cable LLC's results of operations include its results of operations
for the three months ended March 31, 1999, the results of its wholly-owned
subsidiaries, Holdings Finance, Avalon Michigan LLC and Avalon New England
for the period ended March 31, 1999.
(3) Taconic's results of operations includes the actual historical results of
operations for the period from January 1, 1999 through March 31, 1999.
(4) Pro forma adjustments represent those adjustments necessary to present
operating results as if all pending and completed acquisitions and the
financings occurred on January 1, 1999. These adjustments included the
following:
(a) To adjust revenues, costs, and expenses and corporate overhead of $949,
$728 and $17, respectively for the three months ended March 31, 1999,
and to account for the acquisitions of Nova Cablevision, Cross Country
Cable TV, Traverse Internet, Galaxy American Communications, R/COM,
Novagate Communications and Hometown TV as if these acquisitions
occurred on January 1, 1999.
(b) Amount represents increased depreciation and amortization due to excess
of fair value over historical cost generated from the acquisitions of
Taconic and other completed and pending acquisitions calculated as
follows (dollars in thousands):
Three Months
Ended
March 31,
1999
------------
Pro forma depreciation and amortization...................... $11,179
Historical depreciation and amortization..................... 10,944
-------
Pro forma adjustment......................................... $ 235
=======
(c) To remove tax benefits, net, since after reorganization and completion
of the pending and completed mergers, these subsidiaries will be
treated as partnerships for federal income tax purposes (dollars in
thousands):
Taconic......................................................... $ 28
Mercom.......................................................... (1,362)
-------
Total tax (benefit), net.................................... $(1,334)
=======
(d) Amount represents increased interest expense of $606 due to the
financings for completed acquisitions during the first three months
ended March 31, 1999.
(5) Michigan Holdings' results of operations include the results of operations
of its wholly-owned subsidiary, Avalon Michigan, Inc. for the year ended
December 31, 1998. Avalon Michigan Inc.'s results of operations include
the results of operations of its majority-owned subsidiary, Avalon Cable
LLC for the year ended December 31, 1998.
(6) Cable Michigan's results of operations includes the actual historical
results of operations of Cable Michigan for the period from January 1,
1998 through November 5, 1998.
(7) Avalon Cable LLC results of operations include its results of operations
from its inception (October 21, 1998) through December 31, 1998, the
results of operations of Avalon New England, its wholly-owned subsidiary,
for
35
NOTES TO UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS--(Continued)
For the Three Months Ended March 31, 1999 and the Year Ended December 31, 1998
the year ended December 31, 1998, the results of operations of Holdings
Finance, its wholly-owned subsidiary, from its inception (October 21, 1998)
through December 31, 1998, and the results of operations of Avalon Michigan
LLC from the date of acquisition (November 6, 1998) of Cable Michigan
through December 31, 1998.
(8) Amrac's results of operations includes the historical results of
operations for the period from January 1, 1998 through May 28, 1998.
(9) Pegasus' combined results of operations includes the actual historical
results of operations for the period from January 1, 1998 through June 30,
1998.
(10) Taconic's results of operations includes the actual historical results of
operations of Taconic for the year ended December 31, 1998.
(11) Pro forma adjustments represent those adjustments necessary to present
operating results as if all pending and completed acquisitions and the
financings and the reorganization occurred on January 1, 1998. These
adjustments included the following:
(a) To adjust revenues, costs and expenses and corporate overhead of
$6,061, $4,036 and $97, respectively for the year ended December 31,
1998, to account for the acquisitions of Nova Cablevision, Cross
Country Cable TV, Traverse Internet, Galaxy American Communications,
R/COM, Novagate Communications and Hometown TV as if these acquisitions
occurred on January 1, 1998.
(b) Amount represents increased depreciation and amortization due to excess
of fair value over historical cost generated from the acquisitions of
Cable Michigan (including Mercom), Amrac, Pegasus, Taconic and our
other completed and pending acquisitions calculated as follows (dollars
in thousands):
Year Ended
December 31,
1998
------------
Pro forma depreciation and amortization...................... $44,828
Historical depreciation and amortization..................... 37,589
-------
Pro forma adjustment......................................... $ 7,239
=======
(c) Amount represents increased interest expense due to the financings and
the offerings (dollars in thousands):
Year Ended
December 31,
1998
--------------
Historical interest expense, net.......................... $16,409
-------
Senior subordinated notes................................. 14,063
Senior discount notes..................................... 13,500
Credit facility (1)....................................... 16,386
Other debt................................................ 122
Amortization of deferred financing fees................... 1,458
------
Pro forma interest expense................................ 45,529
-------
Pro forma adjustment...................................... $29,120
=======
--------
(1) If the assumed interest rate on the credit facility increased by
0.125%, total pro forma interest expense would increase by
$225,000 for the year ended December 31, 1998.
36
(d) To remove tax benefits, net, since after the reorganization two of the
three issuers will be treated as partnerships for federal income tax
purposes (dollars in thousands):
Year Ended
December 31,
1998
------------
Pegasus...................................................... $ 5
Taconic...................................................... 97
Cable Michigan............................................... (2,382)
-------
Total tax (benefit), net................................. $(2,280)
=======
(e) To eliminate minority interest in loss of Mercom due to the completion
of the Mercom acquisition of $473 for the year ended December 31, 1998.
37
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
Cable Michigan and Avalon Cable of Michigan Holdings, Inc.
Avalon Cable of Michigan, Inc. is a wholly owned subsidiary of Avalon Cable
of Michigan Holdings, Inc. On November 6, 1998, Avalon Cable of Michigan, Inc.
acquired Cable Michigan. Accordingly, Cable Michigan is the predecessor entity
to both Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of Michigan,
Inc.
Prior to September 30, 1997, Cable Michigan was operated as part of
Commonwealth Telephone Enterprises, Inc. The table below sets forth selected
historical consolidated data for Cable Michigan. The historical consolidated
financial data presented below reflect periods during which Cable Michigan did
not operate as an independent company and, accordingly, certain allocations
were made in preparing the financial data. Therefore, this data may not reflect
the results of operations or the financial condition which would have resulted
if Cable Michigan had operated as a separate independent company during these
periods, and are not necessarily indicative of Cable Michigan's future results
of operations or financial position.
The selected historical consolidated statement of operations and balance
sheet data of Cable Michigan shown below for the five years ended December 31,
1997 have been derived from the consolidated financial statements of Cable
Michigan which have been audited by PricewaterhouseCoopers LLP, independent
accountants. The selected historical consolidated statement of operations and
balance sheet data for the period from January 1 to November 5, 1998 have been
derived from the consolidated financial statements of Cable Michigan, which
have been audited by PricewaterhouseCoopers LLP, independent accountants. The
selected historical consolidated statements of operations and balance sheet
data of Avalon Cable of Michigan Holdings, Inc. as of December 31, 1998 and for
the year ended December 31, 1998 have been derived from the consolidated
financial statements of Avalon Cable of Michigan Holdings, Inc., which have
been audited by PricewaterhouseCoopers LLP, independent accountants. The
selected historical consolidated financial and other data for the three months
ended March 31, 1999 have been derived from the unaudited consolidated
financial statements of Avalon Cable of Michigan Holdings, Inc., which in the
opinion of the management of the issuers, reflect all adjustments necessary to
present fairly the financial position and results of operations for the periods
presented. The audited consolidated financial statements of Cable Michigan as
of December 31, 1996, 1997 and November 5, 1998 and for each of the two years
in the period ended December 31, 1997 and for the period from January 1, 1998
through November 5, 1998 are included elsewhere herein. The operating results
for the three months ended March 31, 1999 are not necessarily indicative of
results to be expected for the year ending December 31, 1999.
The consolidated statement of operations data, other financial data and
balance sheet data include the results of operations for Mercom since August
1995. The other operating data includes Mercom operating data for all periods
presented. In July 1997, the Mercom Florida cable system was sold. This system
served approximately 1,900 subscribers at the time of the sale.
38
You should read the information in this table in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus and the financial statements and related
notes thereto which you can find elsewhere in this prospectus.
Period from Three
January 1, Months
Year Ended December 31, 1998 to Year ended Ended
------------------------------------------------ November 5, December 31, March 31,
1993 1994 1995 1996 1997 1998 1998(10) 1999
-------- -------- -------- -------- -------- ----------- ------------ ----------
(dollars in thousands)
Statement of operations
data
Revenues................ $ 48,665 $ 49,141 $ 60,675 $ 76,187 $ 81,299 $ 74,521 $ 18,187 $ 24,577
Costs and expenses...... 25,283 26,981 28,465 37,016 40,978 38,621 10,067 13,034
Corporate overhead...... 3,372 1,562 6,284 7,075 7,204 6,087 655 787
Depreciation and
amortization........... 32,697 28,685 25,154 31,427 32,082 28,098 8,183 10,839
Non-recurring expenses.. -- -- -- -- -- 5,764 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Operating (loss) income. (12,687) (8,087) 772 669 1,035 (4,049) (718) (83)
Interest (expense), net. (15,960) (15,767) (15,918) (15,052) (11,393) (7,382) (8,050) (11,431)
Gain on sale of Florida
cable system........... -- -- -- -- 2,571 -- -- --
Other (expense) income,
net.................... (496) (2,372) 4,645 6,127 3,429 897 (150) 7,333
-------- -------- -------- -------- -------- -------- -------- --------
Net loss................ $(29,143) $(26,226) $(10,501) $ (8,256) $ (4,358) $(10,534) $ (8,918) $ (4,181)
======== ======== ======== ======== ======== ======== ======== ========
Balance sheet data (end
of period)
Total assets............ $147,286 $116,972 $172,759 $149,200 $142,597 $131,220 $591,879 $610,576
Long-term debt
(excluding current
portion)............... -- -- 181,807 163,247 143,000 120,000 406,290 442,727
Net (deficit) equity.... (60,419) (76,931) (73,757) (79,741) (53,874) (63,865) 26,082 21,901
Cash flow data
Cash flow from operating
activities............. N/A 29,589 311 27,817 18,344 15,028 92,338 10,599
Cash flow from investing
activities............. N/A (8,995) (13,345) 19,215 (10,009) (18,697) (565,870) (39,819)
Cash flow from financing
activities............. N/A (19,786) 14,993 (18,334) 5,587 (7,457) 482,820 33,159
Other financial data
EBITDA before seller
expenses (1)........... $ 20,010 $ 20,598 $ 25,926 $ 32,096 $ 33,117 $ 29,813 $ 7,465 10,756
EBITDA margin (2)....... 41.1% 41.9% 42.7% 42.1% 40.7% 40.0% 41.0% 43.8%
Capital expenditures.... N/A $ 8,678 $ 11,207 $ 9,605 $ 14,041 $ 18,697 11,468 4,269
Ratio of earnings to
fixed charges (3)...... N/A N/A -- -- -- -- 1.0x 1.0x
Amount of the Deficiency
of earnings to fixed
charges (3)............ N/A N/A N/A 15,119 8,525 12,368 -- --
Other operating data
(end of period)
Homes passed (4)........ 296,918 308,343 316,196 327,439 336,895 345,010 349,162 389,049
Basic subscribers (5)... 170,134 179,109 191,774 198,322 203,912 214,819 211,537 236,988
Basic penetration (6)... 57.3% 58.1% 60.7% 60.6% 60.5% 62.3% 60.6% 60.9%
Premium units (7)....... N/A N/A 80,925 64,118 65,361 64,866 55,550 60,840
Premium penetration (8). N/A N/A 42.2% 32.3% 32.1% 30.2% 26.3% 25.7%
Average monthly revenue
per basic subscriber
(9).................... $ 29.65 $ 27.53 $ 31.36 $ 32.30 $ 33.03 $ 33.18 $ 34.96 $ 34.94
(See Notes to Selected Historical Financial and Other Data)
39
AMRAC Clear View
Avalon Cable LLC's wholly owned subsidiary, Avalon Cable of New England LLC,
acquired AMRAC Clear View on May 29, 1998. Accordingly, AMRAC Clear View is the
predecessor entity to both Avalon Cable LLC and Avalon Cable of New England
LLC.
The selected historical statement of operations and balance sheet data of
AMRAC Clear View shown below for the four years ended December 31, 1997 have
been derived from the financial statements of AMRAC Clear View which have been
audited by Greenfield, Altman, Brown, Berger & Katz, P.C., independent
accountants. The selected historical financial and other data of AMRAC Clear
View shown below for the year ended December 31, 1993 has been derived from the
unaudited financial statements of AMRAC Clear View. The selected historical
financial and other data for the period ended May 28, 1997 have been derived
from the unaudited financial statements of AMRAC Clear View, which in the
opinion of management of the issuers, reflect all adjustments necessary to
present fairly the financial position and results of operations for the period
presented. The audited financial statements of AMRAC Clear View as of December
31, 1996 and 1997 and May 28, 1998 and for the three years ended December 31,
1997 and for the period ended May 28, 1998 are included elsewhere herein. The
operating results for the period ended May 28, 1998 are not necessarily
indicative of results to be expected for the year ending December 31, 1998. You
should read the information contained in this table in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus and the financial statements and related
notes thereto which you can find elsewhere in this prospectus.
Period Ended
Year Ended December 31, May 28,
------------------------------------------- ---------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------ -------
(dollars in thousands)
Statement of operations
data
Revenues................ $ 1,483 $ 1,576 $ 1,701 $ 1,807 $ 1,902 $ 786 $ 779
Costs and expenses...... 891 900 975 1,045 1,038 435 443
Corporate overhead...... 100 72 94 97 102 42 42
Depreciation and
amortization........... 347 323 331 340 136 57 47
------- ------- ------- ------- ------- ------ -------
Operating income........ 145 281 301 325 626 252 247
Interest expense, net... (147) (142) (130) (91) (47) (23) --
Other income, net....... -- -- -- -- 51 -- --
------- ------- ------- ------- ------- ------ -------
Net (loss) income....... $ (2) $ 139 $ 171 $ 234 $ 630 $ 229 $ 247
======= ======= ======= ======= ======= ====== =======
Balance sheet data (end
of period)
Total assets............ $ 1,490 $ 1,200 $ 1,001 $ 1,043 $ 1,374 $1,159 $ 1,073
Long-term debt
(excluding current
portion)............... 1,512 1,044 778 488 163 416 --
Partners' (deficit)
equity................. (394) (286) (180) 54 684 283 931
Cash flow data
Cash flows from
operating activities... 369 459 436 622 689 313 276
Cash flows from
investing activities... (66) (64) (117) (75) (118) (56) (61)
Cash flows from
financing activities... (179) (420) (303) (261) (284) (139) (561)
Other financial data
EBITDA before seller
expenses (1)........... $ 492 $ 604 $ 632 $ 665 $ 762 $ 309 $ 294
EBITDA margin (2)....... 33.2% 38.3% 37.2% 36.8% 40.1% 39.3% 37.7%
Capital expenditures.... $ 66 $ 64 $ 117 $ 65 $ 118 $ 56 $ 61
Ratio of earnings to
fixed charges (3)...... 1.0x 1.9x 2.2x 3.1x 9.3x 8.0x 44.4x
Other operating data
(end of period)
Homes passed (4)........ 6,025 6,250 6,447 6,640 6,775 6,693 6,955
Basic subscribers (5)... 4,277 4,558 4,808 4,901 5,025 4,964 5,101
Basic penetration (6)... 71.0% 72.9% 74.6% 73.8% 74.2% 74.2% 73.3%
Premium units (7)....... 2,049 1,931 1,770 1,667 1,465 1,455 1,561
Premium penetration (8). 47.9% 42.4% 36.8% 34.0% 29.2% 29.3% 30.6%
Average monthly revenue
per basic subscriber
(9).................... N/A N/A $ 30.27 $ 31.02 $ 31.94 $31.92 $ 30.77
(See Notes to Selected Historical Financial and Other Data)
40
Pegasus Cable Television
Prior to July 21, 1998, Pegasus Cable Television, Inc. and Pegasus Cable
Television of Connecticut, Inc., which we refer to collectively as Pegasus
Cable Television, operated as part of Pegasus Communications Corporation. The
table below sets forth selected historical combined data for Pegasus Cable
Television. The historical combined financial data presented below reflect
periods during which Pegasus Cable Television did not operate as an independent
company and, accordingly, certain allocations were made in preparing the
financial data. Therefore, this data may not reflect the results of operations
or the financial condition which would have resulted if Pegasus Cable
Television had operated as a separate independent company during these periods,
and are not necessarily indicative of Pegasus Cable Television's future results
of operations or financial position.
The selected historical combined statement of operations and balance sheet
data of Pegasus Cable Television shown below for the three years ended December
31, 1997 have been derived from the combined financial statements of Pegasus
which have been audited by PricewaterhouseCoopers LLP, independent accountants.
The selected historical combined financial and other data for the six months
ended June 30, 1997 and 1998 have been derived from the unaudited combined
financial statements of Pegasus Cable Television, which in the opinion of
management of the issuers, reflect all adjustments necessary to present fairly
the combined financial position and results of operations for the periods
presented. The audited combined financial statements of Pegasus Cable
Television as of December 31, 1996 and 1997 and for the three years ended
December 31, 1997 are included elsewhere herein. The operating results for the
six months ended June 30, 1998 are not necessarily indicative of results to be
expected for the year ending December 31, 1998. You should read the information
in this table in conjunction with the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of this prospectus and
the combined financial statements and related notes thereto which you can find
elsewhere in this prospectus.
Six Months
Year Ended December 31, Ended June 30,
------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(dollars in thousands)
Statement of operation data
Revenues.......................... $ 5,135 $ 5,775 $ 6,191 $ 2,990 $ 3,277
Costs and expenses................ 2,604 3,024 3,190 1,617 1,693
Corporate overhead................ 368 349 242 132 97
Depreciation and amortization..... 1,658 1,669 1,565 769 835
------- ------- ------- ------- -------
Operating income.................. 505 733 1,194 472 652
Interest expense, net............. (1,744) (1,887) (1,791) (863) (938)
Other (expense), net.............. (20) (27) (44) (31) (22)
------- ------- ------- ------- -------
Net loss.......................... $(1,259) $(1,181) $ (641) $ (422) $ (308)
======= ======= ======= ======= =======
Balance sheet data (end of period)
Total assets...................... $10,251 $11,584 $12,661 $12,156 $12,988
Long-term debt (excluding current
portion)......................... 15,023 15,044 15,018 15,026 14,994
Shareholders' (deficit)........... (7,026) (8,207) (8,785) (8,629) (9,093)
Cash flow data
Cash flows from operating
activities....................... 1,172 3,379 2,681 1,739 1,705
Cash flows from investing
activities....................... (291) (1,247) (889) (520) (117)
Cash flows from financing
activities....................... (401) (2,615) (1,090) (777) (971)
Other financial data
EBITDA before seller expenses (1). $ 2,163 $ 2,402 $ 2,759 $ 1,241 $ 1,487
EBITDA margin (2)................. 42.1% 41.6% 44.6% 41.5% 45.4%
Capital expenditures.............. $ 164 $1,175 $ 691 $ 445 $ 114
Ratio of earnings to fixed charges
(3).............................. -- -- -- -- --
Amount of the Deficiency of
earnings to fixed charges (3).... 1,239 1,156 625 414 303
Other operating data (end of
period)
Homes passed (4).................. 19,245 19,437 19,631 19,562 19,739
Basic subscribers (5)............. 14,859 14,678 14,894 15,226 15,413
Basic penetration (6)............. 77.2% 75.5% 75.9% 77.8% 78.1%
Premium units (7)................. 5,315 4,807 4,300 4,607 4,236
Premium penetration (8)........... 35.8% 32.7% 28.9% 30.3% 27.5%
Average monthly revenue per basic
subscriber (9)................... $ 29.00 $ 32.59 $ 34.89 $ 33.41 $ 36.04
(See Notes to Selected Historical Financial and Other Data)
41
Taconic Technology
Currently, the assets and related liabilities that we will acquire from
Taconic Technology are being operated as part of Taconic Technology. The table
below sets forth selected historical data for these assets and liabilities of
Taconic Technology. The historical financial data presented below reflect
periods during which these assets and liabilities of Taconic Technology did not
operate as an independent company and, accordingly, certain allocations were
made in preparing the financial data. Therefore, this data may not reflect the
results of operations or the financial condition which would have resulted if
these assets and liabilities of Taconic Technology had operated as a separate
independent company during these periods, and are not necessarily indicative of
the future results of operations or financial position these assets and
liabilities of Taconic Technology.
The selected historical statements of operations and balance sheet data of
Taconic Technology shown below for the three years ended December 31, 1998 have
been derived from the financial statements of Taconic Technology, which have
been audited by KPMG LLP, independent accountants. The selected financial and
other data of Taconic Technology shown below for the year ended December 31,
1995 has been derived from the unaudited financial statements of Taconic
Technology. The selected historical consolidated financial and other data for
the three months ended March 31, 1998 and 1999 have been derived from the
unaudited consolidated financial statements of Taconic Technology, which in the
opinion of management of the issuers, reflect all adjustments necessary to
present fairly the financial position and results of operations for the periods
presented. The audited financial statements of Taconic Technology as of
December 31, 1997 and 1998 and for the two years then ended December 31, 1998
are included elsewhere herein. The operating results for the three months ended
March 31, 1999 are not necessarily indicative of results to be expected for the
year ending December 31, 1999. You should read the information in this table in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of this prospectus and the
combined financial statements and related notes thereto which you can find
elsewhere in this prospectus.
Three Months
Ended
Year Ended December 31, March 31,
------------------------------ --------------
1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------ ------
(dollars in thousands)
Statement of operations data
Revenues....................... $1,771 $1,916 $2,005 $2,086 $ 489 $ 523
Costs and expenses............. 1,108 1,213 1,278 1,378 343 340
Corporate overhead............. 56 62 34 22 9 6
Depreciation and amortization.. 359 432 426 426 107 105
------ ------ ------ ------ ------ ------
Operating income............... 248 209 267 260 30 72
Interest expense, net.......... (129) (102) (79) (17) (17) --
Other (expense), net........... (15) (43) (75) (97) (5) (28)
------ ------ ------ ------ ------ ------
Net income..................... $ 104 $ 64 $ 113 $ 146 $ 8 $ 44
====== ====== ====== ====== ====== ======
Balance sheet data (end of
period)
Total assets................... $2,797 $2,638 $2,337 $2,372 $2,266 $2,399
Long-term debt (excluding
current portion).............. 1,110 946 793 -- -- --
Shareholders' equity........... 614 678 792 1,707 1,569 1,751
Cash flow data
Cash flows from operating
activities.................... 521 367 104 37 19
Cash flows from investing
activities.................... (238) (214) (81) (14) (19)
Cash flows from financing
activities.................... (283) (153) (23) (23) --
Other financial data
EBITDA before seller expenses
(1)........................... $ 607 $ 641 $ 693 $ 686 $ 137 $ 177
EBITDA margin (2).............. 34.3% 33.5% 34.6% 32.9% 28% 33.8%
Capital expenditures........... $ 445 $ 238 $ 214 $ 81 $ 14 $ 19
Ratio of earnings to fixed
charges (3)................... 1.7x 1.8x 2.5x 3.4x 3.7x 4.0x
Other operating data (end of
period)
Homes passed (4)............... 7,037 7,128 7,210 7,200 7,200 7,200
Basic subscribers (5).......... 4,738 4,733 4,819 5,100 4,875 5,000
Basic penetration (6).......... 67.3% 66.4% 66.8% 70.8% 67.7% 69.4%
Premium units (7).............. 1,492 1,337 1,271 1,225 1,262 1,200
Premium penetration (8)........ 31.5% 28.2% 26.4% 24.0% 25.9% 24.0%
Average monthly revenue per
basic subscriber (9).......... $31.87 $33.72 $34.98 $34.67 $34.92 $34.87
(See Notes to Selected Historical Financial and Other Data)
42
Avalon Cable LLC
The selected historical consolidated statement of operations and balance
sheet data for the period from September 4, 1997 (inception) through December
31, 1997, the year ended December 31, 1998 and as of December 31, 1997 and 1998
have been derived from the consolidated financial statements of Avalon Cable
LLC, which have been audited by PricewaterhouseCoopers LLP, independent
accountants. The selected historical consolidated financial and other data for
the three months ended March 31, 1999 have been derived from the unaudited
consolidated financial statements of Avalon Cable LLC, which in the opinion of
the management of the issuers, reflect all adjustments necessary to present
fairly the financial position and results of operations for the periods
presented. The audited consolidated financial statements of Avalon Cable LLC as
of December 31, 1998 and 1997, for the year ended December 31, 1998 and for the
period from inception, September 4, 1997, through December 31, 1997 are
included elsewhere herein. The operating results for the three months ended
March 31, 1999 are not necessarily indicative of results to be expected for the
year ending December 31, 1999. You should read the information in this table in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of this prospectus and the
financial statements and related notes thereto which you can find elsewhere in
this prospectus.
Three
Months
Period from Year ended Ended
September 4, 1997 (inception) December 31, March 31,
through December 31, 1997 1998 1999
----------------------------- ------------ ---------
Statement of operations
data
Revenues.................. $ -- $ 18,187 $ 24,577
Costs and expenses........ -- 10,067 13,034
Corporate overhead........ -- 655 787
Depreciation and
amortization............. -- 8,183 10,839
----- -------- --------
Operating (loss).......... -- (718) (83)
Interest (expense), net... 4 (8,050) (11,431)
Other (expense) income,
net...................... -- (6,614) 1,362
----- -------- --------
Net loss.................. $ 4 $(15,382) $(10,152)
===== ======== ========
Balance sheet data (end of
period)
Total assets.............. $ 504 $590,098 $608,795
Long-term debt (excluding
current portion)......... -- 406,290 442,727
Members' interest......... 4 151,252 141,100
Cash flow data
Cash flows from operating
activities............... $ -- $ 7,296 $ 10,599
Cash flows from investing
activities............... -- (565,870) (39,819)
Cash flows from financing
activities............... -- 567,862 33,159
Other financial data
EBITDA before seller
expenses (1)............. -- $ 7,465 10,756
EBITDA margin (2)......... -- 41.0% 43.8%
Capital expenditures...... -- 11,468 4,269
Ratio of earnings to fixed
charges (3).............. -- 1.0x 1.0x
Amount of the deficiency
of earnings to fixed
charges (3).............. -- -- --
Other operating data (end
of period)
Homes passed (4).......... -- 28,350 389,049
Basic subscribers (5)..... -- 20,604 236,988
Basic penetration (6)..... -- 72.7% 60.9%
Premium units (7)......... -- 4,912 60,840
Premium penetration (8)... -- 23.8% 25.7%
Average monthly revenue
per basic subscriber (9). -- $ 34.22 $ 34.94
(See Notes to Selected Historical Financial and Other Data)
43
Avalon Cable of Michigan, Inc.
The selected historical consolidated statement of operations and balance
sheet data of Avalon Cable of Michigan, Inc. shown below as of December 31,
1998 and 1997 and for the year ended December 31, 1998 and for the period from
September 4, 1997 (inception) to December 31, 1997 have been derived from the
consolidated financial statements of Avalon Cable of Michigan, Inc. which have
been audited by PricewaterhouseCoopers LLP, independent accountants. The
selected historical consolidated financial and other data for the three months
ended March 31, 1999 have been derived from the unaudited consolidated
financial statements of Avalon Cable of Michigan, Inc., which in the opinion of
the management of the issuers, reflect all adjustments necessary to present
fairly the financial position and results of operations for the periods
presented. The audited consolidated financial statements of Avalon Cable of
Michigan, Inc. as of December 31, 1998 and 1997 and for the year ended December
31, 1998 and for the period from September 4, 1997 (inception) to December 31,
1997 are included elsewhere herein. The operating results for the three months
ended March 31, 1999 are not necessarily indicative of results to be expected
for the year ending December 31, 1999.
This related financial and other data is for Avalon Cable of Michigan, Inc.
which is a guarantor of the New Notes. The predecessor to Avalon Cable of
Michigan, Inc. is Cable Michigan, whose data is presented on a prior page.
You should read the information in this table in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus and the financial statements and related
notes thereto which you can find elsewhere in this prospectus.
The period from Three Months
September 4, 1997 Year Ended Ended
(inception) through December 31, March 31,
December 31, 1997 1998 1999
------------------- ------------ ------------
Statement of operations data
Revenues......................... $-- $ 18,187 $ 24,577
Costs and expenses............... -- 10,067 13,034
Corporate overhead............... -- 655 787
Depreciation and amortization.... -- 8,183 10,839
---- --------- --------
Operating (loss) income.......... -- (718) (83)
Interest (expense), net.......... 4 (8,050) (11,431)
Other (expense) income, net...... -- (150) 7,333
---- --------- --------
Net loss......................... $ 4 $ (8,918) $ (4,181)
==== ========= ========
Balance sheet data (end of
period)
Total assets..................... $504 $ 591,879 $610,756
Long-term debt (excluding current
portion)........................ -- 406,290 442,727
Stockholders' equity............. 4 26,082 21,901
Cash flow data
Cash flows from operating
activities...................... -- $ 92,338 $ 10,599
Cash flows from investing
activities...................... -- (565,870) (39,819)
Cash flows from financing
activities...................... -- 482,820 33,159
Other financial data
EBITDA before seller expenses
(1)............................. -- $ 7,465 $ 10,756
EBITDA margin (2)................ -- 41.0% 43.8%
Capital expenditures............. -- 11,468 4,269
Ratio of earnings to fixed
charges (3)..................... -- 1.0x 1.0x
Amount of the deficiency of
earnings to fixed charges (3)... --
Other operating data (end of
period)
Homes passed (4)................. -- 349,213 389,049
Basic subscribers (5)............ -- 211,537 236,988
Basic penetration (6)............ -- 60.6% 60.9%
Premium units (7)................ -- 55,550 60,840
Premium penetration (8).......... -- 26.3% 25.7%
Average monthly revenue per basic
subscriber (9).................. -- $ 34.96 $ 34.94
(See Notes to Selected Historical Financial and Other Data)
44
NOTES TO THE SELECTED HISTORICAL FINANCIAL AND OTHER DATA
(1) Represents net income before depreciation and amortization, interest
income (expense), net, income taxes, other expenses, net, gain or loss
from the sale of assets, non-recurring items and non-cash expenses. For
the period from January 1, 1998 through November 5, 1998, EBITDA before
seller expenses excludes $5,764,000 of non-recurring costs incurred by
Cable Michigan. For the year ended December 31, 1997, EBITDA before seller
expenses excludes a $2,571,000 gain recognized by Cable Michigan on the
sale of a Florida cable system. Management believes that EBITDA before
seller expenses is a meaningful measure of performance and it is commonly
used in the cable television industry to analyze and compare cable
television companies on the basis of operating performance, leverage and
liquidity. However, EBITDA before seller expenses is not intended to be a
performance measure that should be regarded as an alternative to, or more
meaningful than, either operating income or net income as an indicator of
operating performance or cash flows as a measure of liquidity, as
determined in accordance with GAAP. EBITDA before seller expenses, as
computed by management, is not necessarily comparable to similarly titled
amounts of other companies. See the financial statements, including
statements of cash flows, included elsewhere herein.
(2) Represents EBITDA before seller expenses as a percentage of revenues.
(3) The ratio of earnings to fixed charges represents the number of times
fixed charges were covered by net income adjusted for provision (benefit)
for income taxes, equity in (loss) of unconsolidated entities, minority
interest in (loss) income of consolidated entity and fixed charges. Fixed
charges consist of interest expense, net and a portion of operating lease
rental expense deemed to be representative of the interest factor.
(4) The number of dwelling units in a particular community that management
estimates can be connected to our cable system.
(5) A home with one or more televisions connected to a cable system is counted
as one basic subscriber. Bulk accounts are included on an equivalent basic
by dividing the total monthly bill for the account by the basic monthly
charge for a single outlet in the area.
(6) Calculated as basic subscribers as a percentage of homes passed.
(7) Includes only single channel services offered for a monthly fee per
channel and does not include tiers of channels as a package for a single
monthly fee. A subscriber may purchase more than one premium service, each
of which is counted as a separate premium service unit.
(8) Calculated as premium units as a percentage of basic subscribers.
(9) Represents revenues during the respective period divided by the number of
months in the period divided by the average number of basic subscribers
(beginning of period plus end of period divided by two) for this period.
(10) The operations of Avalon Cable of Michigan, Inc. commenced on November 6,
1998 with the acquisition of Cable Michigan.
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
General. Members of our management and investors formed Avalon Cable LLC in
1997 to acquire, operate and develop cable television systems in mid-sized
suburban and exurban markets. Our operations in the New England cluster are the
result of our acquisitions of AMRAC Clear View in May 1998 and of Pegasus Cable
Television in July 1998. In addition, we have entered into agreements to
acquire cable system assets and related liabilities of Taconic Technology which
had approximately 5000 basic subscribers as of March 31, 1999 and Hometown TV
which had approximately 400 basic subscribers as of March 31, 1999. The
combined purchase price for these pending transactions is approximately $9.0
million. As of March 31, 1999, we had a total of 25,900 basic subscribers in
our New England cluster, after giving effect to all completed and pending
transactions. We expect that these pending acquisitions will close in the third
quarter of 1999.
On November 6, 1998, we completed our acquisition of Cable Michigan. The
cable systems located in the Michigan cluster account for a substantial
majority of our subscribers. Since November 6, 1998, Cable Michigan has
acquired all of the outstanding shares of Mercom, Inc. that we did not own for
total consideration of approximately $21.9 million. In addition, we have
acquired, for a combined purchase price of approximately $13.3 million, cable
television systems from Nova Cablevision which had approximately 6,400 basic
subscribers as of March 31, 1999, cable television systems from Cross Country
Cable TV which had approximately 1,850 basic subscribers as of March 31, 1999,
cable system assets of R/COM, L.C. which had approximately 800 basic
subscribers as of March 31, 1999, assets of Novagate Communications Corp., an
Internet service provider which had approximately 5,000 Internet subscribers as
of March 31, 1999 and the assets of Traverse Internet, Inc., an Internet
service provider which had approximately 4,500 Internet subscribers as of March
1999.
Since November 6, 1998, we have also entered into an agreement for our
Michigan cluster to acquire certain cable system assets of Galaxy American
Communications which had approximately 550 basic subscribers as of March 1999.
We expect that this pending acquisition will close in the third quarter of
1999. As of March 31, 1999, we had a total of 217,100 basic subscribers and
9,500 Internet subscribers in our Michigan cluster, after giving effect to all
completed and pending transactions.
In order to facilitate certain aspects of our financing, on March 26, 1999,
we completed a series of transactions we refer to as the "reorganization:"
. Avalon Cable of Michigan, Inc. transferred substantially all of its
assets and liabilities to Avalon Cable LLC, which then transferred these
assets and liabilities to Avalon Cable of Michigan LLC and, as a result,
Avalon Cable of Michigan LLC now operates our Michigan cluster;
. Avalon Cable of Michigan Holdings, Inc. ceased to be an obligor on the
old notes and together with Avalon Cable of Michigan, Inc. became a
guarantor of the obligations of Avalon Cable LLC under the old notes;
. Avalon Cable of Michigan LLC became an additional obligor on the senior
subordinated notes and the credit facility; and
. Avalon Cable of Michigan, Inc. ceased to be an obligor on the senior
subordinated notes and the credit facility and became a guarantor of all
of the obligations of Avalon Cable of Michigan LLC under the senior
subordinated notes and the credit facility.
We do not expect that this reorganization will impact our operations. The
reorganization has impacted the financial statements of Avalon Cable of
Michigan Holdings, Inc., Avalon Cable of Michigan, Inc., Avalon Cable LLC and
Avalon Cable of Michigan LLC as follows:
. The $196 million principal amount at maturity of old notes and their
associated discount and deferred financing costs of Avalon Cable of
Michigan Holdings were transferred to Avalon Cable of Michigan,
46
Inc. This increased the equity in Avalon Cable of Michigan Holdings and
reduced the equity in Avalon Cable of Michigan, Inc.
. The assets and liabilities, excluding the deferred tax liabilities, net
of Avalon Cable of Michigan, Inc. were then transferred to Avalon Cable
LLC in exchange for an approximate 88% interest in Avalon Cable LLC. The
assets and liabilities transferred by Avalon Cable of Michigan, Inc. to
Avalon Cable LLC included the old notes and associated discount and
deferred financing costs received from Avalon Cable of Michigan Holdings.
. Avalon Cable LLC contributed the assets and liabilities received from
Avalon Cable of Michigan, Inc., other than the old notes and associated
discount and deferred financing costs, to its wholly-owned subsidiary,
Avalon Cable of Michigan LLC. Since Avalon Cable LLC and Avalon Cable of
Michigan, Inc. are under common control, these assets and liabilities
were recorded at their historical cost.
. Avalon Cable of Michigan LLC's statement of operations will include
activity from the date after the reorganization through March 31, 1999.
. At March 31, 1999, the financial statements of Avalon Cable LLC were
consolidated in Avalon Cable of Michigan, Inc. with a minority interest
of approximately 12%.
. Intercompany debt with Avalon Cable of New England was cancelled.
Although Avalon Cable of Michigan Holdings and Avalon Cable of Michigan,
Inc. are guarantors of the obligations of Avalon Cable LLC under the new
notes, their assets consist of their equity interests in Avalon Cable of
Michigan, Inc. and Avalon Cable LLC, respectively. As a result, you should not
expect Avalon Cable of Michigan Holdings and Avalon Cable of Michigan, Inc.,
as guarantors, to have any assets available to make interest and principal
payments on the new notes since they do not have other operations and will not
have access to additional sources of cash flow other than their investment in
the respective companies.
We have implemented a number of operational and organizational changes to
the businesses we have acquired and expect others, including in connection
with pending acquisitions. As a result, we believe that the historical results
of operations presented below of each of Cable Michigan, AMRAC Clear View,
Pegasus Cable Television, and Taconic Technology may not be indicative of our
results of operations in the future. For additional information, please refer
to "--Pro Forma Operating Results" section of this prospectus.
Revenues. Our revenues are primarily attributable to monthly subscription
fees charged to subscribers for our basic and premium cable television
programming services. Our basic revenues consist of monthly subscription fees
for all services other than premium programming, as well as monthly charges
for customer equipment rental. Premium revenues consist of monthly
subscription fees for programming provided on a per channel basis. In
addition, we derive other revenues from installation and reconnection fees
that we charge to subscribers to commence or reinstate service, pay-per-view
charges, late payment fees, advertising revenues and commissions related to
the sale of merchandise by home shopping services.
Operating Expenses. Our expenses primarily consist of programming fees,
plant and operating costs, general and administrative expenses, and marketing
costs directly attributable to our cable systems. We expect that our
programming costs will increase in the ordinary course of our business as a
result of increases in the number of subscribers, increases in the number of
channels that we provide to customers and contractual rate increases from our
programming suppliers. We benefit and expect to continue to benefit from our
membership in industry cooperatives which provide members with volume
discounts from programming networks and cable equipment vendors. Plant and
operating costs include expenses related to wages and employee benefits,
electricity, systems supplies, vehicles and other operating costs. General and
administrative expenses directly attributable to the systems include wages and
employee benefits for customer service, accounting and administrative
personnel, franchise fees and expenses related to billing, payment processing
and office administration.
47
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. Management
expects to eliminate certain corporate overhead expenses at Nova Cablevision,
Cross Country Cable TV, Novagate Communications, R/COM, Traverse Internet,
Galaxy American Communications, Taconic Technology and Hometown TV of $1.5
million for the year ended December 31, 1998.
Amortization and depreciation. On a pro forma basis, our depreciation and
amortization has and will increase by approximately $7.3 million on a yearly
basis due to our acquisitions and the associated fair value allocation to fixed
assets and intangibles associated with these purchases.
Interest expense, net. On a pro forma basis, interest expense would be $45.5
million. Interest expense is expected to continue at approximately this amount
subject to increases for additional borrowings for acquisitions and
fluctuations due to the floating interest rates we pay under our credit
facility.
On a pro forma basis, our cash flows from operating, investing and financing
activities for the year ended December 31, 1998 were $27.7 million, $(556.1)
million, and $510.5 million, respectively, reflecting our acquisition and
financing activities described elsewhere herein.
In addition, we expect to eliminate non-recurring or one-time operating
costs incurred by Cable Michigan of $1.9 million for the year ended December
31, 1998. These non-recurring costs include expenses such as litigation
expenses, expenses associated with a May 1998 storm in Grand Rapids, expenses
related to the relocation of the customer call center to Michigan and one-time
costs associated with special promotions. We also expect lower administrative
costs through the elimination of some public company expenses of $394,000. For
the year ended December 31, 1998 we expect a total savings of $7.0 million on a
pro forma basis.
For the quarter ended March 31, 1999 management expects to eliminate certain
corporate overhead expenses at Traverse Internet, Galaxy American
Communications, Hometown TV and Taconic Technology of $213,000. We also do not
expect a recurrence of a credit resulting from the May 1998 storm insurance
adjustment of $80,000.
Other operating changes include changes in the areas of customer service and
programming, all of which RCN Corporation managed for Cable Michigan. To better
serve subscribers located in Michigan, we relocated the customer call center
from Pennsylvania, which Cable Michigan shared with RCN Corporation and
Commonwealth Telephone Enterprises, to a site within Michigan and reconfigured
the call center to operate as a stand-alone entity. Management is currently
analyzing its options for acquiring programming for the Michigan cluster. We
are currently using our existing membership in the National Cable Television
Cooperative to program both the Michigan cluster and the New England cluster.
We are exploring joining the programming consortium that RCN Corporation used
in managing Cable Michigan as well as engaging in direct negotiations with
programming suppliers. Management currently believes that, in the aggregate,
our expenses in these areas for the Michigan cluster will not be materially
different than those of Cable Michigan, considering for these purposes both the
direct costs incurred by Cable Michigan and the allocated costs reimbursed to
RCN Corporation.
Giving effect to the foregoing operating and organizational changes and
other adjustments described above, the issuers on a combined basis would have
had pro forma EBITDA before seller expenses of $11.1 million and $41.7 million
and pro forma Adjusted EBITDA of $11.3 million and $48.7 million for the three
months and year ended December 31, 1998, respectively. We define EBITDA as net
income before depreciation and amortization, interest income (expense), net,
income taxes, other expenses, net, gain or loss from the sale of assets,
nonrecurring items and non-cash expenses. Adjusted EBITDA adjusts EBITDA for
the elimination of certain expenses and the inclusion of overhead expenses as
contemplated in the definition of
48
"Leverage Ratio" in the indenture governing the new notes. The "Leverage Ratio"
is used in determining when the issuers and their subsidiaries may incur
additional indebtedness. Management believes that EBITDA before seller expenses
is a meaningful measure of performance and it is commonly used in the cable
television industry to analyze and compare cable television companies on the
basis of operating performance, leverage and liquidity. However, EBITDA before
seller expenses is not intended to be a performance measure that should be
regarded as an alternative to, or more meaningful than, either operating income
or net income as an indicator of operating performance or cash flows as a
measure of liquidity, as determined in accordance with GAAP. EBITDA before
seller expenses, as computed by management, is not necessarily comparable to
similarly titled amounts of other companies. See the financial statements,
including statements of cash flows, included elsewhere herein.
We cannot assure you that we will fully realize our anticipated cost savings
associated with our planned operating changes or our elimination of certain
management fees, redundant corporate, general and administrative costs. We also
cannot assure you that unanticipated costs in combining or operating the
businesses we plan to acquire will not reduce or eliminate our anticipated cost
savings.
Seasonality. We expect that our revenues and EBITDA before seller expenses
will be slightly seasonal. On a combined basis after giving effect to the
Acquisitions, the issuers generated approximately 51.2% of the their revenues
for the fiscal year ended December 31, 1998 during the second and third
quarters. Management believes this seasonality is primarily the result of
increased use of vacation homes in its Michigan cluster from April to
September.
Results of Operations
Overview
The following historical results of operations of Avalon Cable of Michigan
Holdings, Inc., Avalon Cable LLC, and Avalon Cable of Michigan, Inc. refer to
their results of operations for the quarter ended March 31, 1999 compared to
the period from acquisition or contribution (November 6, 1998) to December 31,
1998.
Avalon Cable of Michigan Holdings, Inc.
On November 6, 1998, Cable Michigan merged with and into Avalon Cable of
Michigan, Inc., a wholly-owned subsidiary of Avalon Cable of Michigan Holdings
and Avalon Cable of Michigan, Inc. commenced its operations. Therefore, the
financial and other data for Cable Michigan for the period from November 6,
1998 to December 31, 1998 is reflected in the financial and other data for
Avalon Cable of Michigan Holdings.
On March 26, 1999, Avalon Cable of Michigan, Inc. acquired the remaining
minority interest in Mercom for approximately $21.9 million. During the first
quarter, Avalon Cable of Michigan, Inc. also acquired the cable television
systems of Nova Cablevision and Cross Country Cable for $10.7 million in the
aggregate.
In March 1999, after the acquisition of Mercom, Inc., Avalon Cable of
Michigan, Inc. and its affiliates completed a series of transactions to
facilitate certain aspects of its financing. As a result of these transactions:
. Avalon Cable of Michigan, Inc. contributed its assets and liabilities
excluding deferred tax liabilities, net to Avalon Cable LLC in exchange
for an approximate 88% voting interest in Avalon Cable LLC. Avalon Cable
LLC contributed these assets and liabilities to its wholly-owned
subsidiary, Avalon Cable of Michigan LLC.
. Avalon Cable of Michigan Holdings, Inc. contributed the old notes and
associated deferred financing costs to Avalon Cable of Michigan, Inc.,
who in turn contributed the notes and deferred financing costs to Avalon
Cable LLC.
. Each of Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of
Michigan, Inc. became a guarantor of the obligations of Avalon Cable LLC
under the old notes. Avalon Cable of Michigan Holdings, Inc. and Avalon
Cable of Michigan, Inc. do not have significant assets, other than their
investments in Avalon Cable of Michigan, Inc. and Avalon Cable LLC,
respectively.
. The reorganization was among entities under common control and was
accounted for similar to a pooling-of-interests.
49
Three months ended March 31, 1999 compared to the period from November 6 to
December 31, 1998
Revenues for the three months ended March 31, 1999 were $24.6 million, an
increase of $6.4 million, or 35%, as compared to revenues of $18.2 million for
the period from November 6 to December 31, 1998. This increase is primarily
related to the effects of having a full quarter compared to 55 days as well as
the impact of subscribers from the acquisitions offset by a decrease in revenue
of $0.6 million relating to a decrease in the number of subscribers due to
seasonality and competition.
Costs and expenses excluding depreciation and amortization, corporate
overhead and non-recurring expenses were $13.0 million for the three months
ended March 31, 1999, an increase of $2.9 million, or 29%, as compared to $10.1
million for the period from November 6 to December 31, 1998. This increase is
primarily related to the effects of having a full quarter compared to 55 days,
a regulation change which allowed programmers to increase programming rates
($0.9 million) offset by the discontinuance of the RCN management fee, lower
franchise fees due to a decrease in number of subscribers and the addition of
employees.
Operating income before depreciation and amortization, corporate overhead
and non-recurring expenses was $11.5 million for the three months ended March
31, 1999, an increase of $3.4 million, or 42%, as compared to $8.1 million for
the period from November 6 to December 31, 1998.
Depreciation and amortization for the three months ended March 31, 1999 was
$10.8 million, an increase of $2.6 million, or 32%, compared to $8.2 million
for the period from November 6 to December 31, 1998. This increase is primarily
related to the effects of having a full quarter compared to 55 days and the
impact of additional depreciation and amortization from the additional
acquisitions.
Interest expense, net was $11.4 million for the three months ended March 31,
1999, an increase of $3.4 million, or 42%, compared to $8.0 million for the
period from November 6 to December 31, 1998. This increase is primarily related
to the effects of having a full quarter compared to 55 days and additional
interest on new borrowings.
Other (expense) income, net was $7.3 million for the three months ended
March 31, 1999, an increase of $7.4 million, compared to $(0.1) million for the
period from November 6 to December 31, 1998. This increase is the effect of the
tax benefit associated with the net loss for the period and that the period
from November 6 to December 31, 1998 included an extraordinary loss on
extinguishment of debt of $4.2 million.
There was a net loss of $4.2 million for the three months ended March 31,
1999, a decrease of $4.7 million, or 53%, compared to a net loss of $8.9
million for the period from November 6 to December 31, 1998.
Avalon Cable LLC
In the first quarter of 1999, Avalon Cable of New England LLC, a wholly-
owned subsidiary of Avalon Cable LLC, formed Avalon.com, a wholly-owned
subsidiary. Avalon.com plans to provide internet services to customers in the
New England and Michigan cable areas served by Avalon Cable of New England or
Avalon Cable of Michigan LLC, a wholly-owned subsidiary of Avalon Cable LLC.
On March 26, 1999, after the acquisition of Mercom, Inc., Avalon Cable LLC
and its affiliates completed a series of transactions to facilitate certain
aspects of its financing. As a result of these transactions:
. Avalon Cable of Michigan, Inc. contributed its assets and liabilities
excluding deferred tax liabilities, net to Avalon Cable LLC in exchange
for an approximate 88% voting interest in Avalon Cable LLC. Avalon Cable
LLC contributed these assets and liabilities to its wholly-owned
subsidiary, Avalon Cable of Michigan LLC.
50
. Avalon Cable of Michigan Holdings, Inc. contributed the old notes and
associated deferred financing costs to Avalon Cable of Michigan, Inc. who
in turn contributed the notes and deferred financing costs to Avalon
Cable LLC.
. The reorganization was among entities under common control and was
accounted for similar to a pooling-of-interests.
Three months ended March 31, 1999 compared to the period from November 6 to
December 31, 1998
Revenues for the three months ended March 31, 1999 were $24.6 million, an
increase of $2.3 million, or 35%, as compared to revenues of $18.2 million for
the period from November 6 to December 31, 1998. This increase is primarily
related to the effects of having a full quarter compared to 55 days as well as
the impact of subscribers contributed by Avalon Cable of Michigan, Inc. on
March 26, 1999.
Costs and expenses excluding depreciation and amortization, corporate
overhead and non-recurring expenses were $13.0 million for the three months
ended, an increase of $2.9, or 29%, as compared to $10.1 million for the period
from November 6 to December 31, 1998. This increase is primarily related to the
effects of having a full quarter compared to 55 days, a regulation change which
allowed programmers to increase programming rates ($0.9 million), and the
addition of employees, offset by lower franchise fees due to a decrease in
number of subscribers.
Operating income before depreciation and amortization, corporate overhead
and non-recurring expenses was $11.5 million for the three months ended March
31, 1999, an increase of $3.4 million, or 42%, as compared to $8.1 for the
period from November 6 to December 31, 1998.
Depreciation and amortization for the three months ended March 31, 1999 was
$10.8 million, an increase of $2.6 million, or 32%, compared to $8.2 million
for the period from November 6 to December 31, 1998. This increase is primarily
related to the effects of having a full quarter compared to 55 days and the
impact of additional depreciation and amortization relating to the closing of
the acquisitions as well as the contribution of fixed assets and intangible
assets contributed by Avalon Cable of Michigan, Inc. on March 26, 1999.
Interest expense, net was $11.4 million for the three months ended March 31,
1999, a decrease of $3.4 million, or 42.5%, compared to $8.0 million for the
period from November 6 to December 31, 1998. This decrease is primarily related
to the effects of having a full quarter compared to 55 days and the note
receivable from affiliate being outstanding during the entire quarter offset by
the interest expense on the debt from March 27 through March 31, 1999
contributed by Avalon Cable of Michigan, Inc.
Other (expense) income, net was $1.4 million for the three months ended
March 31, 1999, an increase of $8.0 million, compared to $(6.6) million for the
period from November 6 to December 31, 1998. This increase is the effect of the
period from November 6 to December 31, 1998 included an extraordinary loss on
extinguishment of debt of $6.0 million.
Net loss was $10.1 million for the three months ended March 31, 1998, a
decrease of $5.3 million or 34%, compared to $15.4 million for the period from
November 6 to December 31, 1998.
Avalon Cable of Michigan, Inc.
On November 6, 1998, Cable Michigan merged with and into Avalon Cable of
Michigan, Inc. and Avalon Cable of Michigan, Inc. commenced its operations.
Therefore, the financial and other data for Cable Michigan for the period from
November 6, 1998 to December 31, 1998 is reflected in the financial and other
data for Avalon Cable of Michigan, Inc.
On March 26, 1999, Avalon Cable of Michigan, Inc. acquired the remaining
minority interest of Mercom for approximately $21.9 million. During the
quarter, Avalon Cable of Michigan, Inc. also acquired the cable television
systems of Nova Cablevision and Cross Country Cable for $10.7 million.
51
On March 26, 1999, Avalon Cable of Michigan, Inc. acquired the remaining
minority interest of Mercom for approximately $21.9 million. During the
quarter, Avalon Cable of Michigan, Inc. also acquired the cable television
systems of Nova Cablevision and Cross Country Cable for $10.7 million.
In March 1999, Avalon Cable of Michigan, Inc. and its affiliates completed a
series of transactions to facilitate certain aspects of its financing. As a
result of these transactions:
. Avalon Cable of Michigan, Inc. contributed its assets and liabilities
excluding deferred tax liabilities, net to Avalon Cable LLC in exchange
for an approximate 88% voting interest in Avalon Cable LLC. Avalon Cable
LLC contributed these assets and liabilities to its wholly-owned
subsidiary, Avalon Cable of Michigan LLC.
. Avalon Cable of Michigan, Inc. is a guarantor of the obligations of
Avalon Cable LLC under the old notes and the new notes and a guarantor of
Avalon Cable of Michigan LLC's obligations under the senior subordinated
notes and the credit facility. Avalon Cable of Michigan, Inc. does not
have significant assets, other than its investment in Avalon Cable LLC.
. The reorganization was among entities under common control and was
accounted for similar to a pooling-of-interests.
Three months ended March 31, 1999 compared to the period from November 6 to
December 31, 1998
Revenues for the three months ended March 31, 1999 were $24.6 million, an
increase of $6.4 million, or 35%, as compared to revenues of $18.2 million for
the period from November 6 to December 31, 1998. This increase is primarily
related to the effects of having a full quarter compared to 55 days as well as
the impact of subscribers from the acquisitions offset by a decrease in revenue
of $0.6 million relating to a decrease in the number of subscribers due to
seasonality and competition.
Costs and expenses excluding depreciation and amortization, corporate
overhead and non-recurring expenses were $13.0 million for the three months
ended March 31, 1999, an increase of $2.9 million, or 29%, as compared to
$10.1 million for the period from November 6 to December 31, 1998. This
increase is primarily related to the effects of having a full quarter compared
to 55 days, a regulation change which allowed programmers to increase
programming rates ($0.9 million) offset by the discontinuance of the RCN
management fee, lower franchise fees due to a decrease in number of subscribers
and the addition of employees.
Operating income before depreciation and amortization, corporate overhead
and non-recurring expenses was $11.5 million for the three months ended March
31, 1999, an increase of $3.4 million, or 42%, as compared to $8.1 for the
period from November 6 to December 31, 1998.
Depreciation and amortization for the three months ended March 31, 1999 was
$10.8 million, an increase of $2.6 million, or 32%, compared to $8.2 million
for the period from November 6 to December 31, 1998. This increase is primarily
related to the effects of having a full quarter compared to 55 days and the
impact of additional depreciation and amortization relating to the closing of
the acquisitions.
Interest expense, net was $11.4 million for the three months ended March 31,
1999, an increase of $3.4 million, or 42%, compared to $8.0 million for the
period from November 6 to December 31, 1998. This increase is primarily related
to the effects of having a full quarter compared to 55 days, additional
interest on new borrowings as well as the contribution of the Senior Discount
Notes from Avalon Cable of Michigan Holdings.
Other (expense) income, net was $7.3 million for the three months ended
March 31, 1999, an increase of $7.4 million, or 100%, compared to $0.1 million
for the period from November 6 to December 31, 1998. This increase is the
effect of the tax benefit associated with the net loss for the period and that
the period from November 6 to December 31, 1998 included an extraordinary loss
on extinguishment of debt of $4.2 million.
Net loss was $4.2 million for the three months ended March 31, 1999, a
decrease of $4.7 million, or 53%, compared to $8.9 million for the period from
November 6 to December 31, 1998.
52
The following historical results of operations of Cable Michigan, AMRAC
Clear View, Pegasus Cable Television and Taconic Technology refer to their
results of operations occurring before their respective acquisition by us,
other than a portion of the results of AMRAC Clear View and Pegasus Cable
Television for the year ended December 31, 1998 during which AMRAC Clear View
and Pegasus Cable Television were owned by us. Our management intends to
implement a number of operational and organizational changes to the businesses
described below. As a result, our management believes that the historical
results of operations described below are not necessarily indicative of our
future results of operations. For additional information, please refer to the
"--Overview--Pro Forma Operating Results" section of this prospectus.
Cable Michigan
General
Prior to September 30, 1997, Cable Michigan was operated as a part of
Commonwealth Telephone Enterprises. On September 30, 1997, Commonwealth
Telephone Enterprises distributed all of the outstanding common stock of Cable
Michigan to its stockholders and Cable Michigan became a separate, publicly
traded company. The historical financial and other data for Cable Michigan
presented below reflect periods during which Cable Michigan did not operate as
a separate company and, accordingly, certain assumptions were made in preparing
the financial data. Therefore, the data may not reflect the results of
operations or financial condition which would have resulted had Cable Michigan
operated as a separate, independent company during these periods, and are not
necessarily indicative of Cable Michigan's future results of operations or
financial condition.
Cable Michigan acquired a majority voting interest in Mercom in August 1995
in a common stock rights offering. Immediately before the rights offering,
Cable Michigan held a 43.6% interest in Mercom and accounted for its investment
under the equity method. Following the rights offering, Cable Michigan held a
61.9% interest in Mercom and has consolidated Mercom in its financial
statements since August 1995.
On November 6, 1998, Cable Michigan merged with and into Avalon Cable of
Michigan, Inc., a wholly-owned subsidiary of Avalon Cable of Michigan Holdings
and Avalon Cable of Michigan, Inc. commenced its operations. Therefore, the
financial and other data for Cable Michigan for the period from November 6,
1998 to December 31, 1998 is reflected in the financial and other data for
Avalon Cable of Michigan, Inc.
Nine Months Ended September 30, 1998 Compared with Nine Months Ended September
30, 1997
Revenues for the nine months ended September 30, 1998 were $65.8 million, an
increase of $4.9 million, or 8.0%, as compared to revenues of $60.9 million for
the nine months ended September 30, 1997. This increase was primarily due to
the effects of rate increases implemented in May 1998 and February 1997 and an
increase in the average number of basic subscribers of approximately 3.6%. The
average number of basic subscribers is calculated as the sum of the number of
basic subscribers at the beginning of the period and at the end of the period
divided by two.
Costs and expenses excluding depreciation and amortization, corporate
overhead and non-recurring expenses were $33.9 million for the nine months
ended September 30, 1998, an increase of $3.4 million, or 11.1%, as compared to
$30.5 million for the nine months ended September 30, 1997. This increase was
primarily due to higher programming costs resulting from contractual rate
increases from programming suppliers, increases in the number of channels
provided to customers and increases in the number of basic subscribers.
Operating income before depreciation and amortization, corporate overhead
and non-recurring expenses was $31.9 million for the nine months ended
September 30, 1998, an increase of $1.5 million, or 4.9%, as compared to $30.4
million for the nine months ended September 30, 1997.
53
Net loss was $8.9 million for the nine months ended September 30, 1998, an
increase of $5.6 million or 170%, as compared to $3.3 million for the nine
months ended September 30, 1997.
Year Ended December 31, 1997 Compared with the Year Ended December 31, 1996
Revenues for the year ended December 31, 1997 were $81.3 million, an
increase of $5.1 million, or 6.7%, as compared to revenues of $76.2 million for
the year ended December 31, 1996. This increase was primarily due to the
effects of rate increases implemented in the first quarter of 1996 and 1997 and
an increase in the average number of basic subscribers of approximately 3.1%.
Costs and expenses excluding depreciation and amortization and corporate
overhead were $41.0 million for the year ended December 31, 1997, an increase
of $4.0 million, or 10.8%, as compared to $37.0 million for the year ended
December 31, 1996. This increase was primarily due to higher programming costs
resulting from contractual rate increases from programming suppliers, increases
in the number of channels provided to customers and increases in the number of
basic subscribers, as well as increased payroll and benefits costs.
Operating income before depreciation and amortization and corporate overhead
was $40.3 million for the year ended December 31, 1997, an increase of $1.1
million, or 2.8%, as compared to $39.2 million for the year ended December 31,
1996.
Depreciation and amortization was $32.1 million in 1997, an increase of $.7
million or 2.1% as compared to 1996. Interest expense was $11.8 million in
1997, a decrease of approximately $3.4 million, or 22.6% as compared to 1996
due to lower notes payable to affiliates, partially offset by an increase in
interest expense on new third-party debt. For the year ended December 31, 1997,
Cable Michigan realized a gain of $2.6 million on the sale of the Port St.
Lucie cable operations of Mercom which also resulted in an increase in the
minority share of Mercom's income.
Net loss was $4.4 million for the year ended December 31, 1997, a decrease
of $3.9 million, or 47%, as compared to $8.3 million for the year ended
December 31, 1996.
For the year ended December 31, 1997, Cable Michigan's net cash provided by
operating activities was $18.3 million, comprised primarily of a net loss of
$4.4 million adjusted by non-cash depreciation and amortization of $32.1
million, other non-cash items resulting in a decrease of $4.1 million and
working capital changes of a decrease of $4.6 million. Net cash used in
investing activities of $10.0 million consisting primarily of additions to
property, plant and equipment of $14.0 million, partially offset by proceeds
from the sale of Port St. Lucie of $3.5 million. Net cash provided by financing
activities of $5.6 million consisted of the issuance of long-term debt of
$128.0 million and transfers from Commonwealth Telephone Enterprises of $12.5
million, substantially offset by a change in affiliate notes of $116.8 million
and redemption of long-term debt of $17.4 million.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Revenues for the year ended December 31, 1996 were $76.2 million, an
increase of $15.5 million, or 25.5%, as compared to revenues of $60.7 million
for the year ended December 31, 1995. This increase primarily resulted from the
consolidation of the financial results of Mercom for a full year in 1996 as
compared to only five months in 1995. Mercom accounted for $9.6 million of the
increase in revenues over the same period in 1995. The remaining $5.9 million
increase was due to an increase in the average number of Cable Michigan's basic
subscribers of approximately 5.2% and the effects of rate increases implemented
in April 1995 and February 1996. On an annualized basis, Mercom's revenues
increased approximately $1.6 million, or 11.7%, of which approximately $1.0
million related to a rate increase implemented in February 1996 and
approximately $600,000 related to an increase in the average number of Mercom's
basic subscribers by 3.5%.
54
Costs and expenses excluding depreciation and amortization and corporate
overhead were $37.0 million for the year ended December 31, 1996, an increase
of $8.5 million, or 29.8%, as compared to $28.5 million for the year ended
December 31, 1995. This increase was primarily due to the consolidation of the
financial results of Mercom for a full year in 1996 as compared to only five
months in 1995. Mercom contributed $6.5 million to the increase in operating
expenses in 1996. The remaining $2.0 million increase was the result of higher
programming costs of Cable Michigan due to contractual rate increases from
programming suppliers, increases in the number of channels provided to
customers and increases in the number of basic subscribers. On an annualized
basis, Mercom's operating expenses excluding depreciation and amortization
increased approximately $1.2 million, or 13.5%, primarily as a result of higher
programming costs due to contractual increases from program suppliers.
Operating income before depreciation and amortization and corporate overhead
was $39.2 million for the year ended December 31, 1996, an increase of $7.0
million, or 21.7%, as compared to $32.2 million for the year ended December 31,
1995. Of this increase, $3.1 million resulted from the consolidation of the
financial results of Mercom for a full year in 1996 as compared to only five
months in 1995.
Depreciation and amortization was $31.4 million in 1996, an increase of $6.3
million, or 24.9% as compared to 1995. The increase is attributable to the
securing of a majority voting interest in Mercom in August 1995. Mercom's
financial results have been consolidated since that time resulting in an
increase in depreciation and amortization of approximately $5.8 million for the
twelve months in 1996 as compared to the five months in 1995. Interest expense
was $15.2 million in 1996, a decrease of approximately $.8 million, or 5% as
compared to 1995, due to a combination of lower average outstanding borrowings
and lower average interest rates. Cable Michigan acquired a majority voting
interest in Mercom in August 1995 pursuant to a common stock rights offering.
Immediately prior to the rights offering, Cable Michigan had a 43.63% interest
in Mercom and accounted for its investment under the equity method. Following
the rights offering, Cable Michigan has a 61.92% interest in Mercom and has
consolidated Mercom in its financial statements since August 1995. As a result,
for 1995, minority interest in the income of Mercom was a loss of $.2 million
while for 1996, minority interest in the loss of Mercom was $1.2 million.
Net loss was $8.3 million for the year ended December 31, 1996, a decrease
of $2.2 million, or 21%, as compared to $10.5 million for the year ended
December 31, 1995.
For the year ended December 31, 1996, Cable Michigan generated cash from
operating activities of $27.8 million, comprised principally of a net loss of
$8.3 million adjusted for non-cash depreciation and amortization of $31.4
million, other non-cash items of $2.1 million and working capital changes of
$2.4 million. Net cash used in investing activities was $9.2 million, comprised
principally of capital expenditures of $9.6 million. Net cash used in financing
activities was $18.3 million, comprised of a decrease in affiliate notes of
$16.8 million and principal payments on long-term debt of $1.5 million.
Pegasus Cable Television
General
Prior to July 21, 1998, Pegasus Cable Television was operated as part of
Pegasus Communications Corporation. The historical combined financial data
presented below reflect periods during which Pegasus Cable Television did not
operate as an independent company and, accordingly, certain allocations were
made in preparing the financial data. Therefore, this data may not reflect the
results of operations or the financial condition which would have resulted if
Pegasus Cable Television had operated as a separate independent company during
these periods, and are not necessarily indicative of Pegasus Cable Television's
future results of operations or financial position.
55
Six Months Ended June 30, 1998 Compared with Six Months Ended June 30, 1997
Revenues for the six months ended June 30, 1998 were approximately $3.3
million, an increase of $287,000, or 9.6%, as compared to revenues of
approximately $3.0 million for the six months ended June 30, 1997. This
increase was primarily due to the effects of rate increases implemented in the
first quarters of 1997 and 1998 and an increase in the average number of basic
subscribers of approximately 1.3% during the six months ended June 30, 1998.
Costs and expenses excluding depreciation and amortization and corporate
overhead were approximately $1.7 million for the six months ended June 30,
1998, an increase of $75,000, or 4.7%, as compared to $1.6 million for the six
months ended June 30, 1997. This increase was primarily due to higher
programming costs resulting from contractual rate increases from programming
suppliers, increases in the number of channels provided to customers and
increases in the number of basic subscribers.
Operating income before depreciation and amortization and corporate overhead
was approximately $1.6 million for the six months ended June 30, 1998, an
increase of $212,000, or 15.1%, as compared to $1.4 million for the six months
ended June 30, 1997.
Net loss was $0.3 million for the six months ended June 30, 1998, a decrease
of $0.1 million, or 25%, as compared to $0.4 million for the six months ended
June 30, 1997.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Revenues for the year ended December 31, 1997 were $6.2 million, an increase
of $416,000, or 7.2%, as compared to revenues of $5.8 million for the year
ended December 31, 1996. This increase was primarily due to the effects of rate
increases implemented during the second quarter of 1996 and the second quarter
of 1997 and the addition of a new tier of expanded basic programming in the
first quarter of 1997, which together increased average revenue per subscriber.
Costs and expenses excluding depreciation and amortization and corporate
overhead were $3.2 million for the year ended December 31, 1997, an increase of
$166,000, or 5.5%, as compared $3.0 million for the year ended December 31,
1996. This increase was primarily due to higher programming costs resulting
from contractual rate increases from programming suppliers and the introduction
of a new tier of programming.
Operating income before depreciation and amortization and corporate overhead
was $3.0 million for the year ended December 31, 1997, an increase of $250,000,
or 8.9%, as compared to $2.8 million for the year ended December 31, 1996.
Net loss was $0.6 million for the year ended December 31, 1997, a decrease
of $0.6 million, or 50%, compared to $1.2 million for the year ended December
31, 1996.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Revenues for the year ended December 31, 1996 were $5.8 million, an increase
of $640,000, or 12.5%, as compared to revenues of $5.1 million for the year
ended December 31, 1995. This increase was primarily due to the restructuring
of its basic service offerings and rate increases implemented in the first half
of 1996.
Costs and expenses excluding depreciation and amortization and corporate
overhead were $3.0 million for the year ended December 31, 1996, an increase of
$420,000, or 16.2%, as compared to $2.6 million for the year ended December 31,
1995. This increase was primarily due to an increase in the number of channels
per subscriber associated with the restructuring of its basic service described
above and higher programming costs resulting from contractual rate increases
from programming suppliers.
Operating income before depreciation and amortization and corporate overhead
was $2.8 million for the year ended December 31, 1996, an increase of $220,000,
or 8.8%, as compared to $2.5 million for the year ended December 31, 1996.
56
Net loss was $1.2 million for the year ended December 31, 1996, a decrease
of $0.1 million, or 8%, compared to $1.3 million for the year ended December
31, 1995.
AMRAC Clear View
Period Ended May 28, 1998 Compared with Period Ended May 28, 1997
Revenues for the period ended May 28, 1998 were $779,000, remaining
virtually unchanged, as compared to revenues of $786,000 for the period ended
May 28, 1997.
Costs and expenses excluding depreciation and amortization and corporate
overhead were $443,000 for the period ended May 28, 1998, an increase of
$8,000, or 1.8%, as compared to $435,000 for the period ended May 28, 1997.
This increase was primarily due to higher programming costs resulting from
contractual rate increases from programming suppliers.
Operating income before depreciation and amortization and corporate overhead
was $336,000 for the period ended May 28, 1998, a decrease of $15,000, or 4.3%,
as compared to $351,000 for the period ended May 28, 1997.
Net income was $0.2 million for each of the periods ended May 28, 1998 and
1997.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Revenues for the year ended December 31, 1997 were approximately $1.9
million, an increase of $95,000, or 5.3%, as compared to revenues of
approximately $1.8 million for the year ended December 31, 1996. This increase
was primarily due to an increase in the average number of basic subscribers of
approximately 2.2% for the year ended December 31, 1997 and a full year's
impact from the launch of pay-per-view channels in the fourth quarter of 1996.
Costs and expenses excluding depreciation and amortization and corporate
overhead were $1.0 million for the year ended December 31, 1997, a decrease of
$7,000, or 0.7%, for the year ended December 31, 1996. This decrease was
primarily due to the elimination of a management position in the first quarter
of 1997, which was partially offset by higher programming costs resulting from
contractual rate increases from programming suppliers and increases in the
number of basic subscribers.
Operating income before depreciation and amortization and corporate overhead
was $864,000 for the year ended December 31, 1997, an increase of $102,000, or
13.4%, as compared to $762,000 for the year ended December 31, 1996.
Net income was $0.6 million for the year ended December 31, 1997, an
increase of $0.4 million, or 200%, compared to $0.2 million for the year ended
December 31, 1996.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Revenues for the year ended December 31, 1996 were $1.8 million, an increase
of $106,000, or 6.2%, as compared to revenues of $1.7 million for the year
ended December 31, 1995. This increase was primarily due to an increase in the
average number of basic subscribers of approximately 3.7%.
Costs and expenses excluding depreciation and amortization and corporate
overhead were $1.0 million for the year ended December 31, 1996, an increase of
approximately $70,000, or 7.2%, as compared to $975,000 for the year ended
December 31, 1995. This increase was primarily due to higher programming costs
resulting from contractual rate increases from programming suppliers and
increases in the number of basic subscribers.
Operating income before depreciation and amortization and corporate overhead
was $762,000 for the year ended December 31, 1996, an increase of $36,000, or
5.0%, as compared to $726,000 for the year ended December 31, 1995.
57
Net income was $0.2 million for each of the years ended December 31, 1996
and 1995.
Taconic Technology
General
Currently, the assets and liabilities that we will acquire from Taconic
Technology is operated as part of Taconic Technology Corporation. The
historical financial data presented below reflect periods during which these
assets and liabilities of Taconic Technology did not operate as an independent
company and, accordingly, certain allocations were made in preparing the
financial data. Therefore, this data may not reflect the results of operations
or the financial condition which would have resulted if these assets and
liabilities of Taconic Technology had operated as a separate independent
company during these periods, and are not necessarily indicative of Taconic
Technology's future results of operations or financial position.
Quarter Ended March 31, 1999 Compared with Quarter Ended March 31, 1998
Revenues for the quarter ended March 31, 1999 were approximately $523,000,
an increase of $34,000 or 7.0%, as compared to revenues of approximately
$489,000 for the quarter ended March 31, 1998. This increase was primarily due
to the effects of rate increases implemented in the first quarter of 1998 and
an increase in the average number of subscribers.
Costs and expenses excluding depreciation and amortization and corporate
overhead were approximately $340,000 for the quarter ended March 31, 1999, a
decrease of $5,000, or 1.4%, as compared to $345,000 for the quarter ended
March 31, 1998. This decrease was primarily due to higher programming costs
associated with the growth in subscribers offset by lower expenses due to
timing in marketing expenses.
Operating income before depreciation and amortization and corporate overhead
was approximately $183,000 for the quarter ended March 31, 1999, an increase of
$39,000, or 27.1%, as compared to $144,000 for the quarter ended March 31,
1998.
Net income was $43,000 and $8,000 for the quarters ended March 31,1999 and
March 31, 1998, respectively.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Revenues for the year ended December 31, 1998 were approximately $2.1
million, an increase of $81,000 or 3.9%, as compared to revenues of
approximately $2.0 million for the year ended December 31, 1997. This increase
was primarily due to the effects of rate increases implemented in the first
quarter of 1997 and 1998 and an increase in the average number of basic
subscribers of approximately 6%.
Costs and expenses excluding depreciation and amortization and corporate
overhead were approximately $1.4 million for the year ended December 31, 1998,
an increase of $100,000, or 7.8%, as compared to $1.3 million for the year
ended December 31, 1997. This increase was primarily due to higher programming
costs resulting from contractual rate increases from programming suppliers and
increases in the number of basic subscribers.
Operating income before depreciation and amortization and corporate overhead
was $686,000 for the year ended December 31, 1998, a decrease of $7,000, or
1.0%, as compared to $693,000 for the year ended December 31, 1997.
Net income was $0.1 million for each of the years ended December 31, 1998
and 1997.
58
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Revenues for the year ended December 31, 1997 were $2.0 million, an increase
of $89,000, or 4.7%, as compared to revenues of $1.9 million for the year ended
December 31, 1996. This increase was primarily due to the effects of rate
increases implemented in the first quarter of 1996 and 1997.
Costs and expenses excluding depreciation and amortization and corporate
overhead were $1.3 million for the year ended December 31, 1997, an increase of
$65,000, or 5.4%, as compared to $1.2 million for the year ended December 31,
1996. This increase was primarily due to higher programming costs resulting
from contractual rate increases from programming suppliers.
Operating income before depreciation and amortization and corporate overhead
was $727,000 for the year ended December 31, 1997, an increase of $24,000, or
3.4%, as compared to $703,000 for the year ended December 31, 1996.
Net income was $0.8 million for the year ended December 31, 1997, an
increase of $0.1 million, or 14%, compared to $0.7 million for the year ended
December 31, 1996.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Revenues for the year ended December 31, 1996 were $1.9 million, an increase
of $145,000, or 8.1%, as compared to revenues of $1.8 million for the year
ended December 31, 1995. This increase was primarily due to the effects of rate
increases that were implemented in the first quarter of 1996 and an increase in
the average number of basic subscribers of approximately 2.3%.
Costs and expenses excluding depreciation and amortization and corporate
overhead were $1.2 million for 1996, an increase of $105,000, or 9.5%, as
compared to $1.1 million for the year ended December 31, 1995. The increase was
primarily due to higher programming costs resulting from contractual rate
increases from programming suppliers and increases in the number of basic
subscribers.
Operating income before depreciation and amortization and corporate overhead
was $703,000 for 1996, an increase of $40,000, or 6.0%, as compared to $663,000
for the year ended December 31, 1995.
Net income was $0.1 million for each of the years ended December 31, 1998
and 1997.
Liquidity and Capital Resources
The cable television business generally requires substantial capital for the
construction, expansion, upgrade and maintenance of the delivery system. In
addition, we have pursued, and will continue to pursue, a business strategy
that includes selective acquisitions. We have funded our acquisitions, capital
expenditures and working capital requirements to date through a combination of
secured and unsecured borrowings and equity contributions. We intend to use
amounts available under the credit facility, future debt and equity financings
and internally generated funds to finance our working capital requirements,
capital expenditures and future acquisitions.
Over the next five years, we intend to spend approximately $76 million to
upgrade our existing systems and the systems subject to pending acquisitions.
These capital expenditures are expected to consist of:
. approximately $45 million to upgrade the bandwidth capacity of these
systems and to employ additional fiber in the related cable plant,
. approximately $16 million for ongoing maintenance and replacement and
. approximately $15 million for installations and extensions to the related
cable plant required as a result of growth in our subscriber base.
59
Upon the completion of our planned upgrades, virtually all of the cable plant
included in these systems will have a bandwidth capacity of 450 MHz or greater
and approximately 85% will have a bandwidth capacity of 550 MHz or greater. For
additional information, please refer to "Business--Technology" section of this
prospectus.
Our financing at the time we completed the acquisition of Cable Michigan
consisted of the credit facility, the bridge credit facility, the subordinated
bridge facility and a new equity investment of approximately $80.0 million. We
used the funds obtained in the initial financing to consummate the merger with
Cable Michigan, to refinance existing Cable Michigan indebtedness and existing
Avalon Cable of New England LLC indebtedness and to pay fees and expenses. We
will not receive any cash proceeds from the issuance of the new notes. The net
proceeds of the old note offering and the senior subordinated note offering
were used principally to repay approximately:
. $125.0 million of borrowings under the credit facility,
. $105.0 million of borrowings by the issuers under the bridge credit
facility and
. $18.0 million of borrowings by the issuers under the subordinated bridge
facility, together in each case with accrued interest.
After giving effect to the foregoing, the bridge credit facility was paid in
full and terminated and there were no amounts outstanding under the
subordinated bridge facility.
As of March 31, 1999, on a pro forma basis, after giving effect to all
completed and pending acquisitions and the reorganization, the issuers would
have had no outstanding indebtedness other than the old notes and the issuers'
subsidiaries would have had $442.7 million of indebtedness outstanding and
$24.4 million of trade payables and other liabilities outstanding. Such
indebtedness includes $177.4 million under the credit facility and $150.0
million under the old notes, but excludes $18.5 million of availability under
the revolving credit facility.
Under the credit facility, the issuers' operating subsidiaries currently
have:
. a $30.0 million revolving credit facility with $18.5 million available at
March 31, 1999, and
. senior term loan facilities consisting of a $120.9 million term loan
facility which matures on October 31, 2005 and a $170.0 million term loan
facility which matures on October 31, 2006.
No additional borrowings may be made under the senior term loan facilities.
Borrowings under the revolving credit facility are available for working
capital purposes, capital expenditures and pending and future acquisitions. The
revolving credit facility terminates, and all amounts outstanding thereunder
are payable, on October 31, 2005. In addition, the credit facility provides for
up to $75.0 million in an uncommitted acquisition facility. Borrowings under
the credit facility are guaranteed by each of the issuers, Avalon Cable and
Avalon Cable of New England Holdings, Inc. The credit facility is secured by
substantially all of the assets of the issuers' operating subsidiaries in which
a security interest may be granted. For additional information concerning the
credit facility, including the timing of scheduled payments, see "Description
of Certain Debt--The Credit Facility."
The senior subordinated notes were issued in an aggregate principal amount
of $150.0 million and will mature on December 1, 2008. The senior subordinated
notes are general unsecured obligations of the issuers' operating subsidiaries
and are subordinated in right of payment to all of their current and future
senior indebtedness, including indebtedness under the credit facility. Interest
on the senior subordinated notes accrues at the rate of 9 3/8% per annum and is
payable semi-annually in arrears on June 1 and December 1 of each year, to
holders of record on the immediately preceding May 15 and November 15. For
additional information concerning the senior subordinated notes, see
"Description of Certain Debt--The Senior Subordinated Notes."
The issuers are holding companies with no significant assets other than
their investment in their operating subsidiaries. The primary source of funds
to the issuers will be dividends and other advances and transfers
60
from their operating subsidiaries. The ability of the issuers' operating
subsidiaries to make dividends and other advances and transfers of funds,
including funds required to pay interest on the new notes when due, is subject
to certain restrictions under the credit facility, the indenture governing the
senior subordinated notes and other agreements to which they become a party. A
payment default under the indenture governing the senior subordinated notes
would constitute an event of default under the credit facility, and could
result in the acceleration of the indebtedness thereunder.
The credit facility, the indenture governing the old notes and the new
notes, and the senior subordinated note indenture contain financial and other
covenants that restrict, among other things, the ability of the issuers and
their operating subsidiaries and certain of their affiliates:
. to incur additional indebtedness,
. incur liens,
. pay dividends or make certain other restricted payments,
. consummate certain asset sales,
. enter into certain transactions with affiliates,
. merge or consolidate with any other person or
. sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets.
Such limitations, together with our highly leveraged nature, could limit the
corporate and operating activities of the issuers in the future, including the
implementation of our growth strategy. See "Risk Factors--Our substantial
indebtedness could make us unable to service our indebtedness and meet our
other requirements and could adversely affect our financial health."
We believe that cash generated from operations and borrowings expected to be
available under the credit facility will be sufficient to meet our debt
service, capital expenditure and working capital requirements for the
foreseeable future. We will require additional financing if our plans
materially change in an adverse manner or prove to be materially inaccurate, or
if we engage in any significant acquisitions. We cannot assure you that this
financing, if permitted under the terms of the indenture governing the old
notes and the new notes or other then applicable agreements, will be available
on terms acceptable to us or at all. For additional information, please refer
to the "Risk Factors" section of this prospectus.
Year 2000 Information and Readiness Discussion
We have and will acquire certain financial, administrative and operational
systems. We are in the process of reviewing our existing systems and intend to
review each system that we acquire, as well as the systems employed by third
party service providers (including for billing services) in order to analyze
the extent, if any, to which we face a "Year 2000" problem (a problem that is
expected to arise with respect to computer programs that use only two digits to
identify a year in the date field and which were designed and developed without
considering the impact of the upcoming change in the century).
In particular, we are in the process of completing a review and survey of
all information technology and non-information technology equipment and
software in order to discover items that may not be Year 2000 compliant. We are
contacting each material third party vendor of products and services used by
our company in writing in order to determine the Year 2000 status of the
products and services provided by such vendors. To date, our third party
vendors have indicated that all material products and services are Year 2000
compliant. We anticipate that we will complete our survey of equipment and
software prior to July 1, 1999 and that we will complete all required
remediation and testing prior to December 31, 1999.
Our most reasonably likely worst case Year 2000 scenario involves the
complete failure of our third party billing and customer support system. Such a
scenario is, however, highly unlikely given that our billing and
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customer support systems are relatively new and that our vendors provide
readily available Year 2000 upgrades and/or system replacement packages. In the
unlikely event that our third party billing, customer support and addressable
control systems failed, we could rely on our extensive microfiche back-up
records. We intend to update our microfiche records on a regular basis prior to
December 1999.
To date, we have incurred approximately $0.1 million in expenses relating to
our Year 2000 compliance review. We anticipate that we will incur less than
$0.1 million of additional Year 2000 compliance expenses prior to January 2000.
Although we have not yet made a final determination, we believe that any
"Year 2000" problem, if it arises in the future, should not be material to our
liquidity, financial position or results of operations; however, there can be
no assurance as to the extent of any such liabilities.
Impact of Inflation
With the exception of programming costs, we do not believe that inflation
has had or will likely have a significant impact on our results of operations
or capital expenditure programs. Our programming cost increases in the past
have tended to exceed inflation and we expect them to do so in the future.
Historically, we have been successful in passing these increases on to our
customers, and we expect to be able to do so in the future. However, we cannot
assure you that we will be successful in our efforts to do so.
Proceedings
In connection with the acquisition of Mercom, former shareholders of Mercom
holding approximately 731,894 Mercom common shares or approximately 15.3% of
all outstanding Mercom common shares gave notice of their election to exercise
appraisal rights as provided by Delaware law. With respect to 209,893 of those
shares, we received notice of election from beneficial holders of Mercom common
shares and not from holders of record. We believe that the notice with respect
to the 209,893 shares did not comply with Delaware law and is ineffective. We
cannot predict at this time the effect of the elections to exercise appraisal
rights on us since we do not know whether or the extent to which the former
shareholders which gave such notice will continue to pursue appraisal rights
and seek an appraisal proceeding under Delaware law or choose to abandon these
efforts and accept the consideration payable in the Mercom merger. If these
former shareholders continue to pursue their appraisal rights 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, we would have to pay the additional amount for each Mercom common
share subject to the appraisal proceedings together with a fair rate of
interest. We 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, we would have to pay our own litigation costs. We have already
provided for the consideration of $12.00 per Mercom share due under the terms
of our merger with Mercom with respect to these shares but have not provided
for any additional amounts or costs. We can provide no assurance as to what a
Delaware court would find in any appraisal proceeding or when this matter will
be resolved. Accordingly, we cannot assure you that the ultimate outcome would
not have a material adverse effect on us.
Recent Developments
On May 13, 1999, we signed an agreement with Charter Communications, Inc.
under which Charter Communications agreed to purchase our company and assume or
repay our outstanding debt. The acquisition by Charter Communications requires
many regulatory approvals. We expect to consummate this transaction in the
fourth quarter of 1999, subject to obtaining the required regulatory approvals.
There can be no assurance, however, whether or when this acquisition will
occur. The acquisition, if completed, will give rise to an obligation to make
an offer to purchase the notes to be issued in this exchange offer at 101% of
their accreted value. For more information on this offer, see "Description of
the Notes--Repurchase at the Option of Holders--Change of Control."
62
The agreement with Charter Communications contains customary covenants
limiting our ability, among other things, to do the following, subject in each
case to specified exceptions:
. merge with or acquire the assets of any other person;
. borrow money;
. dispose of material assets or property;
. enter into, terminate or amend in a material and adverse respect any
material agreement; and
. decrease rates or repackage any programming tiers.
Charter Communications is among the leading broadband communications
companies in the United States. Charter Communications currently provides cable
television, high speed Internet access, advanced digital video programming and
paging services to customers.
63
BUSINESS
General
Members of our management and investors formed our company in 1997 to
acquire, operate and develop cable television systems in mid-sized suburban and
exurban markets characterized by attractive growth prospects and fewer multi-
channel television competitors. We seek to acquire cable television systems in
markets with high projected household growth rates and with relatively low
basic penetration, where we believe we can increase the number of basic
subscribers and revenues per subscriber on a cost effective basis. We believe
that less direct competition in our targeted markets will result in greater
stability in operating cable television systems as well as relatively lower
acquisition costs as compared to larger, more competitive markets. Our strategy
is to assemble two or more regional clusters, each consisting of 200,000 to
300,000 basic subscribers so as to develop a critical mass of operations
capable of achieving economies of scale while maintaining geographic diversity
for our company as a whole. As of March 31, 1999, on a pro forma basis
including all of the completed and pending acquisitions:
. our systems would have passed approximately 400,100 homes,
. our systems would have served approximately 242,900 basic subscribers,
with approximately 217,100 located in Michigan and approximately 25,800
located in western New England and upstate New York,
. we would have been one of the leading cable system operators in the State
of Michigan, and
. we would have been one of the 30 largest multiple system cable operators
in the United States.
On November 6, 1998, we completed our acquisition of Cable Michigan which
represents a substantial part of our business. Cable Michigan serves basic
subscribers clustered in four main areas in Michigan: Grand Rapids, Traverse
City, Lapeer and Monroe. We acquired Cable Michigan because of its strong
growth prospects. From 1993 to 1997, Cable Michigan's basic subscribers grew at
a compounded annual rate of 4.6% as compared to the national average of 2.9%
According to Market Statistics, 1997, a publication containing county-wide
demographic information published by Bill Communications, the number of
households in Cable Michigan's territory is projected to grow at a rate equal
to approximately 175% of the national average and approximately 200% of the
Michigan average over the next five years. In addition, we believe there exists
a substantial opportunity to increase Cable Michigan's basic and premium
penetration rates through aggressive marketing and improved customer service.
As of March 31, 1999, Cable Michigan's systems had a basic penetration rate of
60%, compared to the national average of 69% (according to Paul Kagan Inc.),
and a premium penetration rate of 26%, compared to the national average of 72%
(according to Paul Kagan Inc.). The total consideration that we paid in
connection with the Cable Michigan acquisition, excluding the amounts to be
paid in the Mercom transaction and related fees and expenses, was approximately
$425.9 million, net of option exercise proceeds. At this time, Cable Michigan
owned approximately 62% of the outstanding shares of Mercom, Inc.
On March 26, 1999, we completed the acquisition of the remaining 38% from the
public shareholders of Mercom. The total consideration for that acquisition,
including related fees and expenses, was approximately $21.9 million. Prior to
the completion of our acquisition of Cable Michigan, Cable Michigan, with our
assistance, entered into agreements to acquire two additional cable systems,
Nova Cablevision and Cross Country, Cable TV which served, on a combined basis,
approximately 8,300 basic subscribers in Michigan as of March 31, 1999. We
completed the acquisition of Nova Cablevision in March 1999 and the acquisition
of Cross Country Cable TV in January 1999. In addition, we consummated the
acquisitions of the assets of Novagate Communications, an Internet service
provider, and the cable system assets of R/COM, L.C., in March 1999 which
served approximately 5,000 Internet and 800 basic subscribers, respectively, as
of March 1999. On April 1, 1999 we acquired the assets of Traverse Internet,
an Internet service provider, which had approximately 4,500 Internet
subscribers as of March 1999. We have also entered into an agreement to acquire
certain cable system assets of Galaxy American Communications which had
approximately 550 basic subscribers as of March 1999.
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We also provide cable television services to approximately 25,800 basic
subscribers in western New England as of March 31, 1999 after giving effect to
all completed and pending acquisitions. These operations commenced with our
acquisitions of cable system assets from AMRAC Clear View in May 1998 for
approximately $8.1 million and from Pegasus Cable Television in July 1998 for
approximately $30.5 million. We believe that the consolidation of these
operations has allowed and will continue to allow us both to retain and attract
higher quality management and to realize lower overall operating costs for
these systems. Building on this base of operations, we intend to seek other
opportunistic acquisitions in western New England and upstate New York, where
cable system ownership is highly fragmented.
Since we established our New England Cluster, we have entered into
agreements to acquire cable system assets and related liabilities of Taconic
Technology which had approximately 5,000 subscribers as of December 31, 1998
and Hometown TV, which had approximately 400 subscribers as of March 31, 1999.
The combined purchase price for these pending transactions is approximately
$9.0 million.
Business Strategy
Our objective is to increase operating cash flow and maximize the value of
our cable television systems by utilizing our expertise in acquiring and
managing cable systems. We seek to be the leading supplier of multi-channel
television services in our chosen markets by delivering high-quality products
and service at competitive prices. To achieve these goals, we are pursuing the
following business strategies:
Target Mid-Sized Markets. We believe that the mid-sized suburban and exurban
markets that we target have many of the beneficial attributes of larger urban
and suburban markets, such as moderate to high household growth, economic
stability, attractive subscriber demographics and the potential for additional
clustering. We believe that in these markets the lower population densities and
higher costs per subscriber of installing cable plant tend to result in less
direct competition from other multi-channel television services than in larger
markets. We believe that this reduced competition has benefits in both
operating and acquiring cable television systems. First, in operating cable
television systems, we expect to experience greater stability as a result of
lower customer turnover, as there are fewer multi-channel television and other
entertainment alternatives for subscribers in those markets. Second, we expect
to face less competition in acquiring cable television systems than in larger
markets, which has and is expected to continue to result in lower purchase
price multiples.
Build Regional Clusters; Achieve Operating Efficiencies. We believe that by
building regional clusters of 200,000 to 300,000 basic subscribers we will be
able to realize economies of scale while maintaining geographical diversity for
our company as a whole. We have achieved this critical mass in Michigan through
our acquisition of Cable Michigan. The economies of scale include spreading
fixed and semi-fixed costs over a greater number of subscribers, including
costs relating to general management, marketing, technical support and
administration. We believe that we may also be able to reduce technical
operating costs and capital expenditures associated with implementation of new
channels and services by consolidating headends and utilizing digital
compression technology. Furthermore, by aggregating small systems in the same
region, we believe that we will be able to attract higher quality management
than these systems could attract on a stand alone basis.
Grow Through Strategic and Opportunistic Acquisitions. In pursuing its
clustering strategy, we will continue to seek strategic acquisitions at
attractive prices. In the Michigan cluster, given the critical mass achieved
from the acquisition of Cable Michigan, we will continue to pursue fill-in
acquisitions, such as the Nova Cablevision, Cross Country Cable TV and R/COM
acquisitions and the pending cable system acquisitions entered into by Cable
Michigan, and exchanges of systems with other cable operators to create a
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more contiguous footprint. In the New England cluster, where we continue to
build a cluster with critical mass, we will pursue both larger strategic
acquisitions of 50,000 basic subscribers or more as well as fill-in
acquisitions. In addition, we may pursue opportunistic acquisitions outside of
our existing operating regions where these acquisitions could either be the
basis for creating a new cluster or be exchanged for systems that would fit
with our existing clusters.
Upgrade Systems and Prudently Deploy Capital. We seek to provide reliable,
high quality cable television services. As such, our primary objective for
capital expenditures is to maintain, expand and upgrade our cable plant to
improve our cable television services by increasing channels, enhancing signal
quality and improving technical reliability. We believe these improvements will
enhance our position as the leading provider of multi-channel television
services in our markets by creating additional revenue opportunities, enhancing
operating efficiencies, increasing customer satisfaction and improving
relations with local franchising authorities. Over the next five years, we
intend to spend approximately $46 million to upgrade significantly the cable
systems that we currently own or plan to acquire in the pending acquisitions so
that virtually all of the associated cable plant will be at least 450 MHz (60+
analog channels) and approximately 85% will be 550 MHz (78+ analog channels) or
greater. We believe that the upgrade of our cable systems will allow us to
generate additional revenue by providing expanded tiers of basic programming,
multiplexed premium services, additional home shopping channels and pay-per-
view services. In addition, we, like many other multiple system cable
operators, are exploring the viability of new services such as Internet access,
high speed data, on-screen navigators, new video-on-demand and other
interactive services. While upgraded systems will better facilitate our ability
to offer these services, we do not intend to expend significant capital in
these areas until we believe that the demand for these services is proven and
the delivery of these services is cost-effective.
Focus on Customer. We seek to provide superior customer service to our
subscribers. As part of our commitment to customer service, we intend to
maintain, expand and upgrade our cable plant to improve and expand our cable
television services. In addition, based on subscriber surveys and other
marketing studies, we intend to increase and rearrange programming packages and
tier offerings to meet the needs of the various communities we serve. By
centralizing our customer service operations as well as operating local
offices, we believe we will be able to enhance our ability to implement our
customer service policies on a more consistent and uniform basis, while
maintaining a local presence in the markets we serve. Thus, in the Michigan
cluster, we have relocated the centralized customer call center used by Cable
Michigan from a site in Pennsylvania to a site within Michigan and are
maintaining our seven existing local offices to better serve our customers. In
the New England cluster, we centralized the customer service functions of our
various operations to our regional office in Connecticut and are maintaining
our three existing local offices.
Pursue Aggressive Marketing. Our strategy is to promote and market
aggressively and to expand cable television services to increase revenues and
revenues per subscriber by adding, upgrading and retaining customers. In order
to implement our strategy, we plan to:
. introduce targeted marketing campaigns, including outbound tele-
marketing, direct mail, advertising and sponsorship of community based
events such as fairs and sports teams,
. use price promotions, such as installation specials, to attract new
subscribers,
. use premium channel promotions, such as free weekend premium channels and
a second premium channel at no charge for a limited period with a
subscription for another premium channel, to encourage existing basic and
premium subscribers to upgrade their services,
. use contacts between customer service personnel and customers as
opportunities to upgrade service, and
. centralize marketing and programming under a newly-created position of
Vice President of Marketing.
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System Descriptions
Overview
We operate cable television systems in two regions--the Michigan cluster and
the New England cluster. The following chart sets forth certain pro forma
information relating to our cable systems as of March 31, 1999, giving effect
to all completed and pending acquisitions.
Michigan New England
Cluster Cluster Total
-------- ----------- --------
Homes passed............................. 363,438 36,711 400,149
Basic subscribers........................ 217,081 25,857 242,938
Basic penetration........................ 59.7% 70.4% 60.7%
Premium units............................ 55,913 6,364 62,277
Premium penetration...................... 25.8% 24.5% 25.6%
Average monthly revenue per basic
subscriber.............................. $ 34.56 $ 36.08 $ 34.72
The Michigan Cluster--Acquisition History
We formed our Michigan cluster through our acquisition of Cable Michigan. We
continue to add to the Michigan cluster through acquisitions:
Cable Michigan. We commenced our operations in the Michigan cluster when we
acquired Cable Michigan on November 6, 1998. The cable systems that we acquired
from Cable Michigan are located primarily in and around Grand Rapids, Traverse
City, Lapeer and Monroe, Michigan. As of March 31, 1999, these cable systems
passed approximately 342,300 homes and served approximately 207,500 basic
subscribers, including Mercom. In March 1999, we completed the acquisition of
the approximately 38% of Mercom that Cable Michigan did not own when we
acquired Cable Michigan.
Nova Cablevision. In March 1999, Cable Michigan completed its acquisition of
cable system assets from Nova Cablevision for approximately $7.8 million. As of
March 31, 1999, Nova Cablevision's cable system passed approximately 10,000
homes and served approximately 6,400 basic subscribers in 12 towns contiguous
to Cable Michigan's existing cable systems.
Cross Country Cable TV. In January 1999, Cable Michigan completed its
acquisition of the stock of Cross Country Cable TV for approximately $2.1
million. Cross Country Cable TV currently operates a cable system located in
Whitehall and Montague, Michigan. As of March 31, 1999, Cross Country Cable
TV's cable system passed approximately 5,000 homes and served approximately
1,850 basic subscribers.
R/COM. In March 1999, we completed our acquisition of certain assets of
R/COM for approximately $0.5 million. As of March 31, 1999, R/COM's cable
system passed approximately 2,900 homes and served approximately 800 basic
subscribers.
Galaxy American Communications. In February 1999, we signed an agreement to
acquire certain assets of Galaxy American Communications for approximately $0.8
million. As of March 31, 1999, Galaxy American Communications' cable system
passed approximately 3,200 homes and served approximately 550 basic
subscribers.
Traverse City ISP. On April 1, 1999, we completed our acquisition of the
assets of Traverse Internet which served approximately 4,500 residential
customers in the Traverse City area. Traverse Internet currently provides
Internet access through a standard dial-up phone modem connection. We plan to
upgrade these customers to cable-modem based Internet access, which will
provide the same service at significantly higher speeds.
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Novagate Communications ISP. In March 1999, we completed our acquisition of
the assets of Novagate Communications for approximately $2.9 million. As of
March 31, 1999, Novagate Communications served approximately 5,000 residential
Internet customers in the Grand Rapids area. Novagate Communications currently
provides Internet access through a standard dial-up phone modem connection. We
plan to upgrade these customers to cable modem based Interest access, which
will provide the same service at much higher speeds.
The Michigan Cluster--Operations
The cable systems located in the Michigan cluster serve communities situated
in the western, middle and southern portions of Michigan. The following chart
sets forth certain information relating to the cable systems located in the
Michigan cluster as of March 31, 1999, on a pro forma basis, including all
completed and pending acquisitions except the Galaxy American Communications
acquisition.
Western Michigan Mid Michigan Southern Michigan
-------------------------- ------------ -----------------
Grand Rapids Traverse City Lapeer Monroe
------------ ------------- ------------ -----------------
Homes passed............ 128,454 137,914 27,285 69,785
Basic subscribers....... 77,929 81,498 16,737 40,917
Basic penetration....... 60.7% 59.1% 61.3% 58.6%
Premium units........... 18,405 16,982 5,107 15,419
Premium penetration..... 23.6% 20.8% 30.5% 37.7%
Average monthly revenue
per basic subscriber... $ 32.89 $ 33.64 $35.76 $34.00
Approximately 80% of the Michigan cluster's subscriber base is located in
and around Grand Rapids and Traverse City. Our Grand Rapids cluster, located
near Lake Michigan in Kent and Ottawa Counties, is an affluent residential
community and popular recreational area. The economy of Grand Rapids is
supported by the presence of many large employers, including pharmaceutical
companies, automotive parts manufacturing companies and large office furniture
manufacturers. According to Market Statistics, 1997, the Grand Rapids area is
currently the fastest growing region in Michigan. Traverse City is located at
the southern end of Grand Traverse Bay in northwest Michigan, approximately 140
miles north of Grand Rapids. Traverse City is also an affluent residential
community and popular recreational area. Recently, Traverse City's tourism
industry has fueled strong commercial and residential real estate development.
The markets and towns located within the Michigan cluster are, for the most
part, characterized by high homes passed and subscriber growth rates. The
compound annual growth in homes passed and basic subscribers in the Michigan
cluster was 3.2% and 4.6%, respectively, from 1993 to 1997, as compared to the
national averages of 1.0% and 2.9%, respectively, according to Paul Kagan Inc.
The majority of this growth resulted from planned extensions of cable plant
into areas of new home construction. According to Market Statistics, 1997, over
the next five years, the number of households in the Michigan cluster is
forecasted to grow at a rate equal to 175% of the national average and 200% of
the Michigan average.
Giving effect to our merger with Cable Michigan and our other completed and
pending acquisitions, as of March 31, 1999, approximately 42% of the Michigan
cluster's plant capacity was 330 MHz (40 analog channels) or less. Over the
next five years, we expect to invest approximately $43 million to complete its
capital plan for the Michigan cluster. Cable Michigan initiated a plan in 1996
under which approximately $31.6 million had been invested as of March 31, 1999.
Our plan continues Cable Michigan's plan and anticipates the deployment of a
fiber optic network that will span approximately 75% of the Michigan cluster's
customer base. After completion of the plant upgrade projects, approximately
98% of the Michigan cluster's cable systems will have a bandwidth capacity of
at least 450 MHz (60+ analog channels) and approximately 90% of the Michigan
cluster's cable systems will have a bandwidth capacity of at least 550
MHz (78+ analog channels).
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We generally package our basic cable service in the Michigan cluster into
three distinct tiers: Limited Basic Service, Expanded Basic Service and the
Family Value Package. We currently price Limited Basic Service, which consists
primarily of broadcast channels, at an average cost of $11.35 per month;
Expanded Basic Service, which includes traditional cable channels, at an
additional average cost of $11.33 per month; and Family Value Package, which
includes popular sports and cable news channels, at an additional average cost
of $7.13 per month. As of March 31, 1999, Cable Michigan's penetration rates
for Expanded Basic Service and the Family Value Package were 89.3% and 82.4% of
basic subscribers, respectively. In May 1999, Cable Michigan implemented an
average annual rate increase for basic cable service of $2.09 per month, an
increase of approximately 8.4%. We plan to carefully review and refine our
existing programming packages and pricing structure in conjunction with our
marketing strategy.
We believe that there are significant opportunities to increase revenue in
the Michigan cluster. As of March 31, 1999, the Michigan cluster maintained a
60% basic penetration rate and a 26% premium penetration rate, as compared to
national averages of 69% and 72%, respectively, according to Paul Kagan Inc. In
order to increase our pay and basic penetration rates, we plan to introduce
targeted marketing campaigns such as outbound tele-marketing, direct mail,
advertising and sponsorship of community based events. We also believe that we
will be able to generate additional revenues from the upgrade of our cable
systems by providing expanded tiers of basic programming, multiplexed premium
services, additional home shopping channels and pay-per-view services. In
addition, we believe that the revenues generated by the cable systems serving
the Michigan cluster will increase due to the substantial projected growth of
the communities located in the Michigan cluster.
The New England Cluster--Acquisition History
The New England cluster has been formed through our acquisitions of AMRAC
Clear View and Pegasus Cable Television. We plan to add to the New England
cluster through the acquisitions of Taconic Technology and Hometown TV.
AMRAC Clear View and Pegasus Cable Television. On May 30, 1998, we acquired
the assets of AMRAC Clear View for approximately $8.1 million. The AMRAC Clear
View cable systems serve the towns of Hadley and Belchertown in the vicinity of
Amherst, Massachusetts. On July 21, 1998, we acquired the assets of Pegasus
Cable Television for approximately $30.5 million. The Pegasus Cable Television
cable systems serve seven towns located in Massachusetts and seven towns in the
County of Litchfield, Connecticut. As of March 31, 1999, these cable systems,
which currently constitute the New England cluster, passed approximately 28,800
homes and served approximately 20,500 basic subscribers.
Taconic Technology. On September 10, 1998, we entered into an agreement to
purchase the cable related assets of Taconic Technology for approximately $8.5
million. As of March 31, 1999, Taconic Technology's cable system passed
approximately 7,200 homes and served approximately 5,000 basic subscribers.
Taconic Technology's subscribers are located in eight towns in upstate New
York, all of which are situated in close proximity to our current cable systems
in the New England Cluster. We expect that the consummation of the Taconic
Technology acquisition will occur in the second quarter of 1999.
Hometown TV. In December 1998, we signed an agreement to acquire certain
assets of Hometown TV for approximately $0.5 million. As of March 31, 1999,
Hometown TV's cable systems passed approximately 700 homes and served
approximately 400 basic subscribers. We expect that the consummation of the
Hometown TV acquisition will occur in the third quarter of 1999.
The New England Cluster--Operations
The cable systems located in the New England cluster are situated in central
Massachusetts and western New England. The following chart sets forth certain
pro forma information relating to the cable systems located in the New England
cluster as of March 31, 1999, representing the cable systems acquired or to be
acquired by
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us in the AMRAC Clear View, Pegasus Cable Television, Taconic Technology and
Hometown TV acquisitions.
Western
New England
Charlton/ Winsted, CT/
Central Belchertown/ Berkshire, MA/
Massachusetts Hadley Chatham, NY
------------- ------------ --------------
Homes passed............ 13,440 23,272
Basic subscribers....... 10,940 14,916
Basic penetration....... 88.4% 64.1%
Premium units........... 2,946 3,394
Premium penetration..... 26.9% 22.8%
Average monthly revenue
per basic subscriber... $36.08 $36.08
The residential communities located within the New England cluster are
characterized by a growing middle class population base, close proximity to
urban centers, and limited off-air reception of local broadcast channels. The
majority of the New England cluster's central Massachusetts systems are located
within a 30 to 60 minute driving radius of Springfield and Worcester, the
second and third largest cities in Massachusetts. More than 10 colleges and
universities are located within the immediate vicinity of the
Charlton/Belchertown/Hadley area, including the University of Massachusetts,
Amherst College and Smith College. The western New England systems are
comprised of systems located in Connecticut, Massachusetts and New York. The
Winsted system, which is located in the affluent area of Litchfield County,
serves seven communities located approximately 30 miles west of Hartford,
Connecticut. The Chatham system, which is located in eastern New York, and the
Berkshire system, which is located in western Massachusetts, are located
approximately 15 miles from each other and approximately 30 miles southeast of
Albany, New York.
Giving effect to the Taconic Technology and Hometown TV acquisitions, as of
March 31, 1999, approximately 16% of our cable plant in the New England cluster
is 330 MHz (40 analog channels) or less. Over the next three years, we expect
to invest approximately $3 million to complete our capital plan for the New
England cluster. Pursuant to our capital plan, we intend to deploy a fiber
optic network in Charlton, Massachusetts, rebuild approximately 90 miles of
cable plant in Winsted, the most densely populated area in the New England
cluster, and upgrade the Belchertown cable plant. After the completion of our
planned upgrades, all of the New England cluster's cable systems will have a
bandwidth capacity of at least 450 MHz (60+ analog channels). In addition, as
part of our consolidation effort, we plan to eliminate three of the New England
cluster's seven headends within two years after the closing of the Taconic
Technology acquisition.
In the majority of the systems in the New England cluster, we offer a single
level of basic service containing all off-air broadcast channels and certain
satellite delivered programming at an average price of $32.55 per month. In the
remaining systems, we offer tiers of basic cable television programming at an
average price of $10.70 per month for off-air broadcast channels and $18.25 per
month for satellite delivered programming. A limited number of systems offer an
additional package of 10 channels which include news, sports and other
specialized programming not otherwise included in the basic tiers. We plan to
reconfigure these programming packages to accommodate customer preferences and
to add additional tiered programming and premium channels as we complete our
capital plan for the New England cluster.
We believe that significant opportunities exist in the New England cluster
to increase revenue per subscriber and eliminate certain costs. We believe that
the cable systems located in the New England cluster did not aggressively
market their services prior to our acquisition of them. Through the aggregation
of the acquisitions that comprise the New England cluster, we will be able to
consolidate operations, including office space, personnel and headends. We plan
to institute new channel launches, rate increases and marketing programs, in
conjunction with increased system capacity in the majority of the New England
systems by the end of 1999.
70
Programming
We have various contracts to obtain basic, satellite and premium programming
for our cable systems from program suppliers, including, in limited
circumstances, some broadcast stations, with compensation generally based on a
fixed fee per customer or a percentage of the gross receipts for the particular
service. Some program suppliers provide volume discount pricing structures
and/or offer marketing support. In addition, we are a member of the National
Cable Television Cooperative, a programming purchasing consortium consisting of
small to mid-sized multiple system cable operations and individual cable
systems serving, in the aggregate, approximately 8.5 million cable basic
subscribers as of March 31, 1999. Programming consortiums such as the National
Cable Television Cooperative help create efficiencies in securing and
administering programming contracts for small and mid-sized cable operators. We
do not have long-term programming contracts for the supply of a substantial
amount of our programming. In cases where we do have these contracts, they are
generally for a fixed period of time ranging from one to five years and are
subject to negotiated renewal. While our management believes that our relations
with our programming suppliers are generally good, the loss of contracts with
certain of our programming suppliers would have a material adverse effect on
our results of operations.
Our company, like most other cable television systems, offer our customers
various levels, or tiers, of cable service consisting of a combination of local
television stations including network affiliated, independent and public
television stations; a limited number of television signals from
"superstations" originating from distant cities:
. public, government and educational access channels; and
. various satellite-delivered, non-broadcast channels.
Our cable systems generally offer a basic tier of cable service consisting
of broadcast channels and certain satellite delivered programming. For an extra
monthly charge, our cable systems also offer one or more additional tiers of
cable services and per-channel premium satellite-delivered channels generally
providing feature films, live sports events, concerts and other special
entertainment features. The programming offered by our cable systems varies
depending upon each system's channel capacity, viewer interests and, in some
cases, franchise requirements.
We expect programming costs to increase in the ordinary course of our
business as a result of increases in the number of basic subscribers, increased
costs to purchase cable programming, expansion of the number of channels
provided to customers and contractual rate increases from programming
suppliers. We anticipate that programming costs may increase at rates beyond
historic levels, particularly for sports programming. For additional
information, please refer to the "Regulation--Copyright" section of this
prospectus.
Marketing, Customer Service and Community Relations
Our strategy is to promote and market aggressively and to expand cable
television services to increase revenues and revenues per subscriber by adding,
upgrading and retaining customers. In order to implement our strategy, we plan
to:
. introduce targeted marketing campaigns, including outbound tele-
marketing, direct mail, advertising and sponsorship of community based
events such as fairs and sports teams,
. use price promotions, such as installation specials, to attract new
subscribers,
. use premium channel promotions, such as free weekend premium channels and
a second premium channel at no charge for a limited period with a
subscription for another premium channel, to encourage existing basic and
premium subscribers to upgrade their services and
. use our customer service personnel's contacts with customers to upgrade
services.
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We believe that providing superior customer service is a key element to our
long-term success since the quality of customer service affects our ability to
retain customers. Accordingly, we have invested approximately $830,000 to
relocate the centralized customer call center used by Cable Michigan from a
site in Pennsylvania to a site within Michigan and to centralize the customer
service functions of our various operations in the New England cluster to our
regional office in Connecticut. We have staffed our Michigan customer service
center with well-trained customer service representatives and it offers 24-
hour, 7-day per week coverage to all of our customers in the Michigan cluster
on a toll-free basis. We designed our customer service center to handle a high
volume of incoming calls and to have an average call answer time below the 30
second FCC requirement. We have installed a software package that will allow
our customer service center to track call statistics ranging from average
answer time to the number of calls by type, as well as individual and group
performance statistics. This software has allowed us to respond to customer
service inquiries on a more efficient basis.
In the communities we serve, we believe that many customers prefer to
personally visit the local office to pay their bills or ask questions about
their service. As a result, we intend to maintain accessible local offices in
many of our service areas. We believe that local offices and local staffing
will increase the effectiveness of our customer relation efforts, community
relations endeavors and marketing campaigns. Additionally, we believe
familiarity with the communities we serve will allow us to customize our menu
of services and respective pricing to provide our customers with products that
are both diverse and affordable. Thus, we have seven local offices in the
Michigan cluster and the three local offices in the New England cluster.
Recognizing that strong governmental, franchise and public relations are
crucial to our overall success, we intend to undertake an aggressive initiative
to maintain and improve our working relationships with the governmental
entities within our franchise areas. We anticipate that our regional management
personnel will be required to meet regularly with local officials for the
purposes of keeping them advised of our activities within the communities,
receiving information and feedback on our standing with officials and customers
alike and ensuring that we maximize our growth potential in areas where new
housing development is occurring or where significant technical plan
improvements are underway. We also intend that our regional management
personnel, together with our corporate management personnel, will be
responsible for all franchise renewal negotiations as well as the maintenance
of our visibility through involvement in various community and civic
organizations and charities.
Technology
As part of our commitment to customer service, we seek to provide reliable,
high quality cable television services. As such, our primary objective with
respect to capital expenditures is to maintain, expand and upgrade our cable
plant to improve and expand our cable television services. Through the
implementation of our capital plan, we expect to expand channel capacity,
enhance signal quality, improve technical reliability and provide a platform to
develop high-speed Internet access. We believe that these technical
improvements and upgrades create additional revenue opportunities, enhance
operating efficiencies, improve franchising relations and increase customer
satisfaction. Before committing capital to upgrade a system, our management
team carefully assesses:
. subscribers' demand for more channels,
. upgrade requirements in connection with franchise renewals,
. the availability of competing technologies,
. the likely subscriber demand for other cable and broadband
telecommunications services,
. the cost effectiveness of any of these upgrades and
. the extent to which system improvements will increase the attractiveness
of the property to a future buyer.
72
The tables below summarize our existing technical profile and our technical
profile including work in progress projects, in each case on a pro forma basis,
including all completed and pending acquisitions except the Galaxy American
Communications acquisition, as of March 31, 1999. We expect to complete our
technical profile work in progress projects by year end 1999.
330 MHz or Less 400 to 450 MHz 550 MHz or Greater
(Approximately (Approximately (Approximately
40 Analog 60+ Analog 78+ Analog
Channels) Channels) Channels)
--------------- -------------- ------------------
Existing Technical Profile
Michigan cluster:
Number of systems......... 57 25 17
Miles of plant............ 3,408 2,796 1,992
% miles of plant.......... 41.6% 34.1% 24.3%
New England cluster:
Number of systems......... 1 7 0
Miles of plant............ 197 1,012 0
% miles of plant.......... 16.3% 83.7% 0.0%
Total:
Number of systems......... 58 32 17
Miles of plant............ 3,605 3,808 1,992
% miles of plant.......... 38.3% 40.5% 21.2%
Technical Profile Including
Work-in-Progress Projects
Michigan cluster:
Number of systems......... 56 24 19
Miles of plant............ 3,140 2,405 2,766
% miles of plant.......... 37.8% 28.9% 33.3%
New England cluster:
Number of systems......... 1 7 0
Miles of plant............ 201 1,030 0
% miles of plant.......... 16.3% 83.7% 0.0%
Total:
Number of systems......... 57 31 19
Miles of plant............ 3,341 3,435 2,766
% miles of plant.......... 35.0% 36.0% 29.0%
Over the next five years, we plan to spend approximately $76 million to
upgrade our existing systems and the systems we currently own, subject to
pending transactions. These capital expenditures, including the work in
progress reflected above, are expected to consist of:
. approximately $45 million to upgrade the bandwidth capacity of these
systems and to employ additional fiber in the related cable plant,
. approximately $16 million for ongoing maintenance and replacement, and
. approximately $15 million for installations and extensions to the related
cable plant required as a result of growth in our subscriber base.
Upon the completion of our planned upgrades, virtually all of the cable
plant included in these systems will have a bandwidth capacity of 450 MHz or
greater and approximately 85% will have a bandwidth capacity of 550 MHz or
greater.
We expect that our planned use of fiber optic technology as an alternative
to coaxial cable will play a major role in allowing us to consolidate headend
facilities and to reduce amplifier cascades, thereby improving picture quality,
system reliability and headend and maintenance expenditures. Fiber optic
strands are capable of carrying hundreds of video, data and voice channels over
extended distances without the extensive signal
73
amplification typically required for coaxial cable. We anticipate that the
installation of fiber optic cable will allow us, within the next five years, to
consolidate from 80 headends in the Michigan cluster, excluding the number of
headends, to be acquired in the Galaxy American Communications acquisition, as
of March 31, 1999, on a pro forma basis, to approximately 75 headends,
excluding the number of headends to be acquired in the Galaxy American
Communications acquisition, and from eight headends in the New England cluster
as of March 31, 1999, on a pro forma basis, to approximately six headends.
We have been closely monitoring development in the area of digital
compression, a technology that enables cable operators to increase the channel
capacity of cable television systems by permitting a significantly increased
number of video signals to fit in a cable television system's existing
bandwidth. We believe that the utilization of digital compression technology in
the future could enable us to increase channel capacity in certain systems in a
cost efficient manner. Such utilization of digital compression would generally
be implemented as part of system upgrades, where some portion of the additional
analog channels would be allocated to additional tiers of cable services. The
use of digital compression also could expand the number and types of services
offered and enhance the development of current and future revenue sources.
For the cable industry, providing high-speed cable modems to residential and
business customers has recently become a viable source of additional revenue.
Cable modems provide Internet access at higher speeds and lower costs than the
technologies offered by other communication providers. For example, a 10
megabit cable modem provides Internet access at download speeds 350 times
faster than typical 28.8 kilobit dial-up phone modem connections. Cable
Michigan introduced cable-modem based Internet access in the Traverse City area
in 1998. Based on its success to date, we purchased assets of Novagate and
agreed to purchase Traverse Internet, a local ISP in the same market. We
believe that acquiring expertise from an incumbent ISP will allow us to offer
services in a more effective and timely manner. Based on our experience with
these acquisitions, we may seek to acquire additional ISPs.
Franchises
Cable television systems are constructed and operated under fixed-term non-
exclusive franchises or other types of operating authorities, (which we
collectively refer to as "franchises") that are granted by either local
governmental or centralized state authorities. These franchises typically
contain many conditions, such as:
. time limitations on commencement and completion of construction;
. conditions of service, including the number of channels, the provision of
free service to schools and certain other public institutions;
. the maintenance of insurance and indemnity bonds; and
. the payment of fees to communities.
Certain provisions of these local franchises are subject to limits imposed
by federal law.
On a pro forma basis, as of March 31, 1999, we held 470 franchises in the
aggregate, consisting of approximately 449 in the Michigan cluster and
approximately 21 in the New England cluster. As of the same date, none of these
franchises would have accounted for more than 5% of our total revenues on a pro
forma basis. Many of these franchises require the payment of fees to the
issuing authorities of 3% to 5% of "gross revenues" (as defined by each
franchise agreement) from the related cable system. The Cable Communications
Policy Act of 1984 prohibits franchising authorities from imposing annual
franchise fees in excess of 5% of gross annual revenues and also permits the
cable television system operator to seek renegotiation and modification of
franchise requirements if warranted by changed circumstances that render
performance commercially impracticable.
74
As indicated by the following chart, which was calculated on a pro forma
basis as of March 31, 1999 after giving effect to all completed and pending
acquisitions, our franchises expire at various points in time through the year
2019.
Percentage
Percentage Number of of Total
Year of Franchise Number of of Total Basic Basic
Expiration Franchises Franchises Subscribers Subscribers
----------------- ---------- ---------- ----------- -----------
1999-2001................ 60 13% 21,864 9%
2002 and after........... 410 87% 221,074 91%
--- --- ------- ---
Total.................... 470 100% 242,938 100%
=== === ======= ===
The Cable Television Consumer Protection and Competition Act of 1992 and the
Cable Communications Policy Act of 1984 provide, among other things, for an
orderly franchise renewal process which limits a franchising authority's
ability to deny a franchise renewal if the incumbent operator follows
prescribed renewal procedures. In addition, these cable acts established
comprehensive renewal procedures which require, when properly elected by an
operator, that an incumbent franchisee's renewal application be assessed on its
own merits and not as part of a comparative process with competing
applications. For additional information, please refer to the "Regulation"
section of this prospectus.
Competition
As a cable television systems operator, we face competition from:
. alternative methods of receiving and distributing single and/or multiple
channels of video programming, including direct-to-the-home satellite
programming and off-air television broadcast programming;
. other sources of news, information and entertainment such as newspapers,
movie theaters, live sporting events, interactive online computer
services and home video products, including videotape cassette recorders;
and
. local exchange telephone companies and other well-financed businesses
from outside of the cable industry (such as the public and municipally
owned utilities that own certain of the poles on which cable is
attached), which are increasingly entering the business of providing
cable television services.
The extent to which we are competitive depends, in part, upon our ability to
provide, at a reasonable price to consumers, a greater variety of programming
and other services than are available off-air or through other alternative
delivery sources and upon superior technical performance and customer service.
Many of our present and potential competitors have substantially greater
resources than we do.
Congress has adopted legislation and the FCC has implemented regulations
which provide a more favorable operating environment for new and existing
technologies that provide, or have the potential to provide, substantial
competition to cable systems. For instance, the Cable Television Consumer
Protection and Competition Act of 1992 contains provisions, which the FCC has
implemented with regulations, that enhance the ability of cable competitors to
purchase and make available to home satellite dish owners certain satellite
delivered cable programming at competitive costs. In addition, the FCC adopted
regulations that preempt certain local restrictions on satellite and over-the-
air antenna reception of video programming services, including zoning, land-use
or building regulations, or any private covenants, homeowners' association
rule, lease, or similar restriction on property within the exclusive use or
control of the antenna user.
As a result of the legislation and regulations, we presently face
competition from, among others, satellite services whereby signals are
transmitted by satellite to receiving facilities located on customer premises.
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Programming is currently available to the owners of satellite dishes through
conventional, medium and high-powered satellites. Satellite systems generally
provide movies, broadcast stations and other program services similar to those
provided by cable television systems, although some satellite services offer a
greater number of channels and programming packages than are available through
cable television systems. Satellite service known as direct broadcast satellite
service can be received anywhere in the continental United States through
installation of a small rooftop or side-mounted antenna. This technology has
the capability of providing more than 100 channels of programming over a single
high-powered satellite with significantly higher capacity if multiple
satellites are placed in the same orbital position. Direct broadcast satellite
is currently being heavily marketed on a nationwide basis by three direct
broadcast satellite providers, and a fourth company is also proposing to
provide direct broadcast satellite services over multiple satellites. Announced
acquisitions may consolidate all direct broadcast satellite spectrum and assets
into the two dominant direct broadcast satellite providers. Direct broadcast
satellite providers provide significant competition to us and other cable
service providers. Legislation pending before Congress may substantially remove
the legal obstacles to direct broadcast satellite delivery of local and distant
broadcast signals.
The digital satellite service offered by direct broadcast satellite systems
has certain advantages over cable systems with respect to programming and
digital quality. By upgrading our systems and using digital compression
technology, we expect to be able to offer expanded programming choices and
services, more channels and better picture quality, allowing us to compete more
effectively with direct broadcast satellite systems. Furthermore, direct
broadcast satellite does suffer certain significant operating disadvantages
compared to cable television, including the subscriber's present difficulty in
viewing different programming on more than one television set, line-of-sight
reception requirements, up-front costs associated with the dish antenna and the
lack of local programming. Direct broadcast satellite providers currently face
technical and legal obstacles to providing broadcast signals, although certain
direct broadcast satellite providers currently provide local and distant
broadcast signals in certain major markets. The FCC has recently adopted
regulations that may reduce the impact of the existing legal obstacles direct
broadcast satellite providers face with respect to these services.
Cable television systems generally operate under franchises granted on a
non-exclusive basis, so that more than one cable television system may be built
in the same area (known as an "overbuild"), with potential loss of revenue to
the operator of the original system. It is possible that a franchising
authority might grant a second franchise to another company containing terms
and conditions more favorable than those afforded to us. The Cable Television
Consumer Protection and Competition Act of 1992 prohibits franchising
authorities from unreasonably denying requests for additional franchises and
does not prevent franchising authorities from operating cable systems. Well-
financed businesses from outside the cable industry may compete with us for
franchises or provide competing services. Potential competitors include the
public and municipally owned utilities that own certain of the poles on which
cable is attached. Certain municipal power companies have been considering
building new video networks to compete with us within the areas where they
deliver power. Overbuilds historically have been relatively rare, as
constructing and developing a cable television system is capital-intensive, and
it is difficult for the new operator to gain a marketing advantage over the
incumbent operator. Nonetheless, on a pro forma basis as of March 31, 1999,
less than 5% of homes passed by our Michigan cluster have been overbuilt and
none of the homes passed by our New England cluster have been overbuilt. We
believe that our systems are less likely to be overbuilt than those of many
other operators because our targeted markets have lower population densities.
We also compete with local exchange telephone companies. The
Telecommunications Act of 1996 makes it easier for local exchange carriers and
others to provide a wide variety of video services and to provide multichannel
video programming services to subscribers. Various local exchange carriers
currently are providing multi-channel video programming within and outside
their telephone service areas through a variety of distribution methods. Such
distribution methods include both the deployment of broadband wire facilities
and the use of wireless terrestrial transmission facilities. In addition,
certain local exchange carriers may not be required, under certain
circumstances, to obtain local franchises to deliver these video services or to
comply with the variety of obligations imposed upon cable systems under these
franchises. As a result, cable systems
76
could be placed at a competitive disadvantage if the delivery of video services
by local exchange carriers becomes widespread. Issues of cross-subsidization by
local exchange carriers of video and telephony services also pose strategic
disadvantages for cable operators seeking to compete with local exchange
carriers which provide video services. Ameritech Corporation has obtained cable
television franchises in southeastern Michigan and has overbuilt some cable
operators thereby creating a competitive environment. To date, Ameritech has
not applied for cable franchises in the areas served by us, including after
giving effect to the pending Michigan acquisitions. We cannot predict the
likelihood of success of video service ventures by local exchange carriers or
their impact on us.
We face additional competition from private satellite master antenna
television systems. Satellite master antenna television systems offer both
improved reception of local television stations and many of the same satellite-
delivered programming services offered by franchised cable television systems.
Satellite master antenna television operators often enter into exclusive
agreements with building owners or homeowners' associations to provide cable
programming to condominiums, apartments, office complexes and private
residential developments. Cable operators are, therefore, generally required to
obtain the approval of the building owners or homeowners' associations to
provide cable programming. However, some states have enacted laws to provide
franchised cable systems access to such private complexes and the Cable
Communications Policy Act of 1984 gives a franchised cable operator the right
to use existing compatible easements within its franchise area under certain
circumstances. These laws have been challenged in the courts with varying
results. The Telecommunications Act of 1996 broadens the definition of
satellite master antenna television systems not subject to regulation as a
franchised cable television service. A July 1998 FCC decision allowed satellite
master antenna televisions to interconnect facilities using common carrier
facilities located in public rights of way without obtaining cable television
franchises. This decision could spur growth of satellite master antenna
television systems. In addition, some companies are developing and/or offering
packages of telephony, data and video services to these private residential and
commercial developments.
We also compete with wireless terrestrial program distribution services such
as multipoint, multichannel distribution service which use low-power microwave
frequencies to transmit video programming over-the-air to subscribers. There
are multipoint, multichannel distribution service operators who are authorized
to provide or are providing broadcast and satellite programming to subscribers
in areas in the Michigan cluster and the New England cluster. Additionally, the
FCC recently adopted new regulations allocating frequencies in the 28-GHz band
for a new multichannel wireless video service similar to multipoint,
multichannel distribution service. We are unable to predict whether wireless
terrestrial video services will have a material impact on its operations.
Other new technologies, including Internet-based services, may become
competitive with services that cable television systems can offer. Pursuant to
the Telecommunications Act of 1996, the FCC adopted regulations and policies
for the issuance of licenses for digital television to incumbent television
broadcast licensees. Digital television is expected to deliver high definition
television pictures, multiple digital-quality program streams, as well as CD-
quality audio programming and advanced digital services, such as data transfer
and subscription video. In July 1998, the FCC commenced a rulemaking to
determine the extent to which cable operators will be required to carry these
digital signals. The FCC also has authorized television broadcast stations to
transmit textual and graphic information useful both to consumers and
businesses. The FCC also permits commercial and non-commercial FM stations to
use their subcarrier frequencies to provide non-broadcast services including
data transmissions. The FCC established an over-the-air Interactive Video and
Data Service that will permit two-way interaction with commercial and
educational programming along with informational and data services. Local
exchange carriers and other common carriers also provide facilities for the
transmission and distribution to homes and businesses of interactive computer-
based services, including the Internet, as well as data and other non-video
services. The FCC has conducted spectrum auctions for licenses to provide
personal communication systems. Personal communication systems will enable
license holders, including cable operators, to provide voice and data services.
Advances in communications technology as well as changes in the marketplace
and the regulatory and legislative environment are constantly occurring. Thus,
we cannot predict the effect that ongoing or future
77
developments might have on the cable television industry or on our operations.
As other companies begin to provide cable television services, we will face
additional competitors, many of which will have substantially greater resources
than we have.
Employees
As of March 31, 1999, we had a total of approximately 346 employees.
Approximately 20 of our employees located in Michigan are represented by labor
unions or trade councils. We have experienced no work stoppages and believe
that our employee relations are good and will continue to be so after the
closing of the pending acquisitions.
Properties
A cable television system consists of three principal operating components.
The first component is the signal reception processing and originating point
called a "headend." The headend receives television, cable programming service,
radio and data signals that are transmitted by means of off-air antennas,
microwave relay systems and satellite earth systems. Each headend includes a
tower, antennae or other receiving equipment at a location favorable for
receiving broadcast signals and one or more earth stations that receives
signals transmitted by satellite. The headend facility also houses the
electronic equipment which amplifies, modifies and modulates the signals,
preparing them for passage over the system's network of cables. The second
component of the system is the distribution network. The distribution network
originates at the headend and extends throughout the system's service area. A
cable system's distribution network consists of microwave relays, coaxial or
fiber optic cables placed on utility poles or buried underground and associated
electronic equipment. See the "Regulation--Pole Attachment" section of this
prospectus. The third component of the system is a "drop cable," which extends
from the distribution network into each customer's home and connects the
distribution system to the customer's television set.
We own and lease parcels of real property for signal reception sites
(antenna towers and headends), microwave complexes and business offices,
including our principal executive offices. In addition, we own our cable
systems' distribution networks, various office fixtures, test equipment and
certain service vehicles. We will also acquire additional property in the
pending acquisitions. The physical components of our cable systems require
maintenance and periodic upgrading to keep pace with technological advances. We
believe that our properties, including those to be acquired in the pending
acquisitions, both owned and leased, are in good condition and are suitable and
adequate for our business operations.
Legal Matters
In connection with the acquisition of Mercom, former shareholders of Mercom
constituting approximately 15.3% of all outstanding Mercom common shares gave
notice of their election to exercise appraisal rights as provided by Delaware
law. We and the companies we plan to acquire are currently party to various
legal proceedings. In addition, we expect that in the future we will have
various legal proceedings outstanding in the normal course of business. Our
management anticipates that these proceedings will not have a material adverse
effect on our results of operations or our financial condition.
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REGULATION
Overview
We face regulation from federal, state and local governments because we own
and operate cable television systems. Most of the federal laws governing our
cable systems arise from the Cable Communications Policy Act of 1984, the Cable
Television Consumer Protection and Competition Act of 1992 and the
Telecommunications Act of 1996. These statutes amended the federal
Communications Act of 1934 and added provisions specific to cable television.
Many of the cable television provisions of the Communications Act require the
FCC to adopt and enforce regulations. The FCC has done so and regulates many
aspects of our cable systems and our business. Local franchise authorities also
regulate our cable systems through local cable franchise agreements and
ordinances and, in some municipalities, through the local rate regulation
process. In some jurisdictions, state agencies also regulate our cable systems.
The substantial regulation of our cable systems adds additional costs and risks
to our business.
We provide in this section a summary of federal laws and regulations that
could materially affect our cable systems and the cable industry. We also
describe certain state and local laws.
Rate regulation
Rate regulation under the Cable Television Consumer Protection and
Competition Act. The Cable Television Consumer Protection and Competition Act
establishes cable rate regulation at two levels. Local franchise authorities
can obtain authority to regulate rates for equipment and basic service (the
lowest tier of service usually including broadcast signals, public access
programming and some cable satellite services). The FCC regulates rates for
cable programming services tiers, typically the next levels of cable service
after basic service. The Cable Television Consumer Protection and Competition
Act directs the FCC to promulgate regulations to govern the rate regulation
process at both the federal and local level. The Cable Television Consumer
Protection and Competition Act also deregulates rates for any cable system
subject to effective competition, meaning that the cable system faces specified
thresholds of competition in their franchise areas. Generally, the rate
regulation process imposes substantial administrative burdens and costs on
regulated systems and reduces cable rate increases. Rate regulation has forced
some cable systems to reduce rates and make refunds to subscribers.
Changes under the Telecommunications Act of 1996. The Telecommunications Act
of 1996 makes several significant changes to cable rate regulation. The
Telecommunications Act of 1996:
. deregulates rates for cable programming services tiers after March 31,
1999;
. deregulates all rates for certain small cable systems;
. allows non-predatory, bulk discount rates for service to commercial
residential developments;
. allows aggregation of costs for regulated equipment rates at the
franchise, system, regional or company level;
. eliminates individual subscriber rate complaints to the FCC;
. authorizes local franchise authorities to file complaints with the FCC
concerning cable programming services tier rates after receiving multiple
subscriber complaints within prescribed time frames; and
. permits certain cable operators to include prior year losses occurring
before September 1992 in rate calculations.
The changes to cable rate regulation resulting from the Telecommunications
Act of 1996 provide cable systems some relief from the administrative burdens
and costs of rate regulation.
FCC regulations. Following the Cable Television Consumer Protection and
Competition Act, the FCC adopted detailed regulations governing cable service
and equipment rates and the rate regulation process. Those
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regulations have undergone significant changes since 1993. The FCC will likely
continue to modify its rate regulations. Principal components of FCC rate
regulation include:
. Benchmark method. Cable systems subject to rate regulation can use the
FCC's benchmark method to set rates. In 1994, the FCC's benchmark
regulations required operators to implement rate reductions of up to 17%
for regulated services. Cable systems can adjust benchmark rates under
the FCC's comprehensive and restrictive regulations allowing quarterly or
annual increases or decreases for changes in the number of regulated
channels, inflation and increases in certain costs.
. Cost-of-service method. Cable operators subject to rate regulation can
elect to use the FCC's cost-of-service method to set rates. Cost-of-
service permits a cable operator to set rates higher than permitted under
the benchmark method, if costs allowable under the FCC regulations
support the higher rate. The cost-of-service method generally requires
more administrative and professional resources for a cable system. The
FCC cost-of-service rules also require exclusion from the rate base up to
one-third of acquisition costs attributed to tangible and intangible
assets related to providing regulated cable service. The FCC's cost-of-
service regulations also presume an industry-wide 11.25% after tax rate
of return on an operator's allowable rate base. The FCC has initiated a
rulemaking to consider using an operator's actual debt cost and capital
structure for cost-of-service calculations.
. Small cable system abbreviated cost-of-service method. In 1995, the FCC
adopted for qualified small systems a generally less restrictive and more
streamlined method to compute regulated rates.
. Equipment rate regulation. Where franchising authorities have the
authority to regulate basic service rates, they may also regulate the
rates for additional outlets, installation, and subscriber equipment used
to receive the basic cable service tier, such as converter boxes and
remote control units. FCC regulations require franchising authorities to
regulate these rates on the basis of actual cost plus a reasonable
profit, as defined by the FCC.
The FCC currently has several changes to its rate regulations under
consideration. We cannot predict the impact of any changes on our cable
systems.
Current rate regulation status of our cable systems. In many of the
communities where we provide cable service and in many of the systems we plan
to acquire, local franchising authorities actively regulate rates for basic and
related services. At the FCC, it remains possible that complaints remain
pending against cable programming services tier rates charged by some of our
cable systems and by some of the cable systems we propose to acquire. In
addition, a franchising authority has filed a petition for special relief
relating to our limited tier of programming.
The FCC has ordered reductions in certain cable programming services tier
rates charged by Cable Michigan. The FCC based those decisions, in part, on the
finding that Cable Michigan did not qualify for small cable system rate relief
under the FCC's 1995 small system rules. The FCC concluded that Cable Michigan
did not qualify as a "small system" because all affiliated companies served
more than 400,000 subscribers (due to RCN Corporation's investment in Mexican
cable systems). Cable Michigan challenged those decisions on the basis that
certain of its systems should qualify as "small cable systems" under the FCC's
rules, or, in the alternative, that its rates are justified under the FCC's
benchmark method. On July 15, 1998, the FCC permitted Cable Michigan to
withdraw its challenge of the FCC's decision. Because Cable Michigan is no
longer affiliated with RCN Corporation, we anticipate that certain of our
smaller systems will qualify as small cable systems.
"Anti-Buy Through" Provisions
The Cable Television Consumer Protection and Competition Act requires cable
systems to permit subscribers to purchase video programming on a per channel or
a per program basis without the necessity of subscribing to any tier of
service, other than the basic cable service tier. Cable systems without the
technological capability to offer programming in this manner benefit from a
statutory exemption. The
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exemption is available until a cable system obtains the technological
capability, but not later than December 2002. The FCC may also issue waivers.
We expect that our systems will comply with this requirement by the December
2002 deadline.
Broadcast Signal Carriage--Must-Carry and Retransmission Consent
Must-carry. The Cable Television Consumer Protection and Competition Act and
FCC regulations impose substantial restrictions on carriage of broadcast
signals by cable systems. The regulations allow local commercial television
broadcast stations to request mandatory carriage on a cable system ("must-
carry"), subject to certain exceptions. A cable system must devote up to one-
third of its activated channel capacity for the carriage of local commercial
television stations. If a cable operator declines to carry a local broadcast
station requesting must-carry, the broadcaster may file a complaint with the
FCC. If the FCC finds that the broadcast station qualifies for must-carry, the
FCC will order the cable system to commence carriage. Local non-commercial
television stations and certain low power television stations also have
mandatory carriage rights. In March 1997, the U.S. Supreme Court upheld the
constitutionality of the Cable Television Consumer Protection and Competition
Act's must-carry requirements.
On July 9, 1998, the FCC initiated a rulemaking to consider the
requirements, if any, for mandatory carriage of digital television signals. We
cannot predict the ultimate outcome of this rule making or the impact of new
carriage requirements on our cable systems or our business.
Retransmission consent. Local broadcast stations can also elect carriage by
retransmission consent. This means that the cable system cannot carry the
broadcast signal unless first obtaining the broadcaster's consent in writing.
Some broadcast stations have withheld consent unless the cable operator pays
for carriage or provides other consideration. Additionally, cable systems must
obtain retransmission consent for all other commercial television stations
carried on the cable system, except for certain superstations. Similarly,
federal law requires retransmission consent for carriage of commercial radio
stations and certain low-power television stations.
Access Channels
Public, Educational and Governmental Access. Federal law permits franchising
authorities to obtain channel capacity on our cable systems for public,
educational and governmental access programming. When required by a local
franchise authority, we must provide access channel capacity at no charge.
Local franchise authorities may also require us to purchase public, educational
and governmental access equipment and pay other public, educational and
governmental access related expenses. We have no direct editorial control over
programming cablecast on public, educational and governmental channels, except
that we must prohibit obscene programming.
Commercial leased access. Federal law also requires our cable systems to
designate a portion of channel capacity for commercial leased access.
Commercial leased access programmers can request channel capacity from us and
provide programming that may compete with other services we offer. The FCC
regulates commercial leased access rates, terms and dispute resolution. Cable
operators may prohibit or limit the provision of indecent programming on leased
access channels.
Local Franchise Procedures
Federal law. The Communications Act governs several aspects of the local
cable franchise process that directly impact our cable systems. Principal
franchise-related provisions of federal law include:
. A cable system may not operate without a local franchise.
. Local franchise authorities may grant one or more cable franchises and
may not unreasonably deny an application for a competitive franchise.
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. A municipality may operate its own cable system without a franchise.
. In granting or renewing franchises, state and local authorities may
establish requirements for cable-related facilities and equipment, but
not for specific video programming or information services.
. Local franchise authorities can require payments of franchise fees of 5%
of gross revenues derived from the operation of the cable system to
provide cable services. Our franchises and the franchises to be acquired
in the pending acquisitions typically provide for periodic payment of
fees to franchising authorities of 3% to 5% of gross revenues. Federal
law permits us to pass franchise fees on to subscribers.
. Local franchise authorities can require cable operators to construct and
maintain institutional networks as a condition of a franchise grant or
renewal.
. A cable operator can petition for modification of franchise requirements
by the franchise authority or judicial action if warranted by changed
circumstances.
The Telecommunications Act of 1996 imposed additional controls on the local
cable franchise process. The Telecommunications Act of 1996 generally prohibits
franchising authorities from:
. Imposing requirements in the cable franchising process that require,
prohibit or restrict the provision of telecommunications services.
. Imposing franchise fees on revenues derived by the operator from
providing telecommunications services over its cable system.
. Restricting a cable operator's use of any type of subscriber equipment or
transmission technology.
Cable franchise renewals and transfers. The Communications Act contains
renewal procedures and transfer procedures designed to protect cable operators
against arbitrary denials of renewal or transfer. Still, the cable franchise
renewal and transfer processes remain risky and potentially costly. Franchising
authorities may seek to impose new and more onerous requirements, such as
significant upgrades in facilities and services or increased franchise fees, as
a condition of renewal or consent to transfer.
Cable franchises and cable-based Internet services. We are planning to offer
cable-based Internet access and other information services on our systems. The
regulatory status of such services remains uncertain. In September 1998, the
FCC's Cable Services Bureau issued a discussion paper analyzing the regulatory
classification of Internet and other information services. The paper identified
three likely classifications:
. as cable services;
.as telecommunications services; or
.as information services that are currently unregulated.
The ultimate classification of cable-based Internet services under federal law
could have significant impact on the regulation of these services, the ability
of competitors to use the cable plant and the authority to provide these
services under existing franchises. Until the FCC or Congress provides further
guidance, we cannot gauge the impact, if any, such classifications would have
on us or our business.
Inside Wiring Rules
The Cable Television Consumer Protection and Competition Act directed the
FCC to prescribe regulations governing the disposition of inside wiring after a
customer terminates service. In a series of rulemakings and orders, with the
most recent order issued in October 1997, the FCC developed regulations that
limit a cable operator's right to control inside wiring after a subscriber
terminates service or after a multiple dwelling unit owner terminates the cable
operator's rights to access the multiple dwelling unit.
After a subscriber terminates service or a multiple dwelling unit owner
terminates access rights, the regulations generally require the cable operator
to offer its inside wiring for sale to the subscriber or to the
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multiple dwelling unit owner at replacement cost or a negotiated price. If the
cable operator does not sell the inside wiring within a specified period after
termination of service or access rights, then the cable operator must remove
the wiring. If the cable operator neither sells nor removes its wiring, the
wiring is deemed abandoned. A competing provider can then use the inside wiring
to provide service to the individual subscriber or to the multiple dwelling
unit. These regulations increase our risk that a competitor can gain access to
inside wiring after termination of service by a subscriber or termination of
access rights by a multiple dwelling unit owner.
The FCC has also issued a further notice of proposed rulemaking on other
inside wiring issues including possible restrictions on exclusive multiple
dwelling unit contracts and the applicability of the inside wiring rules to all
video providers, not just cable operators. We cannot predict the ultimate
outcome of this rulemaking or its impact on our cable systems.
Ownership Limitations
Horizontal ownership limits. Under the Cable Television Consumer Protection
and Competition Act, the FCC adopted rules prescribing national subscriber
limits. A federal court found the statutory limitation unconstitutional and the
FCC stayed enforcement of its rules. On June 26, 1998, the FCC released an
order on reconsideration of its horizontal ownership rules, although it did not
lift its stay of those rules. In that order, the FCC denied petitions
requesting that it lower its horizontal ownership limits. The FCC has recently
sought comments on whether to change the definition of ownership that
constitutes a cognizable interest in a cable system. The results of these
proceedings could affect all ownership prohibitions.
Affiliated programmer limits. The Cable Television Consumer Protection and
Competition Act requires the FCC to adopt limits on the number of channels on
which a cable operator can carry programming provided by an affiliated video
programmer.
Changes to broadcast cross-ownership restrictions. The Telecommunications
Act of 1996 eliminated the statutory prohibition on the common ownership,
operation or control of a cable system and a television broadcast station in
the same service area and directed the FCC to review its broadcast/cable
ownership restrictions. Upon review, the FCC eliminated its regulatory
restriction on cross-ownership of cable systems and national broadcasting
network stations. The FCC has also released a notice of inquiry seeking comment
on all of the broadcast ownership rules not already under review in other
proceedings.
Changes to satellite master antenna television and MMDS cross-ownership
restrictions. In January 1995, the FCC relaxed its restrictions on ownership of
satellite master antenna television systems. The revised rules permit a cable
operator to acquire satellite master antenna television systems in the
operator's existing franchise area so long as the programming services provided
through the satellite master antenna television system are offered according to
the terms of the cable operator's local franchise agreement. The
Telecommunications Act of 1996 provides that the cable/satellite master antenna
television and cable/multipoint, multichannel distribution service cross-
ownership rules do not apply in any franchise area where the operator faces
effective competition.
Competition with Local Exchange Carriers
The Telecommunications Act of 1996 makes significant changes to the
regulation of local exchange carriers that provide cable services. The
Telecommunications Act of 1996:
. Eliminates the requirement that local exchange carriers obtain Section
214 approval from the FCC before providing video services in their
telephone service areas.
. Removes the statutory telephone company/cable television cross-ownership
prohibition, allowing local exchange carriers to offer video services in
their telephone service areas.
. Permits local exchange carriers to provide service as franchised cable
operators or as "open video system" operators. As an open video system
operator, a local exchange carrier may face less
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burdensome local regulation but must comply with other conditions
including setting aside up to two-thirds of their channel capacity for use
by unaffiliated program distributors.
. Prohibits a local exchange carrier from acquiring an existing cable
system in its telephone service area except in limited circumstances.
The changes to regulation of local exchange carrier ownership of cable
systems increases the risk to our cable systems that local exchange carriers
will seek to compete in our franchise areas.
While the Telecommunications Act of 1996 facilitates the entry of local
exchange carriers into cable markets, it also opens the local exchange markets
to competition. The Telecommunications Act of 1996 removes barriers to entry
into the local telephone exchange market by preempting state and local laws
that restrict competition and by requiring all local exchange carriers to
provide nondiscriminatory access and interconnection to potential competitors,
including cable operators, wireless telecommunications providers and long
distance companies.
Regulations promulgated by the FCC under the Telecommunications Act of 1996
require local exchange carriers to open their telephone networks to competition
by providing competitors interconnection, access to unbundled network elements
and retail services at wholesale rates. As a result of these changes, companies
can interconnect with incumbent local exchange carriers to provide local
exchange services. Numerous parties appealed certain aspects of these
regulations. In a recent decision, the United States Supreme Court largely
upheld the FCC's interconnection regulations, including those related to
certain pricing and access issues. Despite the need to resolve other
outstanding issues, the Court's decision suggests promise for competition in
local exchange services.
Pole Attachments
The Communications Act requires the FCC to regulate the rates, terms and
conditions imposed by public utilities for cable systems' use of utility pole
and conduit space. State authorities can assume this role through a FCC
certification process. In the absence of state regulation, the FCC regulates
pole attachment rates according to a formula that allocates costs between the
pole owner and pole users. In some cases, utility companies have increased pole
attachment fees for cable systems that have installed fiber optic cables for
distribution of telecommunications services and other non-cable services. The
FCC concluded that, in the absence of state regulation, it has jurisdiction to
determine whether utility companies have justified their demand for additional
rental fees. The FCC has also concluded that regulated pole owners cannot
impose disparate attachment rates based on the type of service provided.
The Telecommunications Act of 1996 and the FCC's implementing regulations
make significant changes to pole attachment regulation. Changes include:
. Requiring regulated pole owners to provide cable systems and
telecommunications carriers with nondiscriminatory access to any pole,
conduit or right-of-way controlled by the utility.
. New regulations to govern the rates for pole attachments used by
companies providing telecommunications services, including cable
operators.
. New rate regulations go into effect in February 2001. Any increase will
be phased in through equal annual increments over a period of five years
beginning in February 2001.
Although the FCC has issued its regulations, they are subject to changes on
reconsideration or appeal. Some issues that may affect the ultimate rates for
telecommunications attachments to utility poles remain outstanding.
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Other Statutory Provisions
Other federal law potentially impacting our cable systems or our business
include:
Transactions with affiliated programmers. The Communications Act and FCC
regulations prohibit any satellite video programmer affiliated with a cable
company from favoring an affiliated company over competitors. A satellite video
programmer affiliated with a cable company must sell its programming to
unaffiliated multichannel video distributors on nondiscriminatory terms. These
provisions restrict the ability of program suppliers affiliated with cable
companies to offer exclusive programming arrangements to their affiliates.
Content regulation. The Telecommunications Act of 1996 required operators to
block fully both the video and audio portion of sexually explicit or indecent
programming on channels that are primarily dedicated to sexually oriented
programming or alternatively to carry such programming only at "safe harbor"
time, periods defined by the FCC as the hours between 10 p.m. and 6 a.m. The
U.S. Supreme Court recently ruled that these restrictions are unconstitutional.
The Telecommunications Act of 1996 also contains provisions regulating the
content of video programming and computer services. Specifically, the law
prohibits the use of computer services to transmit "indecent" material to
minors. The U.S. Supreme Court has ruled that the provisions relating to the
regulation of indecent material are unconstitutional.
Under the Telecommunications Act of 1996, the television industry recently
adopted a voluntary ratings system for violent and indecent video programming.
The Telecommunications Act of 1996 also requires all new television sets to
contain a so-called "V-chip" capable of blocking all programs with a given
rating.
Miscellaneous Telecommunications Act of 1996 provisions. The
Telecommunications Act of 1996 modifies several other cable-related statutory
provisions including those governing technical standards, equipment
compatibility, subscriber notice requirements and program access. The
Telecommunications Act of 1996 also repeals the three-year anti-trafficking
prohibition adopted in the Cable Television Consumer Protection and Competition
Act. FCC regulations implementing the Telecommunications Act of 1996 preempt
certain local restrictions on satellite and over-the-air antenna reception of
video programming services, including zoning, land-use or building regulations,
or any private covenant, homeowners' association rule, lease, or similar
restriction on property within the exclusive use or control of the antenna
user.
Other FCC Regulations
In addition to the FCC regulations noted above, cable-related FCC
regulations govern other aspects of our cable systems and our business
including:
. signal leakage,
. equal employment opportunity,
. syndicated program exclusivity,
. network program non-duplication,
. registration of cable systems,
. maintenance of records and public inspection files,
. microwave frequency usage,
. lockbox availability,
. sponsorship identification,
. antenna structure notification, marking and lighting,
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. carriage of local sports broadcast programming,
. political broadcasts and advertising,
. advertising contained in non-broadcast children's programming,
. consumer protection and customer service,
. technical standards,
. consumer electronics equipment compatibility,
. closed captioning, and
. emergency alert systems.
The FCC has the authority to enforce its regulations through cease and
desist orders, substantial fines and other administrative sanctions including
the revocation of FCC licenses needed to operate certain transmission
facilities used in connection with cable operations.
Over the past several years, Congress and other governmental bodies have
considered bills and administrative proposals related to cable television.
Other legislative and administrative proposals regulating cable television will
likely continue to come before lawmakers and administrative agency.
Copyright
The Copyright Act requires cable television systems to obtain a compulsory
copyright license covering the retransmission of television and radio broadcast
signals. In exchange for filing periodic reports and paying a percentage of
revenues to a federal copyright royalty pool, cable systems obtain a compulsory
license to retransmit the copyrighted material on broadcast signals. Congress
and the Copyright Office have considered possible changes to, or elimination
of, the compulsory copyright license. The elimination or substantial
modification of the cable compulsory license could adversely affect our ability
to obtain suitable programming and could substantially increase the cost of
programming available for distribution to our subscribers. We cannot predict
the outcome of this activity.
Cable operators distribute programming and advertising that use music
controlled by three primary performing rights organizations, the American
Society of Composers, Authors and Publishers, Broadcast Music, Inc. and the
Society of European Stage Authors and Composers. In October 1989, the special
rate court of the U.S. District Court for the Southern District of New York
imposed interim rates on the cable industry's use of music controlled by the
American Society of Composers, Authors and Publishers. American Society of
Composers, Authors and Publishers and cable industry representatives have met
to discuss the development of a standard licensing agreement covering music
controlled by the American Society of Composers, Authors and Publishers in
local origination and access channels and pay-per-view programming. We cannot
predict the ultimate outcome of these industry negotiations or the amount of
any license fees required for past and future use of music controlled by the
American Society of Composers, Authors and Publishers. We do not believe such
license fees will materially impact our financial position, results of
operations or liquidity. The same U.S. District Court for the Southern District
of New York recently established a special rate court for Broadcast Music, Inc.
Broadcast Music, Inc. and cable industry representatives recently concluded
negotiations for a standard licensing agreement covering the performance of
Broadcast Music, Inc. music contained in advertising and other information
inserted by operators into cable programming and on certain local access and
origination channels carried on cable systems. The Society of European Stage
Authors and Composers and cable industry representatives have agreed on an
interim licensing plan pending adoption of a standard licensing agreement.
State and Local Regulation
Because our cable systems use local streets and rights-of-way, state and
local governments regulate many aspects of our business, typically through the
cable franchise process. Generally, a municipality will grant a cable system a
non-exclusive franchise to occupy the streets and rights-of-way to operate a
cable system, subject to the terms of the franchise. Most franchises specify
terms of between 5 and 15 years, subject to earlier termination for material
noncompliance. The terms and conditions of franchises vary materially from
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jurisdiction to jurisdiction. Most franchises contain provisions governing
cable service rates, franchise fees, franchise term, system construction and
maintenance obligations, system channel capacity, design and technical
performance, customer service standards, franchise renewal, sale or transfer of
the franchise, territory of the franchisee, indemnification of the franchising
authority, use and occupancy of public streets and types of cable services
provided.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation
similar to that of a public utility. We expect other states to increase
regulation of cable television. Currently, Connecticut, Massachusetts and New
York use centralized authorities for some or all aspects of cable regulation.
Michigan does not currently have a centralized authority for cable television
regulation. State and local authority under cable franchises remains subject to
federal law.
We have not described all present and proposed federal, state, and local
regulations and legislation affecting the cable industry. Other existing
federal regulations, copyright licensing, and, in many jurisdictions, state and
local franchise requirements, are currently the subject of judicial
proceedings, legislative hearings, legislative initiatives (including active
legislation) and administrative proposals which could change, in varying
degrees, the manner in which cable television systems operate. We cannot
predict the outcome of these proceedings or the impact upon us or the cable
television industry.
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MANAGEMENT
Executive Officers, Managers and Directors
Each of the issuers is an indirect subsidiary of, and is controlled by,
Avalon Cable Holdings. Avalon Cable Holdings is a limited liability company
whose affairs are governed by a Board of Managers. The following table sets
forth certain information, as of March 15, 1999, with respect to the executive
officers and managers of Avalon Cable Holdings. Each of Avalon Cable Holdings'
managers is also a manager of Avalon Cable LLC and a director of Avalon Cable
Holdings Finance, Inc. The executive officers of each of the issuers are
substantially similar to the executive officers of Avalon Cable Holdings. The
election of the managers is subject to the terms of the Members Agreement of
Avalon Cable LLC described below. For additional information, please refer to
the "Certain Relationships and Transactions--Members Agreement" section of this
prospectus.
Name Age Position and Offices
---- --- --------------------
David W. Unger.......... 43 Chairman of the Board
Joel C. Cohen........... 54 President, Chief Executive Officer, Secretary and Manager
Peter Polimino.......... 41 Vice President--Finance
Peter Luscombe.......... 41 Vice President--Engineering
John F. Dee............. 39 General Manager of New England Operations
Mark Dineen............. 34 General Manager of Michigan Operations
Jay M. Grossman......... 39 Manager, Vice President and Assistant Secretary
Peggy J. Koenig......... 41 Manager, Vice President and Assistant Secretary
Royce Yudkoff........... 43 Manager
The following sets forth certain biographical information with respect to
the executive officers and managers of Avalon Cable Holdings.
David W. Unger has been the Chairman of the Board of Avalon Cable Holdings
since 1997 when he co-founded Avalon Cable Holdings. Since 1995, Mr. Unger has
invested in, operated and sold communications businesses. Prior to 1995, Mr.
Unger worked for Communications Equity Associates, Teleprompter Corp., TKR
Cable Co. and as an investment banker. In addition to his duties to Avalon, Mr.
Unger serves as Vice President of Muzak LLC, a provider of commercial
background and foreground music. ABRY is the principal investor in Muzak. Mr.
Unger is a director of Muzak.
Joel C. Cohen has been the President, Chief Executive Officer, Secretary and
a Manager of Avalon Cable Holdings since 1997 when he co-founded Avalon Cable
Holdings. From 1996 to 1997, Mr. Cohen served as the Chief Financial Officer of
Patient Education Media, Inc. and as a consultant to various cable companies.
From 1992 to 1996 Mr. Cohen served as a director and as both Chief Operating
Officer and Chief Financial Officer for Harron Communications Corp., a cable
and broadcast television operator with more than 200,000 cable subscribers.
Prior to 1992, Mr. Cohen was Senior Vice President of United Artists
Entertainment Company and President of its international division. Mr. Cohen
also served in various executive positions at Group W Cable and Teleprompter
Corp.
As stated above, Mr. Cohen served as the Chief Financial Officer of Patient
Education Media from June 1996 through December 1997. Prior to June 1996,
Patient Education Media did not employ a Chief Financial Officer. Patient
Education Media was formed in 1994 to create and market patient educational
videos and other products under the trademark TIME-LIFE MEDICAL. Patient
Education Media ceased producing education video tapes in September 1996 and
ceased all operations on December 20, 1996. Thereafter, Patient Education Media
proceeded to liquidate the majority of its assets. On March 14, 1997, Patient
Education Media filed a petition under Chapter 11 of the United States
Bankruptcy Code. In January 1998, Mr. Cohen was appointed by the Bankruptcy
Court for the Southern District of New York to act as disbursing agent in
relation to the liquidation of Patient Education Media.
88
Peter Polimino has been the Vice President of Finance of Avalon Cable
Holdings since November 1998. Mr. Polimino is a financial professional with
over 18 years of experience in cable, broadcast and network television and
radio. Prior to joining Avalon Cable Holdings in November 1998, Mr. Polimino
was Vice President, Finance of the Sales Division of Fox/Liberty Networks
during 1998. From 1980 to 1998, Mr. Polimino held various financial positions
at Westinghouse Broadcasting, including Teleprompter Manhattan Cable,
Huntington TV Cable, Group W Television, KDKA TV/Radio, WINS Radio, WNEW Radio
and The CBS Television Network.
Peter Luscombe has been the Vice President of Engineering of Avalon Cable
Holdings since August 1998. Prior to joining Avalon Cable Holdings, Mr.
Luscombe was Executive Director of Engineering for the 3.1 million subscriber
Atlantic Division of Telecommunications, Inc. His responsibilities included
engineering strategy and technical operations for a variety of cable systems,
including both smaller traditional systems and larger, more technologically
aggressive cable systems with cable modem and compressed digital video
operations. From 1982 through 1997, Mr. Luscombe was Vice President of
Engineering for TKR Cable Company, an 800,000 subscriber MSO. Mr. Luscombe has
been a director of the National Society of Cable Telecommunications Engineers
and a member of the technical advisory committee of the Cable Television
Laboratories, Inc. Mr. Luscombe maintains an active membership in the National
Society of Cable Telecommunications Engineers.
John F. Dee has been the General Manager of Avalon Cable Holdings' New
England operations since July 1998. Prior to joining Avalon Cable Holdings, Mr.
Dee was responsible for the New England operations of Pegasus. He originally
joined Pegasus as Technical Manager in 1992. From 1981 through 1992, Mr. Dee
held various technical positions with United Cable TV and Telecommunications,
Inc.
Mark Dineen has been the General Manager of Avalon Cable Holdings' Michigan
operations since November 1998. Prior to joining Avalon Cable Holdings, Mr.
Dineen was employed by Cable Michigan in various corporate and field positions,
including as Corporate Director of Marketing, since 1992. From 1987 to 1992,
Mr. Dineen held marketing and sales management positions with Bresnan
Communications and Harron Communications in their Michigan cable systems.
Jay M. Grossman is a Vice President, Assistant Secretary and Manager of
Avalon Cable Holdings and a partner in ABRY Partners, Inc. Prior to joining
ABRY Partners in 1996, Mr. Grossman was managing director and co-head of
Prudential Securities' media and entertainment investment banking group. From
1986 to 1994, Mr. Grossman served in various positions, ultimately as a senior
vice president, in the corporate finance department of Kidder, Peabody & Co.
Incorporated. Mr. Grossman is a director (or the equivalent) of various
companies including Nexstar Broadcasting Group, LLC, Network Music Holdings
LLC, Connoisseur Communications Partners, L.P., and DirecTel International,
LLC.
Peggy J. Koenig is a Vice President, Assistant Secretary and Manager of
Avalon Cable Holdings and a partner in ABRY Partners. Ms. Koenig joined ABRY
Partners in 1993. From 1988 to 1992, Ms. Koenig was a Vice President, partner
and member of the Board of Directors of Sillerman Communications Management
Corporation, a merchant bank, which made investments principally in the radio
industry. Ms. Koenig was the Director of Finance from 1986 to 1988 for Magera
Management, an independent motion picture financing company. She is presently a
director (or the equivalent) of Connoisseur Communications Partners, L.P.,
Pinnacle Holdings Inc. and Network Music Holdings LLC.
Royce Yudkoff is a manager of Avalon Cable Holdings and President and
Managing Partner of ABRY Partners. Prior to joining ABRY Partners, Mr. Yudkoff
was affiliated with Bain & Company, an international management consulting
firm. At Bain, where he was a partner from 1985 through 1988, he shared
significant responsibility for the firm's media practice. Mr. Yudkoff is
presently a director (or the equivalent) of various companies including Quorum
Broadcast Holdings Inc., Nexstar Broadcasting Group, LLC, Metrocall, Inc. and
Pinnacle Holdings, Inc.
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Compensation of Managers
Each of the managers of Avalon Cable Holdings receives reimbursement of
reasonable out-of-pocket expenses incurred in connection with meetings of the
Board of Managers. The managers who are employees of Avalon Cable Holdings do
not receive any fee in addition to their regular salary for serving on the
Board of Managers. The managers who are not employees of Avalon Cable Holdings
do not receive any compensation for serving on the Board of Managers.
Executive Compensation
Avalon Cable Holdings was formed in 1997. The issuers were formed during
1997 and 1998 in connection with the acquisitions of Cable Michigan and AMRAC
Clear View and related financing transactions. The executive officers of Avalon
Cable Holdings are similar in all material respects to the executive officers
of the issuers. None of the officers of Avalon Cable Holdings, other than its
chief executive officer, received compensation in excess of $100,000 in his
capacity as an officer of Avalon Cable Holdings in 1998. The following table
sets forth information concerning the compensation of Avalon Cable Holdings'
Chief Executive Officer for services in all capacities rendered to Avalon Cable
Holdings and its affiliates in 1998.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
--------------------------- ------------
Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary Bonus Compensation Options/SARs Compensation
- ------------------ ---- -------- ----- ------------ ------------ ------------
Joel C. Cohen........... 1998 $104,167 -- -- -- --
Chief Executive Officer
Management Employment Agreements
Each of our executive officers, Messrs. Unger, Cohen, Polimino, Luscombe,
Dee and Dineen, is a party to an employment agreement that provides for an
annual base salary and eligibility for a bonus if certain performance goals are
met. The employment agreements for Messrs. Unger, Cohen, Polimino and Luscombe
are described below. Messrs. Dee and Dineen have employment agreements with
similar provisions. In addition, certain of the equity interests in Avalon
owned by these executives will vest under the terms of the Management
Securities Purchase Agreements that are described in the "Certain Relationships
and Related Transactions--Management Securities Purchase Agreements" section of
this prospectus.
David W. Unger. Pursuant to an employment agreement dated November 6, 1998
between Mr. Unger and Avalon Cable LLC, Avalon Cable LLC has agreed to employ,
and Mr. Unger has agreed to serve, as Chairman of the Board of Avalon Cable LLC
and its subsidiaries for a period of five years or until his earlier
resignation, death, disability or termination of employment. Mr. Unger's
employment agreement provides that Mr. Unger is:
. required to devote approximately two-thirds of his business time to our
company,
. entitled to receive a minimum base salary of $125,000 with annual
increases of 5% per year,
. eligible to receive a bonus, as determined by the Board, up to 20% of his
base salary in effect during each fiscal year,
. prohibited from competing with our company during the term of his
employment period and for a period of six months thereafter, and
. prohibited from disclosing any confidential information gained during his
employment with us.
If we terminate Mr. Unger's employment without "Cause," Mr. Unger is
entitled to receive his base salary then in effect and benefits for a period of
six months thereafter subject to compliance with all other applicable
provisions of Mr. Unger's employment agreement.
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Joel C. Cohen. Pursuant to an employment agreement dated November 6, 1998
between Mr. Cohen and Avalon Cable LLC, Avalon Cable LLC has agreed to employ,
and Mr. Cohen has agreed to serve, as President and Chief Executive Officer of
Avalon Cable LLC and its subsidiaries for a period of five years or until his
earlier resignation, death, disability or termination of employment. Mr.
Cohen's employment agreement further provides that Mr. Cohen is:
. required to devote substantially all of his business time to our company,
. entitled to receive a minimum base salary of $250,000 with annual
increases of 5% per year,
. eligible to receive a bonus, as determined by the Board, of up to 20% of
his base salary,
. prohibited from competing with our company during his employment period
and for a period of six months thereafter, and
. prohibited from disclosing any confidential information gained by him
during his employment with us.
If we terminate Mr Cohen's employment without "Cause," Mr. Cohen is entitled
to receive his then base salary and benefits for a period of six months
thereafter subject to compliance with all other applicable provisions of Mr.
Cohen's employment agreement.
Peter Polimino. Pursuant to an employment agreement dated November 6, 1998
between Mr. Polimino and Avalon Cable LLC, Avalon Cable LLC has agreed to
employ, and Mr. Polimino has agreed to serve, as Vice President of Finance of
Avalon Cable LLC and its subsidiaries for a period of five years or until his
earlier resignation, death, disability or termination of employment. Mr.
Polimino's employment agreement further provides that Mr. Polimino is:
. required to devote 100% of his business time to our company,
. entitled to receive a minimum base salary of $110,000 per year,
. eligible to receive a bonus, as determined by the Board, of up to 20% of
his base salary,
. prohibited from competing with us during his employment period and for a
period of six months thereafter, and
. prohibited from disclosing any confidential information gained by him
during his employment with us.
Peter Luscombe. Pursuant to an employment agreement dated November 6, 1998
between Mr. Luscombe and Avalon Cable LLC, Avalon Cable LLC has agreed to
employ, and Mr. Luscombe has agreed to serve, as Vice President of Engineering
of Avalon Cable LLC and its subsidiaries for a period of five years or until
his earlier resignation, death, disability or termination of employment. Mr.
Luscombe's employment agreement further provides that Mr. Luscombe is:
. required to devote 100% of his business time to our company,
. entitled to receive a minimum base salary of $110,000 per year,
. eligible to receive a bonus, as determined by the Board, of up to 20% of
his base salary,
. prohibited from competing with us during his employment period and for a
period of six months thereafter, and
. prohibited from disclosing any confidential information gained by him
during his employment with us.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Investor Securities Purchase Agreement
David W. Unger, Joel C. Cohen, ABRY Broadcast Partners III, Avalon Cable
Holdings and others are parties to an Investor Securities Purchase Agreement
dated as of May 29, 1998, as amended as of November 6, 1998, pursuant to which
Avalon Cable Holdings sold to investors, and investors purchased from Avalon
Cable Holdings, Class A units of Avalon Cable Holdings for $1,000 per unit, in
cash. Under this agreement, as amended, ABRY Broadcast Partners III purchased a
total of 30,000.000 Class A-2 units for an aggregate price of $30,000,000 and a
total of 11,094.031 Class A-3 units for an aggregate purchase price of
$11,094,031, Mr. Unger purchased a total of 802.658 Class A-1 units for an
aggregate price of $802,658 and Mr. Cohen purchased a total of 702.658 Class A-
1 units for an aggregate price of $702,658. The investors are entitled to
indemnification in certain circumstances to the extent that Avalon Cable
Holdings is determined to have breached certain representations, warranties or
agreements contained in the Investors Securities Purchase Agreement.
Management Securities Purchase Agreements
Each of our executives named above entered into a Management Securities
Purchase Agreement with Avalon Cable Holdings pursuant to which Avalon Cable
Holdings sold to each Executive and such Executive purchased from Avalon Cable
Holdings incentive units. The incentive units purchased by each of the
Executives are subject to vesting over a five-year period. In addition, each
Management Securities Purchase Agreement provides that the incentive units
purchased thereunder will, subject to specified limitations, automatically vest
in full upon a Sale of the Company, as defined in such Management Securities
Purchase Agreement, and will cease to vest upon the date on which each such
executive ceases to be employed by Avalon Cable Holdings or any of its
subsidiaries. Each Management Securities Purchase Agreement further provides
that Avalon Cable Holdings or ABRY Broadcast Partners III may repurchase the
applicable executive's unvested units at the initial purchase price at any time
within 18 months of such executive's termination of employment. The aggregate
price paid by each executive for their incentive units was less than $60,000.
Members Agreement
Avalon Cable Holdings, ABRY Broadcast Partners III and our executives are
parties to a Members Agreement dated as of May 29, 1998. Pursuant to this
Members Agreement, ABRY Broadcast Partners III and each of the executives have
agreed to vote their equity interests in Avalon Cable Holdings to elect three
representatives of ABRY Broadcast Partners III and each of Messrs. Unger and
Cohen to the board of managers of Avalon Cable Holdings. The Members Agreement
also contains:
. ""co-sale" rights exercisable by the executives and others in the event
of certain sales by ABRY Broadcast Partners III,
. ""drag along" sale rights exercisable by ABRY Broadcast Partners III, as
majority interest holder in Avalon Cable Holdings, in the event of an
Approved Company Sale (as defined in the Members Agreement) and
. restrictions on transfers by interest holders in Avalon Cable Holdings
other than ABRY Broadcast Partners III.
The voting, co-sale, drag along and transfer restrictions will terminate
upon the consummation of the first to occur of (a) an initial public offering
by Avalon Cable Holdings resulting in at least $25 million in net proceeds or
in which at least 25% of the equity interests of Avalon Cable Holdings are sold
or (b) a Sale of the Company (as defined in the Members Agreement).
Registration Agreement
Avalon Cable Holdings, ABRY Broadcast Partners III, our executives and
certain other holders are parties to a Registration Agreement dated as of May
29, 1998. Pursuant to the Registration Agreement, the holders of
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a majority of the ABRY Registrable Securities (as defined in the Registration
Agreement) may request registration under the Securities Act of all or any
portion of the ABRY Registrable Securities:
. on Form S-1 or any similar long-form registration,
. on Form S-2 or S-3 or any similar short-form registration, if available,
and
. on any applicable form pursuant to Rule 415 under the Securities Act.
In addition, all holders of Registrable Securities (as defined in the
Registration Agreement) will have unlimited "piggyback" registration rights,
which, subject to certain terms and conditions, entitle them to include their
registrable equity securities in any registration of securities by Avalon Cable
Holdings, other than registrations related to transactions and employee benefit
plans.
All expenses incident to a demand registration, including without limitation
all registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, printing expenses, fees of counsel for Avalon
Cable Holdings and the holders of registrable securities and all independent
certified public accountants and underwriters, will be borne by us.
Avalon Cable LLC Securities Purchase Agreement
Avalon Cable Holdings, Avalon Cable LLC, Avalon Cable of Michigan Holdings,
Inc., Avalon Cable of New England Holdings, Inc., Avalon Cable of Michigan,
Inc. and Avalon Investors are parties to a Securities Purchase Agreement dated
as of November 6, 1998, as amended and restated on March 26, 1999. Pursuant to
this Securities Purchase Agreement, on November 6, 1998, Avalon Cable LLC sold
to Avalon Investors, and Avalon Investors purchased from Avalon Cable LLC, all
of the outstanding Class A units issued by Avalon Cable LLC for $45.0 million
in cash. The Class A units have no voting rights. In addition, pursuant to this
Securities Purchase Agreement, as amended on March 26, 1999, Avalon Cable of
Michigan, Inc. transferred to Avalon Cable LLC, and Avalon Cable LLC assumed
from Avalon Cable of Michigan, Inc., all right, title and interest of Avalon
Cable of Michigan, Inc. in substantially all of its assets and liabilities in
exchange for 510,994 Class B-2 Units issued by Avalon Cable LLC. Avalon Cable
LLC then transferred these assets and liabilities to Avalon Cable of Michigan
LLC. These transfers of assets and liabilities were part of the reorganization
and in the reorganization, the number of Class A units and nature of the rights
of Avalon Investors in their Class A units did not change.
Avalon Cable LLC Members Agreement
Avalon Cable LLC, ABRY Broadcast Partners III, Avalon Cable Holdings, Avalon
Cable of New England Holdings, Avalon Cable of Michigan, Inc., Avalon Cable of
Michigan Holdings and Avalon Investors are parties to an Amended and Restated
Members Agreement dated as of March 26, 1999. This Members Agreement contains:
. ""co-sale" rights exercisable by Avalon Investors in the event of certain
sales by ABRY Broadcast Partners III, Avalon Cable Holdings and their
affiliates,
. ""drag along" sale rights exercisable by Avalon Cable Holdings and its
affiliates in the event of an Approved Company Sale (as defined in this
Members Agreement),
. restrictions on transfers by interest holders in Avalon Cable LLC
. ""pre-emptive rights" provisions and
. obligations to enter into a Registration Rights Agreement immediately
before an initial public offering.
Avalon Cable of Michigan, Inc. and Avalon Cable of Michigan Holdings became
parties to this Members Agreement as part of the reorganization. This Members
Agreement terminates upon the first sale of securities of Avalon Cable LLC or a
successor entity to the public with proceeds of more than $50 million.
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ABRY Management and Consulting Services Agreement
Pursuant to an Amended and Restated Management and Consulting Services
Agreement between ABRY Partners, Avalon Cable Holdings, Avalon Cable of
Michigan Holdings, Avalon Cable of Michigan, Inc., Avalon Cable of New England,
Inc., Avalon Cable of New England LLC and Avalon Cable LLC dated as of November
6, 1998, ABRY Partners is entitled to a management fee for advisory and
management consulting services to us. No amounts have been paid or are
currently payable under this agreement.
Cable Michigan Equity Ownership
As of the date of our merger with Cable Michigan, Mr. Unger and Mr. Cohen
owned 5,000 shares and 2,000 shares of Cable Michigan common stock,
respectively, which were purchased at prices substantially below the $40.50
price per share paid in the merger. These shares were purchased by Messrs.
Cohen and Unger in their individual capacities and before the commencement of
the discussions leading to the merger. In the Cable Michigan merger, Mr. Unger
received $202,500 and Mr. Cohen received $81,000 on account of these shares.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The issuers are each indirectly controlled by Avalon Cable Holdings. Avalon
Cable Holdings Finance is a wholly owned subsidiary of Avalon Cable LLC. Avalon
Cable Holdings owns a controlling interest in Avalon Cable LLC. Avalon Cable of
Michigan LLC and Avalon Cable of New England LLC are wholly owned subsidiaries
of Avalon Cable LLC. Avalon Cable Finance, Inc. is a wholly owned subsidiary of
Avalon Cable Holdings Finance.
The following table sets forth certain information regarding the beneficial
ownership of the class A units of Avalon Cable Holdings (which are the only
outstanding membership interests in Avalon Cable Holdings with voting rights)
as of May 15, 1998 by:
. holders having beneficial ownership of more than 5% of the voting equity
interests of Avalon Cable Holdings,
. each manager and director of Avalon Cable Holdings and the issuers,
. the executive officers of Avalon Cable Holdings and the issuers and
. all such managers, directors and executive officers as a group.
For purposes of the table:
. ""Beneficial owner" generally means any person who, directly or
indirectly, has or shares voting or investment power with respect to a
security. Unless otherwise indicated, we believe that each holder has
sole voting and investment power with regard to the equity interests
listed as beneficially owned. Percentage ownership is based on a total of
43,202.901 units outstanding.
. Mr. Yudkoff is the sole owner of the equity interests of ABRY Holdings
III, Inc., the general partner of ABRY Equity Investors, L.P., the
general partner of ABRY Broadcast Partners III, L.P. As a result, Mr.
Yudkoff may be deemed to beneficially own the shares owned by ABRY
Broadcast Partners III, L.P. The address of Mr. Yudkoff is the address of
ABRY Broadcast Partners III, L.P.
Beneficial Ownership
------------------------
Number of Percentage
Beneficial Owner Class A Units Ownership
---------------- ------------- ----------
ABRY Broadcast Partners III, L.P............ 41,094.927 95.12%
18 Newbury Street
Boston, MA 02116
David W. Unger.............................. 802.658 1.86%
Joel C. Cohen............................... 702.658 1.63%
Peter Polimino.............................. -- --
John F. Dee................................. -- --
Mark Dineen................................. -- --
Peter Luscombe.............................. -- --
Jay M. Grossman............................. -- --
Peggy J. Koenig............................. -- --
Royce Yudkoff(b)............................ 41,094.927 95.12%
All managers, directors and executive
officers as a group (9 persons)............ 42,600.243 98.61%
Avalon Equity Structure
The issuers are each indirectly controlled by Avalon Cable Holdings. Avalon
Cable Holdings has three classes of equity units authorized and available for
issuance:
. Class A units,
. Class B units, and
. Class C units.
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Each class of units represents a fractional part of the membership interests
of Avalon Cable Holdings and has the rights and obligations specified in Avalon
Cable Holdings' Amended and Restated Limited Liability Company Agreement.
Voting Units
Each Class A unit is entitled to voting rights equal to the percentage such
unit represents of the aggregate number of outstanding Class A units. A
preferred return accrues semi-annually on the original issue price of each of
these voting units at a rate of 15%, or 20% under certain circumstances, per
annum. Avalon Cable Holdings cannot pay distributions in respect of other
classes of securities, including distributions made in connection with a
liquidation, until the original issue price and accrued preferred return in
respect of each voting unit is paid to each holder thereof. In addition to
these priority distributions, each holder of voting units is also entitled to
participate in distributions payable to the residual common equity interests of
Avalon Cable Holdings.
Incentive Units
The Class B units and Class C units are non-voting equity interests in
Avalon Cable Holdings which were issued to each of Avalon Cable Holdings'
executives subject to the terms and conditions in the applicable Management
Securities Purchase Agreement. Each holder of the incentive units is entitled
to participate in the residual common equity interests, if any, provided that
all of these priority distributions on all Class A units shall have been paid
in full.
Avalon Cable LLC Equity Structure
Avalon Cable LLC directly or indirectly controls each of the issuers'
operating companies. Avalon Cable LLC has authorized two classes of equity
units: Class A units and Class B units. The units represent a fractional part
of the membership interests of Avalon Cable LLC and have the rights and
obligations specified in Avalon Cable LLC's Limited Liability Company
Agreement. Each Class B unit is entitled to voting rights equal to the
percentage such unit represents of the aggregate number of outstanding Class B
units. The Class A units are not entitled to voting rights.
Class A Units
The Class A units are non-voting participating preferred equity interests,
each of which was issued on November 6, 1998 to Avalon Investors.
A preferred return accrues annually on the initial purchase price of each
Class A unit at a rate of 15%, or 17% under certain circumstances, per annum.
Avalon Cable LLC cannot pay distributions in respect of other classes of
securities, including distributions made in connection with a liquidation,
until the initial purchase price and accrued preferred return in respect of
each Class A unit of Avalon Cable LLC is paid to the holders thereof. So long
as any portion of the preferred distributions remains unpaid, the holders of a
majority of the Class A units are entitled to block certain actions by Avalon
Cable LLC, including the payment of certain distributions, the issuance of
senior or certain types of pari passu equity securities or the entering into or
amending of certain related-party agreements. In addition to these
distributions, each Class A unit is also entitled to participate in
distributions made on the Class B units as described below after the priority
distributions, pro rata according to the percentage such unit represents of the
aggregate number of units of Avalon Cable LLC then outstanding.
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Class B Units
The Class B units are equity securities which are divided into two identical
subclasses, Class B-1 units and Class B-2 units. There are currently 64,696
Class B-1 units outstanding, all which were issued to Avalon Cable of New
England Holdings on November 6, 1998, in exchange for its contribution to the
capital of Avalon Cable LLC of its 100% membership interest in Avalon Cable of
New England. There are currently 510,994 Class B-2 units outstanding, all of
which were issued to Avalon Cable of Michigan, Inc. in exchange for the
contribution of substantially all of its assets to the capital of Avalon Cable
LLC as part of the reorganization. After the payment in full of the preferred
distributions on the Class A units, each Class B unit is entitled to
participate in distributions pro rata according to the percentage such unit
represents of the aggregate number of units of Avalon Cable LLC then
outstanding.
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DESCRIPTION OF CERTAIN DEBT
The following description of the material provisions of certain indebtedness
of the issuers and their affiliates is subject to, and is qualified in its
entirety by reference to, the applicable instruments, copies of which may be
obtained as described under "Available Information."
The Credit Facility
The credit facility is a $320,888,000 secured credit facility of Avalon
Cable of New England, Avalon Cable of Michigan LLC and Avalon Cable Finance,
each of which is a borrower. Avalon Cable of Michigan LLC became a borrower
instead of Avalon Cable of Michigan, Inc. as part of the reorganization. The
credit facility was provided to the borrowers by a syndicate of banks and other
financial institutions for which Lehman Commercial Paper Inc. acts as
administrative agent. The credit facility provides for:
. term loan borrowings of up to $120,888,000 under the Tranche A term loan
facility,
. term loan borrowings of $170,000,000 under the Tranche B term loan
facility, and
. revolving credit borrowings of up to $30,000,000 under the revolving
credit facility.
In addition, before November 6, 2001, subject to the approval of the
administrative agent and, in certain instances, to the approval of the required
lenders, the borrowers may request that incremental term loan facilities of up
to $75,000,000 be established in accordance with the terms of the credit
facility. As of March 31, 1999, there were borrowings of $36.3 million
outstanding under the Tranche A term loan facility, $129.6 million outstanding
under the Tranche B term loan facility and $13.7 million outstanding under the
revolving credit facility, and $16.3 million of availability under the
revolving credit facility. The remaining commitments under the Tranche A term
loan facility will terminate on March 31, 1999, and the revolving credit
facility will terminate on October 31, 2005. Additional borrowings could be
made under the Tranche A term loan facility only to complete certain
acquisitions. Borrowings under the revolving credit facility may be used for
acquisitions and other corporate purposes. The Tranche A term loans are subject
to quarterly amortization payments commencing on January 31, 2001 and maturing
on October 31, 2005. The Tranche B term loans are subject to minimal quarterly
amortization payments commencing on January 31, 2001 with substantially all of
such Tranche B term loans scheduled to be repaid in two equal installments on
July 31, 2006 and October 31, 2006.
The interest rate under the credit facility is a rate based on either:
(a) the base rate, which is generally defined as the greater of (1) the
prime or base rate as announced from time to time by a specified lender
under the credit facility and (2) a federal funds rate, or
(b) the Eurodollar rate, which is generally defined as the rate
appearing on Page 3750 of the Dow Jones Markets screen at a specified time
or, if such rate does not so appear, another comparable publicly available
service for displaying eurodollar rates,
plus, in either case, the applicable margin.
As of March 31, 1999, the interest rate on the Tranche A term loans was
7.94% per annum and with respect to the Tranche B term loans was 8.69% per
annum. The applicable margin for the Tranche A term loans and revolving credit
loans is subject to performance based grid pricing which is determined based
upon the consolidated leverage ratio of the borrowers as calculated in
accordance with the credit facility.
The credit facility provides for mandatory prepayments and commitment
reductions (in each case subject to certain exceptions and/or thresholds) out
of net cash proceeds from issuances of capital stock, the incurrence of
indebtedness, certain asset sales, insurance proceeds and excess cash flow.
Voluntary prepayments are permitted in whole or in part at the option of the
borrowers, in minimum principal amounts, without premium or penalty, except
that Tranche B term loans must be prepaid, at 102% and 101% of the principal
amount
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thereof, for the first year and second year, respectively, and the issuers must
reimburse certain of the senior lenders' costs under certain conditions.
The credit facility provides that the borrowers must meet or exceed a
consolidated interest coverage ratio, fixed charge coverage ratio and debt
service coverage ratio and must not exceed certain consolidated leverage
ratios, each as set forth in the credit facility. The credit facility also
contains customary affirmative covenants, including, required interest rate
protection arrangements and the pledge of additional collateral in certain
circumstances, and certain negative covenants, including covenants that limit
certain indebtedness, liens, fundamental changes, disposition of property,
restricted payments, including distributions to the issuers of amounts to pay
the Accreted Interest Redemption Amount and other interest payments on the old
notes and new notes, capital expenditures, investments, optional payments and
modifications of debt instruments, including the indenture governing the old
notes and new notes and the senior subordinated notes, transactions with
affiliates and sales and leasebacks. In particular, under the credit facility,
the issuers' operating companies may pay cash dividends to the issuers to allow
payments of interest, including the Accreted Interest Redemption Amount, on the
old notes and new notes so long as no default, or event of default shall have
occurred and be continuing or would occur as a result thereof and a
consolidated leverage ratio test is satisfied. The credit facility includes
customary events of default.
The obligations of the borrowers under the credit facility are secured by
substantially all the assets of the borrowers. In addition, the obligations of
the borrowers under the credit facility are guaranteed by each of the issuers,
Avalon Cable Holdings, Avalon Cable of New England Holdings, Avalon Cable LLC,
Avalon Cable Finance Holdings, and Avalon Cable of Michigan, Inc. None of the
guarantors have significant assets other than their investments in affiliates.
The Senior Subordinated Notes
On December 3, 1998, Avalon Cable of Michigan, Inc., Avalon Cable of New
England LLC and Avalon Cable Finance, Inc. issued $150.0 million aggregate
principal amount of their 9 3/8% senior subordinated notes due 2008. The senior
subordinated notes were issued under an indenture dated as of December 10, 1998
by and among Avalon Cable of New England, Avalon Cable Finance and Avalon Cable
of Michigan LLC, as issuers, and The Bank of New York, as trustee.
In the reorganization, Avalon Cable of Michigan, Inc. ceased to be obligated
as an issuer under the senior subordinated notes and became a guarantor of
Avalon Cable of Michigan LLC's obligations under the senior subordinated notes.
Thus, the obligors under the senior subordinated notes are currently Avalon
Cable of New England, Avalon Cable Finance and Avalon Cable of Michigan LLC,
which we refer to collectively as the senior subordinated note issuers. Avalon
Cable of Michigan LLC does not have significant assets or liabilities, other
than its equity interest in Avalon Holdings.
The senior subordinated notes are general unsecured obligations of the
senior subordinated note issuers and are subordinated in right of payment to
all current and future senior indebtedness of the senior subordinated note
issuers, including indebtedness under the credit facility. Interest on the
senior subordinated notes accrues at the rate of 9.375% per annum and is
payable semi-annually in arrears on June 1 and December 1 of each year, to
holders of record on the immediately preceding May 15 and November 15. The
senior subordinated notes are limited in aggregate principal amount to $200.0
million, of which $150.0 million was issued in the initial senior subordinated
note offering. The remaining $50.0 million may be issued from time to time,
subject to compliance with the debt incurrence covenants in the senior
subordinated note indenture, the indenture governing the old notes and the new
notes and the financial covenants in the credit facility.
On or after December 1, 2003, the senior subordinated notes will be subject
to redemption at any time at the option of the senior subordinated note
issuers, in whole or in part, at the redemption prices (expressed as percentage
of principal amount) set forth below plus accrued and unpaid interest, if any,
and liquidated
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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:
Year Percentage
---- ----------
2003.......................... 104.688%
2004.......................... 103.125%
2005.......................... 101.563%
2006 and thereafter........... 100.000%
Notwithstanding the foregoing, at any time prior to December 1, 2001, the
senior subordinated note issuers may on any one or more occasions redeem up to
35% of the aggregate principal amount of senior subordinated notes originally
issued under the senior subordinated note indenture at a redemption price equal
to 109.375% of the principal amount thereof, plus accrued and unpaid interest,
if any, and liquidated damages, if any, thereon, to the redemption date, with
the net cash proceeds of any equity offering and/or the net cash proceeds of a
strategic equity investment; provided that at least 65% of the aggregate
principal amount of senior subordinated notes originally issued remain
outstanding immediately after each occurrence of such redemption. As used in
this paragraph, "equity offering" and "strategic equity investment" have
substantially the same meanings as in the indenture governing the old notes and
new notes.
Upon the occurrence of a "change of control," each holder of senior
subordinated notes will have the right to require the senior subordinated note
issuers to repurchase all or any part of such holder's senior subordinated
notes pursuant to a change of control offer at any offer price in cash equal to
101% of the aggregate principal amount thereof plus accrued and unpaid interest
and liquidated damages thereon, if any, to the date of purchase. For such
purpose, "change of control" has substantially the same meaning as in the
Senior Subordinated Note Indenture.
The senior subordinated note indenture contains covenants that, among other
things, limits the ability of the senior subordinated note issuers and their
restricted subsidiaries, to:
. incur additional indebtedness,
. pay dividends or make certain other restricted payments, including
distributions to the issuers of amounts to pay the Accreted Interest
Redemption Amount and interest payments on the old notes and the new
notes,
. enter into transactions with affiliates,
. sell assets or subsidiary stock,
. create liens,
. restrict dividends or other payments from restricted subsidiaries,
. merge, consolidate or sell all or substantially all of their combined
assets,
. incur indebtedness that is senior to the senior subordinated notes but
junior to senior indebtedness and,
. with respect to the restricted subsidiaries, issue capital stock.
In particular, the senior subordinated note indenture provides that payments
of cash dividends by the senior subordinated note issuers to the issuers in
order to make payments of interest, including the Accreted Interest Redemption
Amount, in accordance with the terms of the old note and new notes will be
permitted so long as no default or event of default, as such terms are defined
in the senior subordinated note indenture, shall have occurred and be
continuing or would occur as a consequence thereof. The senior subordinated
note indenture also permits the senior subordinated note issuers to pay
dividends and make other restricted payments, including to the issuers, if
certain other conditions are satisfied. Under certain circumstances, the
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senior subordinated note issuers are required to make an offer to purchase
senior subordinated notes at a price equal to 100% of the aggregate principal
amount thereof plus accrued and unpaid interest and liquidated damages thereon,
if any, to the date of purchase with the proceeds of certain asset sales. The
senior subordinated note indenture contains certain customary events of default
which will include the failure to pay principal, interest and liquidated
damages, the failure to comply with certain covenants under the senior
subordinated notes or the senior subordinated note indenture, certain cross-
defaults on indebtedness, the failure to pay on final judgement in excess of a
threshold amount and events of bankruptcy or insolvency.
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THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
The old notes were originally issued on December 3, 1998 to Lehman Brothers
Inc. and Barclays Capital Inc. pursuant to a purchase agreement dated December
3, 1998. These initial purchasers subsequently resold the notes to qualified
institutional buyers in reliance on Rule 144A under the Securities Act. The
issuers are parties to a Registration Rights Agreement with the initial
purchasers entered into as a condition to the closing under the purchase
agreement. Pursuant to the Registration Rights Agreement, the issuers agreed,
for the benefit of the holders of the old notes, at their cost, to:
. file an exchange offer registration statement on or before March 31,
1999 with the SEC with respect to the exchange offer for the new notes;
. use their best efforts to have the registration statement declared
effective under the Securities Act within 90 days after the filing of the
registration statement; and
. use their best efforts to issue on or prior to 30 business days after the
registration statement is declared effective the new notes in exchange
for all old notes duly tendered in the exchange offer.
Upon the registration statement being declared effective, we will offer the
new notes in exchange for surrender of the old notes. We will keep the exchange
offer open for not less than 20 business days, or longer if required by
applicable law, after the date on which notice of the exchange offer is mailed
to the holders of the old notes. For each old note surrendered to us pursuant
to the exchange offer, the holder of such old note will receive a new note
having a principal amount equal to that of the surrendered old note.
Under existing interpretations of the staff of the SEC contained in several
no-action letters to third parties, we believe that the new notes will in
general be freely tradeable after the exchange offer without further
registration under the Securities Act. However, any purchaser of old notes who
is an "affiliate" of the issuers or who intends to participate in the exchange
offer for the purpose of distributing the new notes:
. will not be able to rely on these interpretations of the staff of the
SEC;
. will not be able to tender its old notes in the exchange offer; and
. must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or transfer of the old
notes, unless such sale or transfer is made pursuant to an exemption from
such requirements.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the exchange offer is required to represent to
us in the letter of transmittal that:
. the new notes are to be acquired by the holder or the person receiving
such new notes, whether or not such person is the holder, in the ordinary
course of business;
. the holder or any such other person, other than a broker-dealer referred
to in the next sentence, is not engaging and does not intend to engage,
in distribution of the new notes;
. the holder or any such other person has no arrangement or understanding
with any person to participate in the distribution of the new notes;
. neither the holder nor any such other person is an "affiliate" of the
issuers within the meaning of Rule 405 under the Securities Act; and
. the holder or any such other person acknowledges that if such holder or
any other person participates in the exchange offer for the purpose of
distributing the new notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with
any resale of the new notes and cannot rely on those no-action letters.
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As indicated above, each broker-dealer, which we refer to as a Participating
Broker-Dealer, that receives new notes for its own account in exchange for old
notes must acknowledge that it:
. acquired the new notes for its own account as a result of market-making
activities or other trading activities;
. has not entered into any arrangement or understanding with the issuers or
any "affiliate" (within the meaning of Rule 405 under the Securities Act)
to distribute the new notes to be received in the exchange offer; and
. will deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of such new notes.
For a description of the procedures for resales by Participating Broker-
Dealers, see "Plan of Distribution."
In the event that changes in the law or the applicable interpretations of
the staff of the SEC do not permit us to effect such an exchange offer, or if
the issuers receive certain notice from any holder of Transfer Restricted
Securities (as defined below) that is a qualified institutional buyer or an
institutional accredited invested prior to the 20th day following the
consummation of the exchange offer, the issuers will use their best efforts to:
. file a shelf registration statement covering the resale of the old notes
on or prior to the earlier to occur of:
(1) the 45th day after the date on which the issuers determine that they
are not required to file the registration statement, or
(2) the 45th day after the date on which the issuers receive the
applicable notice from a holder of Transfer Restricted Securities
(such earlier date being the "Shelf Filing Deadline");
. cause the Shelf Registration Statement to be declared effective under the
Securities Act on or before the 90th day after the Shelf Filing Deadline;
and
. keep the Shelf Registration Statement continuously effective.
"Transfer Restricted Securities" means each old note until:
. the date on which such old note has been exchanged by a person other than
a broker-dealer for a new note in the exchange offer,
. following the exchange by a broker-dealer in the exchange offer of an old
note for a new note, the date on which such new note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of
such sale a copy of the prospectus contained in the registration
statement,
. the date on which such old note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement or
. the date on which such old note is distributed to the public pursuant to
Rule 144 under the Act.
The issuers will, in the event of the filing of the Shelf Registration
Statement, provide to each applicable holder of the old notes copies of the
prospectus, which is a part of the Shelf Registration Statement, notify each
such holder when the Shelf Registration Statement has become effective, and
take certain other actions as are required to permit unrestricted resale of the
old notes. A holder of the old notes that sells such old notes pursuant to the
Shelf Registration Statement generally will be required to be named as a
selling security holder in the related prospectus and to deliver a prospectus
to purchasers, will be subject to certain of the civil liability provisions
under the Securities Act in connection with such sales, and will be bound by
the provisions of the Registration Rights Agreement which are applicable to
such a holder, including certain indemnification obligations.
Holders of old notes will be required to make certain representations to the
issuers to participate in the exchange offer and holders of old notes will be
required to deliver information to be used in connection with
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the Shelf Registration Statement and to provide comments on the Shelf
Registration Statement within the time periods set forth in the Registration
Rights Agreement to have their old notes included in the Shelf Registration
Statement and benefit from the provisions regarding liquidated damages set
forth below. Such required representations and information are described in the
Registration Rights Agreement.
The Registration Rights Agreement provides that:
. the issuers will file the registration statement with the SEC on or prior
to March 31, 1999;
. the issuers will use their best efforts to have the registration
statement declared effective by the SEC on or prior to 90 days after the
date of the original filing of the registration statement;
. unless the exchange offer would not be permitted by applicable law or SEC
policy, the issuers will offer and use their best efforts to issue on or
prior to 30 business days after the registration statement is declared
effective, new notes in exchange for all old notes tendered prior thereto
in the exchange offer; and
. if obligated to file the Shelf Registration Statement, the issues will
file the Shelf Registration Statement with the SEC on or prior to 45 days
after such filing obligation arises and to cause the Shelf Registration
Statement to be declared effective by the SEC on or prior to 90 days
thereafter.
If:
(a) the issuers fail to file any of the registration statements required
by the Registration Rights Agreement on or before the date specified for
such filing;
(b) any of such registration statements is not declared effective by
the SEC on or prior to the date specified for such effectiveness;
(c) the issuers fail to consummate the exchange offer within 30
business days after the registration statement has been declared effective;
or
(d) the Shelf Registration Statement or the registration statement is
filed and declared effective but thereafter ceases to be effective or
usable in connection with resales of Transfer Restricted Securities during
the period specified in the Registration Rights Agreement (each such event
referred to in clauses (a) through (d) above a "registration default"),
the issuers will pay liquidated damages to holders of the old notes as follows:
$.05 per week per $1,000 principal amount of old notes for the first 90-day
period following a registration default and an additional $.05 per week per
$1,000 principal amount at maturity of old notes for each subsequent 90-day
period until all registration defaults have been cured, up to a maximum amount
of liquidated damages for all registration defaults of $.50 per week per $1,000
principal amount at maturity of old notes.
All accrued liquidated damages will be payable to holders of the old notes
in cash on semi-annual payment dates that correspond to the accretion dates
(or, on or after December 1, 2003, the semi-annual interest payment date),
commencing with the first such date occurring after any such additional
interest commences to accrue, until such registration default is cured.
The summary herein of certain provisions of the Registration Rights
Agreement is subject to, and is qualified in its entirety by, all the
provisions of the Registration Rights Agreement, a copy of which is filed as an
exhibit to the registration statement of which this prospectus is a part.
Following the consummation of the exchange offer, holders of the old notes
who were eligible to participate in the exchange offer but who did not tender
their old notes will not have any further registration rights and such old
notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such old notes could be adversely
affected.
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Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on ,
1999, or such later date and time as to which the exchange offer has been
extended. We will issue $1,000 principal amount of new notes in exchange for
each $1,000 principal amount at maturity of outstanding old notes accepted in
the exchange offer. Holders may tender some or all of their old notes pursuant
to the exchange offer. However, old notes may be tendered only in integral
multiples of $1,000.
The form and terms of the new notes are substantially the same as the form
and terms of the old notes except that:
. the new notes bear a new note designation and a different CUSIP number
from the old notes;
. the new notes have been registered under the federal securities laws and
hence will not bear legends restricting the transfer thereof as the old
notes do; and
. the holders of the new notes will generally not be entitled to rights
under the Registration Rights Agreement, which rights generally will be
satisfied when the exchange offer is consummated.
The new notes will evidence the same debt as the tendered old notes and will
be entitled to the benefits of the indenture under which the old notes were
issued. As of the date of this prospectus, $196,000,000 aggregate principal
amount at maturity of old notes were outstanding.
Holders of old notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware, the Delaware Limited Liability Company
Act or the indentures relating to such notes in connection with the exchange
offer. We intend to conduct the exchange offer in accordance with the
applicable requirements of the Securities Exchange Act of 1934, and the rules
and regulations of the SEC thereunder.
We shall be deemed to have accepted validly tendered old notes when, as and
if we have given oral or written notice thereof, such notice if given orally,
to be confirmed in writing, to the exchange agent. The exchange agent will act
as agent for the tendering holders for the purpose of receiving the new notes
from our company.
If any tendered old notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted old notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the expiration date.
Holders who tender old notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of old notes
pursuant to the exchange offer. We will pay all charges and expenses, other
than transfer taxes in certain circumstances, in connection with the exchange
offer. For additional information, please refer to the "--Fees and Expenses"
section of this prospectus.
Expiration Date; Extensions; Amendments
The expiration date is 5:00 p.m., New York City time, on , 1999,
unless we extend the exchange offer, in which case the expiration date will be
the latest date and time to which the exchange offer is extended.
In order to extend the exchange offer, we will notify the exchange agent of
any extension by oral or written notice, such notice if given orally, to be
confirmed in writing, and will issue a press release or other public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date.
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We reserve the right:
. to delay accepting any old notes, to extend the exchange offer or to
terminate the exchange offer if any of the conditions set forth below
under "conditions" shall not have been satisfied, by giving oral or
written notice, such notice if given orally, to be confirmed in writing,
of such delay, extension or termination to the exchange agent, or
. to amend the terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders.
Yield and Interest on the New Notes
Before December 1, 2003, there will be no current payments of cash interest
on the new notes. The new notes and the old notes not exchanged for new notes
will accrete in value at a rate of 11 7/8% per annum, compounded semi-annually,
to an aggregate principal amount of $196,000,000 on December 1, 2003. Holders
of old notes that are accepted for exchange will receive new notes with a
principal amount equal to the accreted value of the old notes on the date of
issuance of the new notes. Old notes accepted for exchange will cease to
accrete in value upon issuance of the new notes.
On December 1, 2003, the issuers will be required to redeem an amount equal
to $369.70 per $1,000 principal amount at maturity of each new note and each
old note not exchanged for a new note then outstanding, on a pro rata basis at
a redemption price of 100% of the principal amount at maturity of the notes so
redeemed. Thereafter, cash interest will be payable semi-annually in arrears on
June 1 and December 1 of each year, commencing June 1, 2004.
Procedures for Tendering
Only a registered holder of old notes may tender such notes in the exchange
offer. To tender in the exchange offer, a holder must complete, sign and date
the letter of transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the letter of transmittal and mail or otherwise
deliver such letter of transmittal or such facsimile, together with the old
notes and any other required documents, or cause The Depository Trust Company
to transmit an agent's message as described below in connection with a book-
entry transfer, to the exchange agent prior to the expiration date. To be
tendered effectively, the old notes, the letter of transmittal or agent's
message and other required documents must be completed and received by the
exchange agent at the address set forth below under "--Exchange Agent" prior to
the expiration date. Delivery of the old notes may be made by book entry
transfer in accordance with the procedures described below. Confirmation of
such book-entry transfer must be received by the exchange agent prior to the
expiration date.
The term "agent's message" means a message, transmitted by a book-entry
transfer facility to, and received by, the exchange agent forming a part of a
confirmation of a book-entry, which states that such book-entry transfer
facility has received an express acknowledgment from the participant in such
book-entry transfer facility tendering the old notes that such participant has
received and agrees:
. to participate in the Automated Tender Option Program;
. to be bound by the terms of the letter of transmittal; and
. that we may enforce such agreement against such participant.
By executing the letter of transmittal or agent's message, each holder will
make to us the representations set forth above in the fourth paragraph under
the heading "--Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by us will constitute
agreement between such holder and the company in accordance with the terms and
subject to the conditions set forth herein and in the letter of transmittal or
agent's message.
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The method of delivery of old notes and the letter of transmittal or agent's
message and all other required documents to the exchange agent is at the
election and sole risk of the holder. As an alternative to delivery by mail,
holders may wish to consider overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure delivery to the exchange agent
before the expiration date. No letter of transmittal or old notes should be
sent to any of the issuers or any of their affiliates. Holders may request
their respective brokers, dealers, commercial banks, trust companies or
nominees to effect the above transactions for such holders.
Any beneficial owner whose old notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. For additional
information, please refer to the "Instructions to Registered Holder and/or
Book-Entry Transfer Facility Participant from Beneficial Owner" included with
the letter of transmittal.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an eligible institution (as defined below) unless
the old notes tendered pursuant thereto are tendered by a registered holder who
has not completed the box entitled "Special Registration Instructions" or
"Special Delivery Instructions" on the letter of transmittal, or for the
account of an eligible institution. In the event that signatures on a letter of
transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantee must be by a member firm of the Medallion System (an
"eligible institution").
If the letter of transmittal is signed by a person other than the registered
holder of any old notes listed therein, such notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such notes with the
signature thereon guaranteed by an eligible institution.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence to our satisfaction of
their authority to so act must be submitted with the letter of transmittal.
We understand that the exchange agent will make a request promptly after the
date of this prospectus to establish accounts with respect to the old notes at
the book-entry transfer facility, The Depository Trust Company (the "book-entry
transfer facility"), for the purpose of facilitating the exchange offer, and
subject to the establishment thereof, any financial institution that is a
participant in the book-entry transfer facility's system may make book-entry
delivery of old notes by causing such book-entry transfer facility to transfer
such old notes into the exchange agent's account with respect to the old notes
in accordance with the book-entry transfer facility's procedures for such
transfer. Although delivery of the old notes may be effected through book-entry
transfer into the exchange agent's account at the book-entry transfer facility,
unless an agent's message is transmitted to and received by the exchange agent
in compliance with Automated Tender Option Program on or prior to the
expiration date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such procedures, the
tender of such notes will not be valid. Delivery of documents to the book-entry
transfer facility does not constitute delivery to the exchange agent.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance of tendered Old Notes and withdrawal of tendered old notes
will be determined by the Issuers, in their sole discretion, which
determination will be final and binding. The issuers reserve the absolute right
to reject any and all old notes not properly tendered or any old notes our
acceptance of which would, in the opinion of the Issuers' counsel, be unlawful.
The issuers also reserve the right to waive any defects, irregularities or
conditions of tender as to particular old notes. The issuers may not waive any
condition to the exchange offer unless such condition is legally waiveable. In
the event such a waiver by the issuers gives rise to the legal requirement to
do so, the issuers will hold the exchange offer open for at least five business
days thereafter. The issuers' interpretation of the terms and conditions of the
exchange offer, including the instructions in the letter of transmittal, will
be
107
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of old notes must be cured within such time as the
issuers shall determine. Although the issuers intend to notify holders of
defects or irregularities with respect to tenders of old notes, neither the
issuers, the exchange agent nor any other person shall incur any liability for
failure to give such notification. Tender of old notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any old notes received by the exchange agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the exchange agent to the tendering holders, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
expiration date.
Guaranteed Delivery Procedures
Holders who wish to tender their old notes and whose old notes are not
immediately available, who cannot deliver their old notes, the letter of
transmittal or any other required documents to the exchange agent, or who
cannot complete the procedures for book-entry transfer, prior to the expiration
date, may effect a tender if:
(a) the tender is made through an eligible institution;
(b) prior to the expiration date, the exchange agent receives by
facsimile transmission, mail or hand delivery from such eligible
institution a properly completed and duly executed notice of guaranteed
delivery, setting forth the name and address of the holder, the certificate
number(s) of such old notes and the principal amount of old notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
three New York Stock Exchange trading days after the expiration date, the
letter of transmittal, or facsimile thereof, or, in the case of a book-
entry transfer, an agent's message, together with the certificate(s)
representing the old notes, or a confirmation of book-entry transfer of
such notes into the exchange agent's account at the Book-Entry Transfer
Facility, and any other documents required by the letter of transmittal
will be deposited by the eligible institution with the exchange agent; and
(c) the certificate(s) representing all tendered old notes in proper
form for transfer, or a confirmation of a book-entry transfer of such old
notes into the exchange agent's account at the book entry transfer
facility, together with a letter of transmittal, of facsimile thereof,
properly completed and duly executed, with any required signature
guarantees, or, in the case of a book-entry transfer, an agent's message,
are received by the exchange agent within three New York Stock Exchange
trading days after the expiration date of the exchange offer.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of old notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the expiration date of
the exchange offer.
To withdraw a tender of old notes in the exchange offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
exchange agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the expiration date of the exchange offer. Any such notice of
withdrawal must:
. specify the name of the person having deposited notes to be withdrawn;
. identify the notes to be withdrawn, including the certificate number(s)
and principal amount of such notes, or, in the case of old notes
transferred by book-entry transfer, the name and number of the account at
the book entry transfer facility to be credited;
. be signed by the holder in the same manner as the original signature on
the letter of transmittal by which such notes were tendered, including
any required signature guarantees, or be accompanied by documents of
transfer sufficient to have the trustee with respect to the old notes
register the transfer of such notes into the name of the person
withdrawing the tender; and
. specify the name in which any such old notes are to be registered, if
different from that of the person having deposited the notes.
All questions as to the validity, form and eligibility, including time of
receipt, of such notices will be determined by us and shall be final and
binding on all parties. Any old notes so withdrawn will be deemed not to have
been validly tendered for purposes of the exchange offer and no new notes will
be issued with respect
108
thereto unless the old notes so withdrawn are validly retendered. Any old notes
which have been tendered but which are not accepted for exchange will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the
exchange offer. Properly withdrawn old notes may be retendered by following one
of the procedures described above under "--Procedures for Tendering" at any
time prior to the expiration date.
Conditions
Notwithstanding any other term of the exchange offer, the issuers shall not
be required to accept for exchange, or exchange notes for, any old notes, and
may terminate or amend the exchange offer as provided herein before the
acceptance of such old notes, if:
. any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer
which, in the issuers' reasonable discretion, might materially impair the
issuers' ability to proceed with the exchange offer, or any material
adverse development has occurred in any existing action or proceeding
with respect to the issuers or any of their subsidiaries; or
. any law, statute, rule, regulation or interpretation by the staff of the
SEC is proposed, adopted or enacted, which, in the issuers' sole
judgment, might materially impair the issuers' ability to proceed with
the exchange offer or materially impair the contemplated benefits of the
exchange offer; or
. any governmental approval has not been obtained, which approval the
issuers shall, in their sole discretion, deem necessary for the
consummation of the exchange offer as contemplated hereby.
If the issuers determine, in their reasonable discretion, that any of the
conditions are not satisfied, the issuers may:
. refuse to accept any old notes and return all tendered old notes to the
tendering holders;
. extend the exchange offer and retain all old notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
holders to withdraw such old notes as described in
"--Withdrawal of Tenders" above;
. waive such unsatisfied conditions with respect to the exchange offer and
accept all properly tendered old notes which have not been withdrawn.
Exchange Agent
The Bank of New York has been appointed as exchange agent for the exchange
offer. Questions and requests for assistance, requests for additional copies of
this prospectus or of the letter of transmittal and requests for notice of
guaranteed delivery should be directed to the exchange agent addressed as
follows:
By Registered or Certified Mail
or Overnight Courier:
The Bank of New York
101 Barclay Street
Reorganization Section, 7 East
New York, New York 10286
Attn: Corporate Trust Trustee Administration
By Facsimile:
(For Eligible Institutions Only)
(212 ) 815-4699
Confirm by Telephone:
(212 ) 815-5942
Denise Robinson
Delivery to an address other than set forth above will not constitute a
valid delivery.
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Fees and Expenses
The expenses of soliciting tenders will be borne by the issuers. The
principal solicitation is being made by mail however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the issuers and their affiliates.
The issuers have not retained any dealer-manager in connection with the
exchange offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the exchange offer. The issuers, however, will pay
the exchange agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The issuers will pay the cash expenses to be incurred in connection with the
exchange offer. Such expenses include fees and expenses of the exchange agent
and trustee, accounting and legal fees and printing costs, among others.
Accounting Treatment
The new notes will be recorded at the same carrying value as the old notes,
which is face value, as reflected in the issuers' accounting records on the
date of exchange. Accordingly, the issuers will recognize no gain or loss for
accounting purposes. The expenses of the exchange offer will be expensed over
the term of the new notes.
Consequences of Failure to Exchange
The old notes that are not exchanged for new notes pursuant to the exchange
offer will remain restricted securities. Accordingly, such old notes may be
resold only:
. to the issuers, upon redemption thereof or otherwise;
. so long as the old notes are eligible for resale pursuant to Rule 144A
under the Securities Act, to a person inside the United States whom the
seller reasonably believes is a qualified institutional buyer within the
meaning of Rule 144A in a transaction meeting the requirements of Rule
144A;
. in accordance with Rule 144 under the Securities Act;
. outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act;
. pursuant to another exemption from the registration requirements of the
Securities Act, and based upon an opinion of counsel reasonably
acceptable to the issuers; or
. pursuant to an effective registration statement under the Securities Act,
in each case in accordance with any applicable securities laws of any
state of the United States.
Resale of the New Notes
With respect to resales of new notes, based on interpretations by the staff
of the SEC set forth in no-action letters issued to third parties, we believe
that a holder or other person who receives new notes, whether or not such
person is the holder, other than a person that is an "affiliate" of the issuers
within the meaning of Rule 405 under the Securities Act, in exchange for old
notes in the ordinary course of business and who is not participating, does not
intend to participate, and has no arrangement or understanding with any person
to participate, in the distribution of the new notes, will be allowed to resell
the new notes to the public without further registration under the Securities
Act and without delivering to the purchasers of the new notes a prospectus that
satisfies the requirements of Section 10 of the Securities Act. However, if any
holder acquires new notes in the exchange offer for the purpose of distributing
or participating in a distribution of the new notes, such holder cannot rely on
the position of the staff of the SEC enunciated in such no-action letters or
any similar interpretive letters, and must comply with the registration and
prospectus delivery requirements of
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the Securities Act in connection with any resale transaction, unless an
exemption from registration is otherwise available. Further, each Participating
Broker-Dealer that receives new notes for its own account in exchange for old
notes, where such old notes were acquired by such Participating Broker-Dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such new notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the exchange offer is required to represent to
the issuers in the letter of transmittal that:
. the new notes are to be acquired by the holder or the person receiving
such new notes, whether or not such person is the holder, in the ordinary
course of business;
. the holder or any such other person, other than a broker-dealer referred
to in the next sentence, is not engaging and does not intend to engage,
in the distribution of the new notes;
. the holder or any such other person has no arrangement or understanding
with any person to participate in the distribution of the new notes;
. neither the holder nor any such other person is an "affiliate" of the
company within the meaning of Rule 405 under the Securities Act; and
. the holder or any such other person acknowledges that if such holder or
other person participates in the exchange offer for the purpose of
distributing the new notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with
any resale of the new notes and cannot rely on those no-action letters.
As indicated above, each Participating Broker-Dealer that receives new notes
for its own account in exchange for old notes must acknowledge that it will
deliver a prospectus in connection with any resale of such new notes. For a
description of the procedures for such resales by Participating Broker-Dealers,
see "Plan of Distribution."
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DESCRIPTION OF THE NOTES
General
The old notes were originally issued pursuant to an indenture by and among
Avalon Cable of Michigan Holdings, Inc., which is referred to as "Michigan
Holdings", Avalon Cable LLC, which is referred to as "Avalon Holdings", and
Avalon Cable Holdings Finance, Inc., which is referred to as "Finance
Holdings", as joint and several obligors, and The Bank of New York, as trustee,
in a private transaction that is not subject to the registration requirements
of the Securities Act. See "Notice to Investors." In the reorganization,
Michigan Holdings ceased to be an obligor under the old notes, and became a
guarantor, together with Avalon Cable of Michigan, Inc., which is referred to
as "Avalon Michigan", of Avalon Holdings' obligations under the New Notes and
the Indenture. Michigan Holdings and Avalon Michigan do not have significant
assets or liabilities, other than their equity interests in Avalon Michigan and
Avalon Holdings, respectively. See "The Company--Corporate Structure." Thus,
currently, the "Issuers" under the Indenture are Avalon Holdings and Finance
Holdings. The form and terms of the new notes are the same as the form and
terms of the old notes, which they replace, except that the holders of the new
notes will not be entitled to certain rights under the Registration Rights
Agreement, including the provisions providing for liquidated damages on the old
notes in certain circumstances relating to the timing of the exchange offer,
which rights will terminate when the exchange offer is consummated.
The terms of the new notes and the old notes, collectively, referred to as
the "Notes", include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939. The new notes are
subject to all such terms, and holders of new notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of the material provisions of the Indenture does not purport to be
complete and is qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. Copies of the
Indenture and Registration Rights Agreement are available as set forth below
under "Available Information." The definitions of certain terms used in the
following summary are set forth below under "Certain Definitions." For purposes
of this summary, references to the "Issuers" do not include their respective
Subsidiaries.
The new notes, like the old notes, will be general unsecured obligations of
the Issuers and will rank pari passu in right of payment with all current and
future senior Indebtedness of the Issuers. However, the operations of the
Issuers are conducted through their Subsidiaries and, therefore, the Issuers
are dependent upon the cash flow of their Subsidiaries to meet their
obligations, including their obligations under the new notes. The Issuers'
Subsidiaries will not be guarantors of the new notes. As a result, the new
notes will be effectively subordinated to all Indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
the Issuers' Subsidiaries. Any right of the Issuers to receive assets of any of
their Subsidiaries upon the latter's liquidation or reorganization (and the
consequent right of the Holders of the new notes to participate in those
assets) will be effectively subordinated to the claims of that Subsidiary's
creditors, except to the extent that the Issuers are themselves recognized as
creditors of such Subsidiary, in which case the claims of the Issuers would
still be subordinate to any security in the assets of such Subsidiary and any
Indebtedness of such Subsidiary senior to that held by the Issuers. As of
December 31, 1998, on a pro forma basis after giving effect to all completed
and pending acquisitions and the Reorganization: (a) the Issuers would have on
a combined basis no Indebtedness other than Indebtedness represented by the old
notes and Indebtedness of their subsidiaries (some of which is guaranteed by
the Issuers) and (b) the Issuers' Subsidiaries would have had on a combined
basis approximately $330.2 million of Indebtedness, including borrowings under
the credit facility, and $17.0 million of trade payables and other liabilities
outstanding and approximately $30.0 million of undrawn availability under the
credit facility. The Indenture permits the Issuers and their Restricted
Subsidiaries to incur additional Indebtedness, including secured Indebtedness,
subject to certain limitations.
All of the Issuers' Subsidiaries are currently Restricted Subsidiaries.
Under certain circumstances, the Issuers will be able to designate current or
future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries
will not be subject to any of the restrictive covenants set forth in the
Indenture.
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Principal, Maturity and Interest
The Notes are limited in aggregate principal amount at issuance to $160.4
million, of which $110.4 million were issued in the initial offering, and will
mature on December 1, 2008. The Old Notes were issued at a substantial discount
from their principal amount at maturity of $196.0 million, to generate gross
proceeds of approximately $110.4 million. Until December 1, 2003, interest will
not be paid currently on the Notes, but the Accreted Value will increase
(representing amortization of original issue discount) between the date of
original issuance and December 1, 2003, on a semi-annual basis using a 360-day
year comprised of twelve 30-day months, such that the Accreted Value shall be
equal to the full principal amount at maturity of the Notes on December 1, 2003
(the "Full Accretion Date"). Beginning on the Full Accretion Date, interest on
the Notes will accrue at the rate of 11.875% per annum and will be payable
semi-annually in arrears on June 1 and December 1 of each year, to Holders of
record on the immediately preceding May 15 and November 15. Additional Notes
may be issued from time to time, subject to the provisions of the Indenture
described below under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock." The Old Notes, the Notes offered
hereby and any additional Notes subsequently issued under the Indenture would
be treated as a single class for all purposes under the Indenture, including,
without limitation, waivers, amendments, redemptions and offers to purchase.
Interest on the Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from the Full Accretion Date.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. Principal, premium, if any, and interest and Liquidated Damages
thereon, if any, on the Notes will be payable at the office or agency of the
Issuers maintained for such purpose within the City and State of New York or,
at the option of the Issuers, payment of interest may be made by check mailed
to the Holders of the Notes at their respective addresses set forth in the
register of Holders of Notes; provided that all payments of principal, premium,
if any, interest and Liquidated Damages, if any, with respect to Notes for
which Holders have given wire transfer instructions to the Issuers at least 10
business days prior to the applicable interest payment date will be required to
be made by wire transfer of immediately available funds to the accounts
specified by the Holders thereof. Until otherwise designated by the Issuers,
the Issuers' office or agency in New York will be the office of the Trustee
maintained for such purpose. The Notes will be issued in denominations of
$1,000 and integral multiples thereof.
Parent Guarantees
The payment obligations of Avalon Holdings under the Notes is jointly and
severally guaranteed (the "Parent Guarantees") by the Parent Guarantors. The
Parent Guarantees were issued in connection with the Reorganization to avoid
certain adverse tax consequences in respect of the Reorganization. Neither
Parent Guarantor has any significant business operations or assets, other than,
with respect to Avalon Michigan, its equity interest in Avalon Holdings, and,
with respect to Michigan Holdings, its equity interest in Avalon Michigan, and
neither Parent Guarantor has any revenues. As a result, prospective purchasers
of the Notes should not expect the Parent Guarantors to participate in
servicing the interest, principal obligations and Liquidated Damages, if any,
on the Notes. The obligations of each Parent Guarantor under its Parent
Guarantee will be limited so as not to constitute a fraudulent conveyance under
applicable law. See the "Risk Factors" section of this prospectus.
Maximum Amount of Obligations
The obligations of each Issuer and each Parent Guarantor (under the Parent
Guarantee) are limited to the maximum amount as will, after giving effect to
all other contingent and fixed liabilities of such Issuer or such Parent
Guarantor, as the case may be (including, without limitation, any obligations
under any senior
Indebtedness) and after giving effect to any collections from or payments made
by or on behalf of any other Issuer or Parent Guarantor, as the case may be, in
respect of the obligations of such other Issuer or other Parent Guarantor, as
the case may be, under its obligations under the Indenture, result in the
obligations of such Issuer or such Parent Guarantor, as the case may be, under
its obligations under the Indenture not constituting a fraudulent conveyance or
fraudulent transfer under federal or state law. See the "Risk Factors" section
of this prospectus.
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Mandatory Payment of Accrued Interest
Prior to December 1, 2003, interest on the Notes will accrete at an annual
rate of 11 7/8% per annum, compounded semi-annually, but will not be paid until
December 1, 2003. On December 1, 2003, the Issuers will be required to redeem
an amount equal to $369.79 per $1,000 principal amount at maturity of each Note
then outstanding (the "Accreted Interest Redemption Amount") ($72,479,000 in
aggregate principal amount at maturity of the Notes, assuming all of the Old
Notes are exchanged in this exchange offer and all New Notes remain outstanding
on such date) on a pro rata basis at a redemption price of 100% of the
principal amount at maturity of the Notes so redeemed. The Accreted Interest
Redemption Amount represents (i) the excess of the aggregate accreted principal
amount of all Notes outstanding on December 1, 2003 over the aggregate issue
price thereof less (ii) an amount equal to one year's simple uncompounded
interest on the aggregate issue price of such Notes at a rate per annum equal
to the stated interest rate on the Notes.
Optional Redemption
Except as described below, the Notes are not redeemable at the Issuers'
option prior to December 1, 2003. Thereafter, the Notes are subject to
redemption at any time at the option of the Issuers, in whole or in part, upon
not less than 30 nor more than 60 days notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest, if any, and Liquidated Damages, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period
beginning on December 1 of the years indicated below:
Year Percentage
---- ----------
2003.......................... 105.938%
2004.......................... 103.958%
2005.......................... 101.979%
2006 and thereafter........... 100.000%
Notwithstanding the foregoing, at any time prior to December 1, 2001, the
Issuers may on any one or more occasions redeem up to 35% of the aggregate
principal amount at maturity of Notes originally issued under the Indenture at
a redemption price equal to 111.875% of the Accreted Value at the date of
redemption, plus Liquidated Damages, if any, to the redemption date, with the
Net Cash Proceeds of any Equity Offering and/or the Net Cash Proceeds of a
Strategic Equity Investment; provided that at least 65% of the aggregate
principal amount at maturity of Notes originally issued remain outstanding
immediately after each occurrence of such redemption; and provided, further,
that each such redemption shall occur within 45 days of the date of the closing
of such Equity Offering and/or Strategic Equity Investment.
As used in the preceding paragraph, "Equity Offering" means any public or
private sale of Capital Stock of any of the Issuers or Avalon or any Subsidiary
of Avalon pursuant to which the Issuers together receive net proceeds of at
least $25.0 million, other than issuances of Capital Stock pursuant to employee
benefit plans or as compensation to employees; provided that to the extent such
Capital Stock is issued by Avalon or any Subsidiary of Avalon, the Net Cash
Proceeds thereof shall have been contributed to one or more of the Issuers in
the form of an equity contribution.
Selection and Notice
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by any other customary method; provided that no Notes of $1,000 or
less shall be redeemed in part. Notices of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each Holder of Notes to be redeemed at its registered address. Notices of
redemption may not be conditional. If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note shall state the portion of
the principal amount thereof to be redeemed. A new Note in principal amount
equal to the unredeemed portion
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thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. Notes called for redemption become due on the date fixed for
redemption. On and after the redemption date, interest ceases to accrue on
Notes or portions of them called for redemption.
Mandatory Redemption
Except as set forth below under "Repurchase at the Option of Holders," the
Issuers are not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Issuers to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to a Change of
Control Offer (as defined below) at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of purchase (or, in the case of
repurchases of Notes prior to the Full Accretion Date, at a purchase price
equal to 101% of the Accreted Value thereof as of the date of purchase)
(collectively, the "Change of Control Payment"). Within 20 days following any
Change of Control, the Issuers will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offer (a
"Change of Control Offer") to repurchase Notes on the date specified in such
notice, which date shall be no earlier than 30 days and no later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date"),
pursuant to the procedures required by the Indenture and described in such
notice. The Issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Issuers will, to the extent
lawful:
. accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer,
. deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all Notes or portions thereof so tendered and
. deliver or cause to be delivered to the Trustee the Notes so accepted
together with an Officers' Certificate stating the aggregate principal
amount at maturity of Notes or portions thereof being purchased by the
Issuers.
The Paying Agent will promptly mail to each Holder of Notes so tendered the
Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture provides that,
prior to complying with the provisions of this covenant, but in any event
within 90 days following a Change of Control, the Issuers will either repay all
outstanding senior Indebtedness or obtain the requisite consents, if any, under
all agreements governing outstanding senior Indebtedness to permit the
repurchase of Notes required by this covenant. The Issuers will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Credit Facility and the indenture governing the Senior Subordinated
Notes limit the ability of the Issuers to purchase any Notes and provides that
certain change of control events with respect to the Issuers, the Company
Issuers or Avalon would constitute a default thereunder. Any future credit
agreements or other agreements relating to Indebtedness to which the Issuers or
the Company Issuers become a party may contain similar restrictions and
provisions. In the event a Change of Control occurs at a time when the Issuers
are
115
prohibited from purchasing Notes, the Issuers could seek the consent of its
lenders or lenders of the Company Issuers to the purchase of Notes or could
attempt to refinance the borrowings that contain such prohibition. If the
Issuers or the Company Issuers do not obtain such a consent or repay such
borrowings, the Issuers will remain prohibited from purchasing the Notes and
the Senior Subordinated Notes. In such case, the Issuers' failure to purchase
tendered Notes would constitute an Event of Default under the Indenture which
would, in turn, constitute a default under the Credit Facility.
The meaning of the phrase "all or substantially all" as used in the
Indenture in the definition of "Change of Control" with respect to a sale of
assets varies according to the facts and circumstances of the subject
transaction, has no clearly established meaning under relevant law and is
subject to judicial interpretation. Accordingly, in certain circumstances,
there may be a degree of uncertainty in ascertaining whether a particular
transaction would involve a disposition of "all or substantially all" of the
assets of the Issuers, and therefore it may be unclear whether a Change of
Control has occurred and whether the Notes are subject to a Change of Control
Offer.
Restrictions in the Indenture on the ability of the Issuers and their
Restricted Subsidiaries to incur additional Indebtedness, to grant Liens on
their property, to make Restricted Payments and to make Asset Sales may also
make more difficult or discourage a takeover of the Issuers, whether favored or
opposed by the management of the Issuers. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that the Issuers or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout
of the Issuers or any of their Subsidiaries by the management of the Issuers or
other persons. While such restrictions cover a wide variety of arrangements
which have traditionally been used to effect highly leveraged transactions, the
Indenture may not afford the holders of the Notes protection in all
circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The Issuers will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Issuers and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Issuers repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
Asset Sales
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, consummate an Asset Sale unless:
(i) such Issuer or such Restricted Subsidiary receives consideration at
the time of such Asset Sale at least equal to the fair market value
(evidenced by a resolution of its Board of Directors, whose determination
shall be conclusive, set forth in an Officers' Certificate delivered to the
Trustee) of the assets or Equity Interests issued or sold or otherwise
disposed of and
(ii) at least 75% of the consideration therefor received by such Issuer
or such Restricted Subsidiary is in the form of cash or Cash Equivalents;
provided that the amount of
(x) any liabilities (as shown on such Issuer's or such Restricted
Subsidiary's most recent balance sheet), of such Issuer or any of its
Restricted Subsidiaries (other than contingent liabilities and
liabilities that are by their terms subordinated to the Notes) that are
assumed by the transferee of any such assets and
(y) any securities, notes or
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other obligations received by such Issuer or any such Restricted Subsidiary
from such transferee that are promptly converted by such Issuer or such
Restricted Subsidiary into cash (to the extent of the cash received), shall be
deemed to be cash for purposes of the foregoing and the next paragraph.
Notwithstanding the immediately preceding paragraph, the Issuers and their
Restricted Subsidiaries will be permitted to consummate an Asset Sale without
complying with the prior paragraph if:
. such Issuer or such Restricted Subsidiary receives consideration at the
time of such Asset Sale at least equal to the fair market value of the
assets or other property sold, issued or otherwise disposed of (as
evidenced by a resolution of its Board of Directors, which shall be
conclusive, set forth in an Officers' Certificate delivered to the
Trustee) and
. at least 75% of the consideration for such Asset Sale constitutes a
controlling interest in a Permitted Business, assets used or useful in a
Permitted Business and/or cash or Cash Equivalents;
provided that any cash (other than any amount deemed cash under clause (ii) (x)
of the preceding paragraph) or Cash Equivalents received by such Issuer or such
Restricted Subsidiary in connection with any Asset Sale permitted to be
consummated under this paragraph shall constitute Net Cash Proceeds subject to
the provisions of the next paragraph.
Within 360 days after the receipt of any Net Cash Proceeds from an Asset
Sale, the Issuer or such Restricted Subsidiary, as the case may be, may apply
such Net Cash Proceeds, at its option, (a) to repay Indebtedness of the Company
Issuers (and to correspondingly permanently reduce the commitments with respect
thereto under the Credit Facility) or (b) to the acquisition of a controlling
interest in a Permitted Business, the making of a capital expenditure or the
acquisition of assets used or useful in a Permitted Business. Pending the final
application of any such Net Cash Proceeds, the Issuers or such Restricted
Subsidiary, as the case may be, may temporarily reduce revolving credit
borrowings or otherwise invest such Net Cash Proceeds in any manner that is not
prohibited by the Indenture. Any Net Cash Proceeds from Asset Sales that are
not applied or invested as provided in the first sentence of this paragraph
within the applicable period shall be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10.0 million, the Issuers
shall be required, to the extent permitted by the Senior Subordinated Note
Indenture, to make an offer to all Holders of Notes and all holders of other
pari passu Indebtedness of the Issuers containing provisions similar to those
set forth in the Indenture with respect to offers to purchase or redeem with
the proceeds of sales of assets (an "Asset Sale Offer") to purchase the maximum
principal amount of Notes and such other pari passu Indebtedness of the Issuers
that may be purchased out of the Excess Proceeds, at an offer price in cash in
an amount equal to 100% of the principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of repurchase (or,
in the case of repurchases of Notes prior to the Full Accretion Date, at a
purchase price equal to 100% of the Accreted Value thereof as of the date of
repurchase), in accordance with the procedures set forth in the Indenture and
such other Indebtedness. To the extent that any Excess Proceeds remain after
consummation of an Asset Sale Offer, the Issuers may use such Excess Proceeds
for any purpose not otherwise prohibited by the Indenture (including as
provided in the next paragraph). If the aggregate principal amount at maturity
or Accreted Value (as applicable) of Notes and such other Indebtedness tendered
into such Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee
shall select the Notes and such other Indebtedness to be purchased on a pro
rata basis, by lot or by any other customary method; provided that no Notes of
$1,000 or less shall be redeemed in part. Upon completion of such offer to
purchase, the amount of Excess Proceeds shall be reset at zero.
If any of the Issuers is, or may be, required to make an Asset Sale Offer,
the Company Issuers may be required to make a similar offer to purchase the
Senior Subordinated Notes (and pari passu Indebtedness) from the holders
thereof. In such event, the Issuers and the Company Issuers may make
simultaneous similar offers to purchase the Notes (and any pari passu
Indebtedness containing similar provisions) and the Senior Subordinated Notes
(and pari passu Indebtedness), respectively. If such simultaneous offers are
made, the Excess Proceeds shall first be utilized to redeem any Senior
Subordinated Notes (and pari passu Indebtedness) tendered pursuant to such
offer by the Company Issuers. To the extent that any Excess Proceeds are
remaining after such offer by the Company Issuers, such remaining Excess
Proceeds shall be utilized to redeem a pro rata portion of the Notes and any
pari passu Indebtedness containing similar provisions.
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The Issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to an Asset Sale Offer.
Certain Covenants
Restricted Payments
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, directly or indirectly:
. declare or pay any dividend or make any other payment or distribution on
account of the Issuers' or any of their Restricted Subsidiaries' Equity
Interests (including, without limitation, any payment in connection with
any merger or consolidation involving any Issuer) or to the direct or
indirect holders of the Issuers' or any of their Restricted Subsidiaries'
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock)
of any Issuer and other than dividends or distributions payable to any
Issuer or another Restricted Subsidiary and if such Restricted Subsidiary
has equity holders other than any of the Issuers or other Restricted
Subsidiaries, to its other equity holders on a pro rata basis);
. purchase, redeem or otherwise acquire or retire for value (including
without limitation, in connection with any merger or consolidation
involving any Issuer) any Equity Interests of any Issuer or any direct or
indirect parent of any Issuer or other Affiliate of any Issuer;
. make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness of any Issuer that
is subordinated to the Notes, except a payment of interest or principal
at Stated Maturity, or a payment of interest made through the issuance of
additional Indebtedness of the same kind as the Indebtedness on which
such interest shall have accrued or payment on Indebtedness owed to
another Issuer and except any payment in respect of the ABRY Subordinated
Debt; or
. make any Restricted Investment (all such payments and other actions set
forth in the clauses above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Issuers would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted
Payment had been made at the beginning of the applicable
quarter, have been permitted to incur at least $1.00 of
additional Indebtedness pursuant to the test set forth in the
first paragraph of the covenant described below under the
caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Issuers and their Restricted
Subsidiaries after the Issue Date (excluding Restricted Payments permitted
by clauses (2), (3), (4), (7), (8), (9), (10), (11), (12) and (13) of the
next succeeding paragraph), is less than the sum of:
. 100% of the aggregate Consolidated Cash Flow of the Issuers (or, in
the event such Consolidated Cash Flow shall be a deficit, minus 100%
of such deficit) accrued for the period beginning on the first day
of the Issuers' first fiscal quarter commencing after the Issue Date
and ending on the last day of the Issuers' most recent calendar
month for which financial information is available to the Issuers
ending prior to the date of such proposed Restricted Payment, taken
as one accounting period, less
. 1.4 times Consolidated Interest Expense for the same period, plus
. 100% of the aggregate Net Cash Proceeds received by the Issuers as a
contribution to the equity capital of the Issuers or from the issue
or sale since the Issue Date of Equity Interests of the
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Issuers (other than Disqualified Stock), or of Disqualified Stock or
debt securities (including the ABRY Subordinated Debt) of the Issuers
that have been converted into such Equity Interests (other than
Equity Interests (or Disqualified Stock or convertible debt
securities) sold to a Restricted Subsidiary of the Issuers and other
than Disqualified Stock or convertible debt securities that have been
converted into Disqualified Stock), plus
. to the extent that any Restricted Investment that was made after the
Issue Date is sold for cash or otherwise liquidated or repaid for
cash, the amount of such Net Cash Proceeds plus
. to the extent that any Unrestricted Subsidiary is redesignated as a
Restricted Subsidiary after the Issue Date, the fair market value of
the Investment of the applicable Issuer or Restricted Subsidiary of
such Issuer in such Subsidiary as of the date of such redesignation.
The foregoing provisions shall not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such
payment would have complied with the provisions of the
Indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any Indebtedness of any of the Issuers which is
subordinated to the Notes or Equity Interests of any of the
Issuers in exchange for, or out of the Net Cash Proceeds of
the substantially concurrent sale (other than to a Restricted
Subsidiary of any of the Issuers) of, other Equity Interests
of any of the Issuers (other than any Disqualified Stock) or
capital contributions to any of the Issuers; provided that the
amount of any such Net Cash Proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other
acquisition shall be excluded from clause (c) (2) of the
preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
Indebtedness of any of the Issuers which is subordinated to
the Notes with the Net Cash Proceeds from an incurrence of
Permitted Refinancing Indebtedness;
(4) the payment of any dividend or distribution by a Restricted
Subsidiary of any of the Issuers to the holders of its common
Equity Interests so long as the applicable Issuer or such
Restricted Subsidiary receives at least its pro rata share of
such dividend or distribution in accordance with its Equity
Interests;
(5) the repurchase, redemption or other acquisition or retirement
for value of any Equity Interests of any of the Issuers or the
payment of a dividend to any Affiliates of the Issuers to
effect the repurchase, redemption, acquisition or retirement
of an Affiliate's equity interest, that are held by any member
of any of the Issuers' (or any of their respective Restricted
Subsidiaries) management pursuant to any management equity
subscription or purchase agreement or stock option agreement
or similar agreement; provided that the aggregate price paid
for all such repurchased, redeemed, acquired or retired Equity
Interests shall not exceed $2 million in any fiscal year;
(6) from and after the time that the aggregate Consolidated Cash
Flow of the Issuers (calculated on a pro forma basis as
described in the definition of "Leverage Ratio") for any full
fiscal quarter multiplied by four exceeds $60 million,
payments or distributions to any Affiliate of the Issuers to
permit such Affiliate to pay for the performance of management
functions by an Affiliate of the Issuers in an aggregate
amount not to exceed the greater of (A) $250,000 in any fiscal
year and (B) 0.25% of Total Revenues for such year;
(7) any payments or distributions or other transactions to be made
in connection with the Merger, the Mercom Acquisition or the
Reorganization (including fees and expenses incurred in
connection therewith);
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(8) payments to Affiliates of the Issuers and holders of Equity
Interests in the Issuers in amounts equal to the amounts
required to pay any Federal, state or local income taxes to
the extent that:
(A) such income taxes are attributable to the income of the
Issuers and their Restricted Subsidiaries (but limited, in
the case of taxes based upon taxable income, to the extent
that cumulative taxable net income subsequent to the Issue
Date is positive) and
(B) such taxes are related to Indebtedness between or among any
of the Issuers and any of their Restricted Subsidiaries or
Avalon or any of its Restricted Subsidiaries;
(9) Restricted Investments received in connection with an Asset
Sale that complies with the covenant described under "--Asset
Sales");
(10) payments on the ABRY Subordinated Debt (including all accrued
interest thereon) in accordance with the terms thereof;
(11) payments or distributions to dissenting stockholders pursuant
to transactions permitted under the terms of the Indenture;
(12) the distribution by Avalon Holdings to the holders of its
Capital Stock of all the Equity Interests held by Avalon
Holdings in any of its Subsidiaries; provided that,
substantially simultaneously with such distribution, such
Equity Interests, and/or option to purchase all such Equity
Interests, are sold to a third party for consideration in an
amount at least equal to the fair market value of such Equity
Interests and Avalon Holdings receives an amount equal to the
Net Cash Proceeds of such sale and any other consideration
received in connection therewith; and
(13) other Restricted Payments in an aggregate amount not to
exceed $5.0 million;
provided, however, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (5), (6), (10) and (13) above,
no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the applicable Issuer or the
Restricted Subsidiary of such Issuer, pursuant to the Restricted Payment. The
fair market value of any non-cash Restricted Payment shall be determined by the
Board of Directors of such Issuer or Restricted Subsidiary, as the case may be,
whose resolution with respect thereto shall be delivered to the Trustee, such
determination shall be conclusive and shall be based upon an opinion or
appraisal issued by an appraisal, accounting or investment banking firm of
national standing if such fair market value exceeds $10.0 million. Not later
than the date of making any Restricted Payment, such Issuer or Restricted
Subsidiary, as the case may be, shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant "--Restricted
Payments" were computed, together with a copy of any opinion or appraisal
required by the Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) other than Permitted Debt and the Issuers will not issue any
Disqualified Stock and will not permit any of their Restricted Subsidiaries to
issue any shares of preferred stock (other than to an Issuer or another
Restricted Subsidiary); provided, however, that the Issuers may incur
Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock
and any of the Issuers' Restricted Subsidiaries may incur Indebtedness or issue
shares of preferred stock if the Issuers' Leverage Ratio at the time of
incurrence of such Indebtedness or the issuance of such Disqualified Stock or
such preferred stock, as the case may be, after giving pro forma effect to such
incurrence or issuance and to the use of the proceeds therefrom would have been
no greater than (a) 7.0 to 1,
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if such incurrence or issuance is on or prior to December 31, 2000, and (b) 6.5
to 1, if such incurrence or issuance is after December 31, 2000.
The Indenture will also provide that the Issuers will not incur any
Indebtedness that is contractually subordinated in right of payment to any
other Indebtedness of the Issuers unless such Indebtedness is also
contractually subordinated in right of payment to the Notes on substantially
identical terms; provided, however, that no Indebtedness of the Issuers shall
be deemed to be contractually subordinated in right of payment to any other
Indebtedness of the Issuers solely by virtue of being unsecured.
The provisions of the first paragraph of this covenant shall not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(1) the incurrence by the Issuers or their Restricted Subsidiaries of
Indebtedness under the Credit Facility letters of credit (with letters of
credit being deemed to have a principal amount equal to the maximum
potential liability of the Issuers and their Restricted Subsidiaries
thereunder) and related Guarantees under the Credit Facility; provided that
the aggregate principal amount of all Indebtedness of the Issuers and their
Restricted Subsidiaries outstanding under the Credit Facility after giving
effect to such incurrence, including all Permitted Refinancing Indebtedness
incurred to refund, refinance or replace any other Indebtedness incurred
pursuant to this clause (1) does not exceed an amount equal to $345,888,000
less the aggregate amount applied by the Issuers and their Restricted
Subsidiaries to permanently reduce the availability of Indebtedness under
the Credit Facility pursuant to the provisions described under the caption
"--Certain Covenants--Asset Sales";
(2) the incurrence by the Issuers of the ABRY Subordinated Debt;
(3) the incurrence by the Issuers and their Restricted Subsidiaries of
Existing Indebtedness;
(4) the incurrence by the Issuers of the Existing Michigan Indebtedness
and the Mercom Intercompany Loan;
(5) the incurrence by the Issuers of Indebtedness represented by the
Notes and the incurrence by the Company Issuers of Indebtedness represented
by the Senior Subordinated Notes in an aggregate principal amount of $150
million outstanding on the date of the Indenture;
(6) the incurrence by the Issuers or any of their Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant or equipment used in the
business of the Issuers or such Restricted Subsidiary, in an aggregate
principal amount, including all Indebtedness incurred to refund, refinance
or replace Indebtedness incurred pursuant to this clause (6), not to exceed
$10.0 million at any time outstanding;
(7) the incurrence by the Issuers or any of their Restricted
Subsidiaries of Permitted Refinancing Indebtedness;
(8) the incurrence by the Issuers or any of their Restricted
Subsidiaries of intercompany Indebtedness between or among any of the
Issuers and any of their Restricted Subsidiaries; provided, however, that
(1) if one of the Issuers is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full in cash
of all Obligations with respect to the Notes and the Indenture, and (2)(A)
any subsequent event or issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than one of
the Issuers or a Restricted Subsidiary thereof and (B) any sale or other
transfer of any such Indebtedness to a Person that is not any one of the
Issuers or a Restricted Subsidiary thereof shall be deemed, in each case,
to constitute an incurrence of such Indebtedness by such Issuer or such
Restricted Subsidiary, as the case may be, that was not permitted by this
clause (8);
(9) the incurrence by the Issuers or any of their Restricted
Subsidiaries of Hedging Obligations that are incurred in the ordinary
course of business for the purpose of fixing or hedging currency, commodity
or interest rate risk (including with respect to any floating rate
Indebtedness that is permitted by the terms
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of the Indenture to be outstanding) in connection with the conduct of their
respective businesses and not for speculative purposes;
(10) the guarantee by the Issuers of Indebtedness of any of their
Restricted Subsidiaries so long as the incurrence of such Indebtedness by
such Restricted Subsidiary is permitted to be incurred by another provision
of this covenant "--Incurrence of Indebtedness and Issuance of Preferred
Stock";
(11) the guarantee by any Restricted Subsidiary of Indebtedness of any
of the Issuers so long as such guarantee by such Restricted Subsidiary
complies with the provisions under the covenant "--Guarantees by Restricted
Subsidiaries";
(12) Indebtedness consisting of customary indemnification, adjustments
of purchase price or similar obligations, in each case, incurred or assumed
in connection with the acquisition of any business or assets; and
(13) the incurrence by the Issuers or any of their Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount
(or accreted value, as applicable) at any time outstanding, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any other Indebtedness incurred pursuant to this clause (13), not to exceed
$15.0 million.
For purposes of determining compliance with this covenant, in the event that
an item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (13) above as of
the date of incurrence thereof or is entitled to be incurred pursuant to the
first paragraph of this covenant as of the date of incurrence thereof, the
Issuers shall, in their sole discretion, classify or reclassify such item of
Indebtedness in any manner that complies with this covenant. Accrual of
interest, the accretion of accreted value and the payment of interest in the
form of additional Indebtedness will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant and the payment of dividends on
Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock will not be deemed an issuance of Disqualified Stock.
Liens
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, create, incur, assume or otherwise cause or suffer to exist or
become effective any Lien (other than Permitted Liens) of any kind securing
Indebtedness, Attributable Debt, or trade payables upon any of their property
or assets, now owned or hereafter acquired, unless all payments due under the
Indenture and the Notes are secured on an equal and ratable basis with the
obligations so secured until such time as such obligations are no longer
secured by a Lien; provided that, with respect to any Indebtedness which by its
terms is Subordinate to the Notes, any Lien securing such Indebtedness shall be
subordinate to the Liens securing the Notes and all payments due under the
Indenture and the Notes.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to:
(1)(x) pay dividends or make any other distributions to the Issuers or
any of their Restricted Subsidiaries (1) on its Capital Stock or (2) with
respect to any other interest or participation in, or measured by, its
profits, or (y) pay any Indebtedness owed to the Issuers or any of their
Restricted Subsidiaries,
(2) make loans or advances to the Issuers or any of their Restricted
Subsidiaries or
(3) transfer any of its properties or assets to the Issuers or any of
their Restricted Subsidiaries, except for such encumbrances or restrictions
existing under or by reason of:
. Existing Indebtedness as in effect on the Issue Date,
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. the Credit Facility as in effect on the date of the Indenture
and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or
refinancings thereof; provided that such amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are no more
restrictive with respect to such dividends and other payments
restrictions than those contained in the Credit Facility as in
effect on the date of the Indenture;
. the terms of any Indebtedness permitted by the Indenture to be
incurred by any Restricted Subsidiary of any of the Issuers,
. the Indenture and the Notes,
. the Indenture under which the Senior Subordinated Notes will be
issued and the Senior Subordinated Notes,
. any instrument governing Indebtedness or Capital Stock of a
Person acquired by the Issuers or any of their Restricted
Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or
the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired, provided
that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Indenture to be incurred,
. by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business,
. purchase money obligations (including Capital Lease
Obligations) for property acquired in the ordinary course of
business that impose restrictions of the nature described in
clause (3) above on the property so acquired,
. Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such
Permitted Refinancing Indebtedness are no more restrictive,
taken as a whole, than those contained in the agreements
governing the Indebtedness being refinanced,
. contracts for the sale of assets, including, without
limitation, customary restrictions with respect to a Subsidiary
pursuant to an agreement that has been entered into for the
sale or disposition of all or substantially all of the Capital
Stock or assets of such Subsidiary or
. applicable law or any applicable rule, regulation or order.
Guarantees by Restricted Subsidiaries
The Issuers will not permit any of their Restricted Subsidiaries, directly
or indirectly, to Guarantee, assume or in any other manner become liable for
the payment of any Indebtedness of the Issuers (other than as part of the
Reorganization) unless:
. such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture providing for a Guarantee of payment of the
Notes by such Restricted Subsidiary, and
. such Restricted Subsidiary waives, and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against
the Issuers or any other Restricted Subsidiary as a result of any
payment by such Restricted Subsidiary under its Guarantee until the
Notes have been paid in full.
Merger, Consolidation, or Sale of Assets
The Issuer or Issuers holding all or substantially all of the assets of the
Issuers on a combined basis will not, directly or indirectly, consolidate or
merge with or into (whether or not such Issuer is the surviving
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corporation), or sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Issuers on a combined
basis in one or more related transactions, to another Person unless:
. such Issuer is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than such Issuer)
or to which such sale, assignment, transfer, conveyance or other
disposition shall have been made is a Person organized or existing under
the laws of the United States, any state thereof or the District of
Columbia; provided that the Issuers agree that so long as the Notes are
outstanding at least one of the Issuers shall be a corporation organized
or existing under the laws of the United States, any state thereof or
the District of Columbia;
. the Person formed by or surviving any such consolidation or merger (if
other than such Issuer) or the Person to which such sale, assignment,
transfer, conveyance or other disposition shall have been made assumes
all the obligations of such Issuer under the Notes and the Indenture
pursuant to a supplemental indenture in a form reasonably satisfactory
to the Trustee;
. immediately before and after such transaction no Default or Event of
Default shall have occurred; and
. except in the case of a merger of such Issuer with or into a Restricted
Subsidiary of such Issuer, the Issuer or the Person formed by or
surviving any such consolidation or merger (if other than such Issuer),
or to which such sale, assignment, transfer, conveyance or other
disposition shall have been made, together with the surviving Issuers,
will, immediately before and after such transaction after giving pro
forma effect thereto and any related financing transactions as if the
same had occurred at the beginning of the applicable quarter, be
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the test set forth in the first paragraph of covenant described above
under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock."
The Indenture also provides that none of the Issuers may, directly or
indirectly, lease all or substantially all of its properties or assets, in one
or more related transactions, to any other Person.
Notwithstanding the foregoing, (a) any or all of the Issuers may merge or
consolidate with or transfer substantially all of its assets to an Affiliate
that has no significant assets or liabilities and was formed solely for the
purpose of changing the jurisdiction of organization of such Issuer or the form
of organization of such Issuer, provided that the amount of Indebtedness of
such Issuer and its Restricted Subsidiaries is not increased thereby and
provided, further, that the successor assumes all obligations of such Issuer
under the Indenture and the Registration Rights Agreement and (b) nothing in
this section shall be deemed to prevent the consummation of the Reorganization.
Upon any consolidation or merger, or any sale, assignment, transfer, lease,
conveyance or other disposition of all or substantially all of the properties
or assets of the Issuers in accordance with this covenant, the successor
corporation formed by such consolidation or into or with which an Issuer or
Issuers are merged or to which such sale, assignment, transfer, lease,
conveyance or other disposition is made shall succeed to, and be substituted
for and may exercise every right and power of such Issuer or Issuers under the
Indenture with the same effect as if such successor Person had been named as
such Issuer or Issuers therein (so that from and after the date of such
consolidation, merger, sale, lease, conveyance or other disposition, the
provisions of the Indenture referring to the "Issuers" shall refer instead to
the successor corporation and not to such Issuer or Issuers), and may exercise
every right and power of such Issuer or Issuers under the Indenture with the
same effect as if such successor Person had been named as such Issuer or
Issuers therein; provided, however, that the predecessor Issuer shall not be
relieved from the obligation to pay the principal of and interest on the Notes
except in the case of a sale, assignment, transfer, conveyance or other
disposition of all or substantially all of the properties or assets of the
Issuers on a combined basis that meets the requirements of this covenant.
Transactions with Affiliates
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any properties or assets to, or purchase any property or assets
from, or enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or Guarantee
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with, or for the benefit of, any Affiliate of any such Person (each of the
foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction
is on terms that are no less favorable to such Issuer or the relevant
Restricted Subsidiary than those that would have been obtained in a comparable
transaction by such Issuer or such Restricted Subsidiary with an unrelated
Person and (ii) such Issuer delivers to the Trustee (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $2.5 million, a resolution of its Board of
Directors set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved
by a majority of the members of its Board of Directors and (b) with respect to
any Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $10.0 million, an opinion as to the
fairness to the Holders of such Affiliate Transaction from a financial point of
view issued by an investment banking, appraisal or accounting firm of national
standing; provided that none of the following shall be deemed to be Affiliate
Transactions:
. any employment agreement entered into by any of the Issuers or any of
their Restricted Subsidiaries or Avalon in the ordinary course of
business,
.transactions between or among any of the Issuers and/or their Restricted
Subsidiaries,
.any sale or other issuance of Equity Interests (other than Disqualified
Stock) of any of the Issuers,
. Restricted Payments that are permitted by the covenant described above
under the caption "--Restricted Payments,"
. fees and compensation paid to members of the Boards of Directors of the
Issuers and their Restricted Subsidiaries or Avalon in their capacity as
such, to the extent such fees and compensation are reasonable and
customary,
. advances to employees for moving, entertainment and travel expenses,
drawing accounts and similar expenditures in the ordinary course of
business,
. fees and compensation paid to, and indemnity provided on behalf of,
officers, directors or employees of the Issuers or any of their
Restricted Subsidiaries or Avalon, as determined by the Board of
Directors of such Person, to the extent such fees and compensation are
reasonable and customary,
. all transactions associated with the Reorganization and the Mercom
Acquisition,
. the Mercom Intercompany Loan, the ABRY Management Agreement and the
Mercom Management Agreement and
.Indebtedness permitted under the Indenture.
Sale and Leaseback Transactions
The Issuers will not, and will not permit any of their Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
the Issuers or any of their Restricted Subsidiaries may enter into a sale and
leaseback transaction if:
. such Issuer or Restricted Subsidiary could have incurred Indebtedness in
an amount equal to the Attributable Debt relating to such sale and
leaseback transaction pursuant to the test set forth in the first
paragraph of the covenant described above under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock,"
. the gross cash proceeds of such sale and leaseback transaction are at
least equal to the fair market value (as determined in good faith by the
Board of Directors of such Issuer or Restricted Subsidiary, whose
determination shall be conclusive, and set forth in an Officers'
Certificate delivered to the Trustee) of the property that is the
subject of such sale and leaseback transaction and
. the transfer of assets in such sale and leaseback transaction is
permitted by, and such Issuer or Restricted Subsidiary applies the
proceeds of such transaction in compliance with, the covenant described
above under the caption "Repurchase at the Option of Holders--Asset
Sales."
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Sale or Issuance of Capital Stock of Restricted Subsidiaries
Other than pursuant to the Reorganization, the Issuers:
. will not, and will not permit any of their Restricted Subsidiaries to,
transfer, convey, sell, lease or otherwise dispose of any Equity
Interests in any such Restricted Subsidiary to any Person (other than an
Issuer or a Restricted Subsidiary of an Issuer), unless (a)(1) such
transfer, conveyance, sale, lease or other disposition is of all the
Equity Interests in such Restricted Subsidiary or after giving effect
thereto, such Restricted Subsidiary will still constitute a Restricted
Subsidiary and (b) the Net Cash Proceeds from such transfer, conveyance,
sale, lease or other disposition are applied in accordance with the
covenant described above under the caption "Repurchase at the Option of
Holders--Asset Sales," and
. will not permit any of their Restricted Subsidiaries to issue any of its
Equity Interests (other than, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person other than to
such Issuer or a Wholly Owned Restricted Subsidiary of such Issuer if,
after giving effect thereto, such Restricted Subsidiary will not be a
direct or indirect Subsidiary of an Issuer.
Reports
The Indenture provides that whether or not the Issuers are required by the
rules and regulations of the Commission, so long as any Notes are outstanding,
the Issuers, on a combined consolidated basis, will furnish to each of the
Holders of Notes:
. quarterly and annual financial statements substantially equivalent to
financial statements that would have been included in a filing with the
Commission on Forms 10-Q and 10-K if the Issuers were required to file
such financial information, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that
describes the financial condition and results of operations of the
Issuers and, with respect to the annual information only, reports
thereon by the Issuers' independent public accountants (which shall be
firm(s) of established national reputation) and
. all information that would be required to be filed with the Commission
on Form 8-K if the Issuers were required to file such reports.
All such information and reports shall be provided on or prior to the dates
on which such filings would have been required to be made had such Issuer been
subject to the rules and regulations of the Commission. In addition, the
Issuers shall make such information available to securities analysts and
prospective investors upon request. For so long as any Notes remain
outstanding, the Issuers shall furnish to the Holders and to securities
analysts and prospective investors, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event of
Default:
. default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes;
. default in payment when due of the Accreted Value of or the principal of
or premium, if any, on the Notes;
. failure by any of the Issuers or any of their Restricted Subsidiaries to
comply with the provisions described under the captions "--Restricted
Payments," "--Incurrence of Indebtedness and Issuance of Preferred
Stock" or "--Merger Consolidation or Sale of Assets";
. failure by any of the Issuers or any of their Restricted Subsidiaries
for 30 days after notice to comply with the provisions described under
the captions "Repurchase at the Option of Holders--Asset Sales" or
"Repurchase at the Option of Holders--Change of Control";
. failure by any of the Issuers or any of their Restricted Subsidiaries
for 60 days after notice to comply with any of its other agreements in
the Indenture or the Notes;
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. default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by any of the Issuers or any of their
Restricted Subsidiaries (or the payment of which is guaranteed by any of
the Issuers or any of their Restricted Subsidiaries) whether such
Indebtedness or guarantee now exists, or is created after the Issue
Date, which default:
(a) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness prior to the expiration of the grace
period provided in such Indebtedness on the date of such default (a
"Payment Default") or
(b) results in the acceleration of such Indebtedness prior to its
express maturity and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default or
the maturity of which has been so accelerated, aggregates without
duplication $5.0 million or more;
. failure by any of the Issuers or any of their Restricted Subsidiaries to
pay final judgments aggregating in excess of $5.0 million (excluding
amounts covered by insurance), which judgments are not paid, discharged
or stayed for a period of 60 days; and
. certain events of bankruptcy or insolvency with respect to any of the
Issuers or any of their Restricted Subsidiaries that constitute a
Significant Subsidiary, or any group of Restricted Subsidiaries that,
taken together, would constitute a Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount at maturity of the then outstanding Notes
may declare all the Notes to be due and payable immediately; provided that so
long as any Indebtedness permitted to be incurred pursuant to the Credit
Facility shall be outstanding, such acceleration shall not be effective until
the earlier of (a) an acceleration of such Indebtedness under the Credit
Facility and (b) five business days after receipt by the Issuers of written
notice of such acceleration of the Notes. Notwithstanding the foregoing, in the
case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to any of the Issuers or any of their Restricted
Subsidiaries, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount at maturity of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or
Event of Default (except a Default or Event of Default relating to the payment
of principal or interest) if it determines that withholding notice is in their
interest.
The Holders of a majority in aggregate principal amount at maturity of the
Notes then outstanding by notice to the Trustee may on behalf of the Holders of
all of the Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the Accreted Value or principal of,
the Notes.
The Issuers are required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuers are required upon
becoming aware of any Default or Event of Default that is continuing, to
deliver to the Trustee a statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No past, present or future director, officer, employee, incorporator,
manager, member or stockholder of any Person who is or was an Issuer or Parent
Guarantor, as such, shall have any liability for any obligations of the Issuers
under the Notes or the Indenture or any related documents or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a waiver
is against public policy.
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Legal Defeasance and Covenant Defeasance
The Issuers may, at their option and at any time, elect to have all of their
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for:
. the rights of Holders of outstanding Notes to receive payments in respect
of the principal of, premium, if any, and interest and Liquidated Damages
on such Notes when such payments are due from the trust referred to
below,
. the Issuers' obligations with respect to the Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust,
. the rights, powers, trusts, duties and immunities of the Trustee, and the
Issuers' obligations in connection therewith and
. the Legal Defeasance provisions of the Indenture.
In addition, the Issuers may, at their option and at any time, elect to have
the obligations of the Issuers released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or
Event of Default with respect to the Notes. In the event Covenant Defeasance
occurs, certain events (not including non-payment, bankruptcy, receivership and
insolvency events) described under "Events of Default" will no longer
constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
. the Issuers must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will
be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any,
and interest and Liquidated Damages on the outstanding Notes on the
stated maturity or on the applicable redemption date, as the case may be,
and the Issuers must specify whether the Notes are being defeased to
maturity or to a particular redemption date;
. in the case of Legal Defeasance, the Issuers shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that (A) the Issuers have received from, or
there has been published by, the Internal Revenue Service a ruling or (B)
since the Issue Date, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred;
. in the case of Covenant Defeasance, the Issuers shall have delivered to
the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Covenant Defeasance had
not occurred;
. no Default or Event of Default shall have occurred and be continuing on
the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the
date of deposit;
. such Legal Defeasance or Covenant Defeasance will not result in a breach
or violation of, or constitute a default under any material agreement or
instrument (other than the Indenture) to which any of the Issuers or any
of their Restricted Subsidiaries is a party or by which any of the
Issuers or any of their Restricted Subsidiaries is bound;
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. the Issuers must have delivered to the Trustee an opinion of counsel
(subject to customary qualifications and assumptions) to the effect that
after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
. the Issuers must deliver to the Trustee an Officers' Certificate stating
that the deposit was not made by the Issuers with the intent of
preferring the Holders of Notes over the other creditors of the Issuers
with the intent of defeating, hindering, delaying or defrauding creditors
of the Issuers or others; and
. the Issuers must deliver to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions precedent provided
for relating to the Legal Defeasance or the Covenant Defeasance have been
complied with.
Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Issuers may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Issuers are not required to transfer or exchange any Note
selected for redemption. Also, the Issuers are not required to transfer or
exchange any Note for a period of 15 business days before a selection of Notes
to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount at maturity of the Notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount at maturity of the
then outstanding Notes (including consents obtained in connection with a tender
offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder):
. reduce the principal amount of Notes whose Holders must consent to an
amendment, supplement or waiver,
. reduce the Accreted Value or principal of or change the fixed maturity of
any Note or alter the provisions with respect to the redemption of the
Notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders"),
. reduce the rate of or change the time for payment of interest on any
Note,
. waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in
aggregate principal amount at maturity of the Notes and a waiver of the
payment default that resulted from such acceleration),
. make any Note payable in money other than that stated in the Notes,
. make any change in the provisions of the Indenture relating to waivers of
past Defaults or the rights of Holders of Notes to receive payments of
principal of or premium, if any, or interest on the Notes,
. waive a redemption payment with respect to any Note (other than a payment
required by one of the covenants described above under the caption "--
Repurchase at the Option of Holders"), or
. make any change in the foregoing amendment and waiver provisions.
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Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Issuers and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, omission, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes, to
provide for the assumption of the Issuers' obligations to Holders of Notes in
the case of a merger, consolidation or asset transfer (including the
Reorganization), to add additional guarantees with respect to the Notes, to
make any change that would provide any additional rights or benefits to the
Holders of Notes or that does not adversely affect the legal rights under the
Indenture of any such Holder, or to comply with requirements of the Commission
in order to effect or maintain the qualification of the Indenture under the
Trust Indenture Act.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of any of the Issuers, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Notes, unless such Holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
Additional Information
Anyone who receives this prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Avalon Holdings,
Attention: Vice President--Finance.
Book-Entry, Delivery and Form
The new notes initially will be represented by one or more global notes in
registered, global form without interest coupons (collectively, the "Global
Note"). The Global Note will be deposited upon issuance with the Trustee as
custodian for the Depositary, in New York, New York, and registered in the name
of the Depositary or its nominee, in each case for credit to an account of a
direct or indirect participant as described below.
Except as set forth below, the Global Note may be transferred, in whole and
not in part, only to another nominee of the Depositary or to a successor of the
Depositary or its nominee. Beneficial interest in the Global Note may not be
exchanged for new notes in certificated form except in the limited
circumstances described below. Except in the limited circumstances described
below, owners of beneficial interests in the Global Note will not be entitled
to receive physical delivery of Certificated Notes (as defined below).
The new notes may be presented for registration of transfer and exchange at
the offices of the Exchange Agent.
The Depositary has advised the Issuers that the Depositary is a limited-
purpose trust company created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the
clearance and settlement of transactions in those securities between
Participants through electronic book-entry changes in accounts of Participants.
The Participants include securities brokers and dealers (including the Initial
Purchaser), banks, trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies that
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clear through or maintain a custodial relationship with a Participant, either
directly or indirectly (collectively, "Indirect Participants"). Persons who are
not Participants may beneficially own securities held by or on behalf of the
Depositary only through the Participants or Indirect Participants. The
ownership interest and transfer of ownership interest of each actual purchaser
of each security held by or on behalf of the Depositary are recorded on the
records of the Participants and Indirect Participants.
The Depositary has also advised the Issuers that pursuant to procedures
established by it:
. upon deposit of the Global Note, the Depositary will credit the accounts
of Participants designated by the exchanging holders with portions of the
principal amount of Global Note; and
. ownership of such interests in the Global Note will be shown on, and the
transfer of ownership thereof will be effected only through, records
maintained by the Depositary (with respect to Participants) or by
Participants and the Indirect Participants (with respect to other owners
of beneficial interests in the Global Note).
Except as described below, owners of interests in the Global Note will not
have new notes registered in their names, will not receive physical delivery of
new notes in certificated form and will not be considered the registered owners
or "Holders" thereof under the Indenture for any purpose.
Payments in respect of the principal of, and premium, if any, and Liquidated
Damages, if any, and interest on a Global Note registered in the name of the
Depositary or its nominee will be payable by the Trustee to the Depositary or
its nominee in its capacity as the registered Holder under the Indenture. Under
the terms of the Indenture, the Issuers and the Trustee will treat the persons
in whose names the new notes, including the Global Note, are registered as the
owners thereof for the purpose of receiving such payments and for any and all
other purposes whatsoever. Consequently, neither the Issuers, the Trustee nor
any agent of the Issuers or the Trustee has or will have any responsibility or
liability for:
. any aspect of the Depositary's records or any Participant's or Indirect
Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Note, or for maintaining,
supervising or reviewing any of the Depositary's records or any
Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Note; or
. any other matter relating to the actions and practices of the Depositary
or any of its Participants or Indirect Participants.
The Depositary has advised the Issuers that its current practice upon
receipt of any payment in respect of securities such as the new notes
(including principal and interest) is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in principal amount of beneficial interests in the
relevant security as shown on the records of the Depositary unless the
Depositary has reason to believe it will not receive payment on such payment
date. Payments by Participants and the Indirect Participants to the beneficial
owners of new notes will be governed by standing instructions and customary
practices and will be the responsibility of the Participants or the Indirect
Participants and will not be the responsibility of the Depositary, the Trustee
or the Issuers. Neither the Issuers nor the Trustee will be liable for any
delay by the Depositary or its Participants in identifying the beneficial
owners of the new notes, and the Issuers and the Trustee may conclusively rely
on and will be protected in relying on instructions from the Depositary or its
nominee for all purposes.
Interests in the Global Note are expected to be eligible to trade in the
Depositary's Same-Day Funds Settlement System and secondary market trading
activity in such interests will, therefore, settle in immediately available
funds, subject in all cases to the rules and procedures of the Depositary and
its Participants. See "--Same Day Settlement and Payment."
The Depositary has advised the Issuers that it will take any action
permitted to be taken by a Holder of new notes only at the direction of one or
more Participants to whose account the Depositary has credited the
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interests in the Global Note and only in respect of such portion of the
aggregate principal amount of the new notes as to which such Participant or
Participants has or have given direction. However, if there is an Event of
Default under the new notes, the Depositary reserves the right to exchange
Global Note for legended new notes in certificated form, and to distribute such
new notes to its Participants.
The information in this section concerning the Depositary and its book entry
systems has been obtained from sources that the Issuers believe to be reliable,
but the Issuers take no responsibility for the accuracy thereof.
Although the Depositary has agreed to the foregoing procedures to facilitate
transfers of interests in the Global Note among Participants in the Depositary,
it is under no obligation to perform or to continue to perform such procedures,
and such procedures may be discontinued at any time. None of the Issuers, the
Initial Purchaser or the Trustee or any of their respective agents will have
any responsibility for the performance by the Depositary or its respective
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
Exchange of Book-Entry Notes for Certificated Notes
A Global Note is exchangeable for definitive new notes in registered
certificated form ("Certificated Notes") if:
. the Depositary (A) notifies the Issuers that it is unwilling or unable to
continue as depositary for the Global Note and the Issuers thereupon fail
to appoint a successor depositary or (B) has ceased to be a clearing
agency registered under the Securities Exchange Act,
. the Issuers, at their option, notify the Trustee in writing that they
elect to cause issuance of the Certificated Notes or
. there shall have occurred and be continuing a Default or Event of Default
with respect to the new notes.
Neither the Issuers nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
new notes and the Issuers and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
Exchange of Certificated Notes for Book-Entry Notes
Certificated Notes may not be exchanged for beneficial interests in any
Global Note unless the transferor first delivers to the Trustee a written
certificate (in the form provided in the Indenture) to the effect that such
transfer will comply with the appropriate transfer restrictions applicable to
such Notes. See "Notice to Investors."
Same Day Settlement and Payment
The Indenture requires that payments in respect of the new notes represented
by the Global Note (including principal, premium, if any, interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Global Note Holder. With respect to
Certificated Notes, the Issuers will make all payments of principal, premium,
if any, interest and Liquidated Damages, if any, by wire transfer of
immediately available funds to the accounts specified by the Holders thereof
or, if no such account is specified, by mailing a check to each such Holder's
registered address. The new notes represented by the Global Note are expected
to be eligible to trade in the PORTAL market and to trade in the Depositary's
Same-Day Funds Settlement System, and any permitted secondary market trading
activity in such new notes will, therefore, be required by the Depositary to be
settled in immediately available funds. The Issuers expect that secondary
trading in the certificated Notes will also be settled in immediately available
funds.
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Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"ABRY" means ABRY Partners, Inc.
"ABRY III" means ABRY Broadcast Partners III, L.P.
"ABRY Management Agreement" means the Management and Consulting Services
Agreement entered into as of May 29, 1998 and amended and restated as of
November 6, 1998 by and among ABRY Partners, Inc., Avalon Michigan Inc. and
Avalon New England, and any successor agreement; provided that any such
successor agreement shall not modify the ABRY Management Agreement as in effect
as of November 6, 1998 in any material respect, taken as a whole, adverse to
the Issuers and their Subsidiaries or the Trustee.
"ABRY Subordinated Debt" means Indebtedness of the Issuers in principal
amount not to exceed $30.0 million in the aggregate at any time outstanding (a)
that is owed to Avalon, directly or indirectly, or to ABRY III, ABRY or any
other investment fund controlled by ABRY, (b) as to which the payment of
principal of (and premium, if any) and interest and other payment obligations
in respect of such Indebtedness shall be subordinate to the prior payment in
full of the Senior Discount Notes and the Notes to at least the following
extent: (i) no payments of principal (or premium, if any) or interest on or
otherwise due in respect of such Indebtedness may be permitted for so long as
any default in the payment of principal (or premium, if any) or interest on the
Senior Discount Notes and/or the Notes exists and (ii) in the event that any
other default that with the passing of time or the giving of notice, or both,
would constitute an event of default exists with respect to the Senior Discount
Notes and/or the Notes, upon notice by 25% or more in principal amount at
maturity of the Senior Discount Notes and/or the Notes, as appropriate, to the
trustee under the Senior Discount Notes and/or the Notes, such trustee or
trustees shall have the right to give notice to the Issuers and the holders of
such Indebtedness (or trustees or agents therefor) of a payment blockage, and
thereafter no payments of principal of (or premium, if any) or interest on or
otherwise due in respect of such Indebtedness may be made for a period of 179
days from the date of such notice and (c) that shall automatically convert into
common equity of the Issuers within 18 months of the date of issuance thereof,
unless refinanced.
"Accreted Value" means as of any date prior to December 1, 2003, an amount
per $1,000 principal amount at maturity of the Notes that is equal to the sum
of (a) the initial offering price of each Note and (b) the portion of the
excess of the principal amount at maturity of each Note over such initial
offering price which shall have been amortized through such date, such amount
to be so amortized on a daily basis and compounded semi-annually on each June
1, and December 1, at the rate of 11 7/8% per annum from the Issue Date through
the date of determination computed on the basis of a 360-day year of twelve 30-
day months.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured
by a Lien encumbering any asset acquired by such specified Person.
"Acquisition Transactions" means the acquisition (i) by the Issuers and
their subsidiaries of 1,822,810 outstanding shares of the common stock of
Mercom, (ii) by Avalon Michigan Inc. or Avalon Michigan LLC of a cable
television system from Cross Country Cable TV, Inc., (iii) by Avalon Michigan
Inc. or Avalon Michigan LLC of a cable television system from Nova Cablevision,
Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P., (iv) by Avalon
Michigan Inc. or Avalon Michigan LLC of the assets of Traverse Internet, Inc.
and (v) by Avalon New England of all of the cable system assets of Taconic
Technology Corp.
133
"Affiliate" means, with respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified
Person. For purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling," "controlled by" and "under
common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Amrac" means Amrac Clear View, a Limited Partnership.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than in the ordinary course of business (provided that the
sale, lease, conveyance or other disposition of all or substantially all of
the assets of the Issuers and their Restricted Subsidiaries taken as a whole
will be governed by the covenants described above under the captions
"Repurchase at the Option of Holders--Change of Control" and "--Merger,
Consolidation, or Sale of Assets" and not by the provisions of the covenant
described above under the caption "--Asset Sales"), and (ii) the issue or sale
by the Issuers or any of their Restricted Subsidiaries of Equity Interests in
any of their Restricted Subsidiaries, in the case of either clause (i) or
(ii), whether in a single transaction or a series of related transactions (a)
that have a fair market value in excess of $2.5 million or (b) for Net Cash
Proceeds in excess of $2.5 million. Notwithstanding the foregoing: (i) a
transfer of assets by any of the Issuers to a Restricted Subsidiary of any
Issuer or by a Restricted Subsidiary of any Issuer to such Issuer or to
another Issuer or Restricted Subsidiary of an Issuer, (ii) an issuance or sale
of Equity Interests by a Restricted Subsidiary of an Issuer to any Issuer or
to another Issuer or Restricted Subsidiary of any Issuer, (iii) a Restricted
Payment that is permitted by the covenant described above under the caption
"--Restricted Payments" and (iv) transactions that are part of the
Reorganization will not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Avalon" means Avalon Cable Holdings LLC, a Delaware limited liability
company.
"Avalon Michigan" means Avalon Cable of Michigan, Inc., a Pennsylvania
corporation.
"Avalon Michigan LLC" means Avalon Cable of Michigan LLC, a Delaware
limited liability company.
"Avalon New England" means Avalon Cable of New England LLC, a Delaware
limited liability company.
"Board of Directors" means, as to any Person, the board of directors of
such Person (or, if such Person is a limited liability company, the board of
managers of such Person) or similar governing body or any duly authorized
committee thereof.
"Business Day" means a day other than a Saturday, Sunday or other day on
which commercial banks in New York City are authorized or required by law to
close.
"Cable Michigan" means Cable Michigan, Inc., a Pennsylvania corporation.
"Capital Lease Obligation" means, as to any Person, the obligations of such
Person to pay rent or other amounts under any lease of (or other arrangement
conveying the right to use) real or personal property, or a combination
thereof, which obligations are required to be classified and accounted for as
capital leases on a balance sheet of such Person under GAAP, and, for the
purposes of the Indenture, the amount of such obligations at any time shall be
the capitalized amount thereof at such time determined in accordance with
GAAP.
134
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock and (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited).
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and Eurodollar
time deposits with maturities of not more than one year from the date of
acquisition, bankers' acceptances with maturities of not more than one year
from the date of acquisition and overnight bank deposits, in each case with (A)
Brown Brothers Harriman or (B) any other domestic commercial bank having
capital and surplus in excess of $500 million and a Thompson Bank Watch Rating
of "B" or better, (iv) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the qualifications
specified in clause (iii) above, (v) commercial paper having the highest rating
obtainable from Moody's Investors Service, Inc. or one of the two highest
ratings from Standard & Poor's with maturities of not more than one year from
the date of acquisition and (vi) money market funds at least 95% of the assets
of which constitute Cash Equivalents of the kinds described in clauses (i)-(v)
of this definition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the combined assets of the Issuers and their Restricted
Subsidiaries, taken as a whole, or of all or substantially all of the, direct
or indirect, assets of Avalon, in either case, to any "person" (as such term is
used in Section 13(d)(3) of the Securities Exchange Act) other than another
Issuer, a Restricted Subsidiary or an Additional Obligor; (ii) the adoption of
a plan relating to the liquidation or dissolution of an Issuer or Issuers which
individually or in the aggregate holds all or substantially all of the combined
assets of the Issuers; (iii) (A) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of
which is that any "person" (as defined above), other than the Principals,
becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Securities Exchange Act, except that a person shall be deemed
to have "beneficial ownership" of all securities that such person has the right
to acquire, whether such right is currently exercisable or is exercisable only
upon the occurrence of a subsequent condition), directly or indirectly, of more
than 35% of the Capital Stock of Avalon (measured by voting power rather than
number of shares) and (B) the Principals "beneficially own" (as such term is
defined in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act, except
that a person shall be deemed to have "beneficial ownership" of all securities
that such person has the right to acquire, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, in the aggregate a lesser percentage of the
Capital Stock of Avalon (measured by voting power rather than number of shares)
than such other person; (iv) the first day on which a majority of the members
of the Board of Directors of Avalon are not Continuing Managers; or (v) (A)
Avalon or an Issuer or Issuers which individually or in the aggregate holds all
or substantially all of the combined assets of the Issuers, consolidates with,
or merges with or into, any Person or (B) any Person consolidates with, or
merges with or into, Avalon or an Issuer or Issuers which individually or in
the aggregate holds all or substantially all of the combined assets of the
Issuers, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of such Issuer or Issuers or Avalon is converted into
or exchanged for cash, securities or other property, other than any such
transaction where the Voting Stock of such Issuer or Issuers or Avalon
outstanding immediately prior to such transaction is converted into or
exchanged for Voting Stock (other than Disqualified Stock) of the surviving or
transferee Person constituting a majority of the outstanding shares of such
Voting Stock of such surviving or transferee Person (immediately after giving
effect to such issuance); provided, however, that notwithstanding the
foregoing, the Reorganization shall not be deemed to be a Change of Control.
"Commission" means the Securities and Exchange Commission.
135
"Company Issuers" means initially Avalon Michigan, Avalon New England and
Avalon Cable Finance, Inc. or any successor thereto; provided that subsequent
to the Reorganization, the Company Issuers shall be Avalon New England, Avalon
Michigan LLC, as successor to Avalon Michigan, and Avalon Cable Finance, Inc.
or any successor thereto.
"Completed Acquisitions" means the acquisitions of Cable Michigan, Amrac and
Pegasus by Avalon or an Affiliate of Avalon.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such
Consolidated Net Income, plus (iii) Consolidated Interest Expense of such
Person for such period, to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iv) depreciation and amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) of such
Person and its Restricted Subsidiaries for such period to the extent that such
depreciation and amortization were deducted in computing such Consolidated Net
Income, plus (v) other non-cash items decreasing such Consolidated Net Income,
minus (vi) non-cash items increasing such Consolidated Net Income for such
period (other than items that were accrued in the ordinary course of business),
in each case, on a consolidated basis and determined in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum, without duplication of (i) the consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid or
accrued (including, without limitation, amortization of original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), (ii) the consolidated interest expense of such Person
and its Restricted Subsidiaries that was capitalized during such period, (iii)
any interest expense on Indebtedness of another Person that is guaranteed by
such Person or any of its Restricted Subsidiaries or secured by a Lien on
assets of such Person or any of its Restricted Subsidiaries (whether or not
such guarantee or Lien is called upon) and (iv) the product of (a) all cash
dividend payments (and non-cash dividend payments in the case of a Person that
is a Restricted Subsidiary) on any series of preferred stock of such Person or
any of its Restricted Subsidiaries, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of such Person, expressed
as a decimal, in each case, on a consolidated basis and in accordance with
GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
(for such period, on a consolidated basis, determined in accordance with GAAP);
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary,
(ii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded, (iii) the cumulative effect of a change in accounting principles
shall be excluded and (iv) the Net Income of any Unrestricted Subsidiary shall
be excluded whether or not distributed to an Issuer or one of its Restricted
Subsidiaries.
"Continuing Managers" means the managers of Avalon on the Issue Date and
each other manager, if, in each case, such other manager's nomination for
election to the board of managers of Avalon is recommended by at least 66 2/3%
of the then Continuing Managers or such other manager receives the vote of the
Permitted Investors in his or her election by the equityholders of Avalon.
136
"Control Investment Affiliate" means as to any Person, any other Person
which (a) directly or indirectly, is in control of, is controlled by, or is
under common control with, such Person and (b) is organized by such Person
primarily for the purpose of making equity or debt investments in one or more
companies. For purposes of this definition, "control" of a Person means the
power, directly or indirectly, to direct or cause the direction of the
management and policies of such Person whether by contract or otherwise.
"Credit Facility" means that certain Senior Credit Agreement, dated as of
November 5, 1998, by and among the Company Issuers, the lenders party thereto,
Lehman Commercial Paper Inc., as administrative agent and other parties
thereto, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case
as amended, modified, renewed, refunded, replaced or refinanced from time to
time.
"Default" means any event that is or with the passage of time or the giving
of notice (or both) would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature, except to the extent that such Capital Stock is solely
redeemable with, or solely exchangeable for, any Capital Stock of such Person
that is not Disqualified Stock; provided, however, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require the Issuers or their Affiliates to repurchase such Capital
Stock upon the occurrence of a Change of Control or an Asset Sale shall not
constitute Disqualified Stock if the terms of such Capital Stock provide that
the Issuers or their Affiliates may not repurchase or redeem any such Capital
Stock pursuant to such provisions unless such repurchase or redemption complies
with the covenant described under the caption under "--Certain Covenants--
Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Excess Proceeds" means any Net Cash Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of the third paragraph
under the caption "--Asset Sales" within the applicable period.
"Existing Michigan Indebtedness" means Indebtedness incurred by Avalon
Michigan Inc. or Mercom between the Issue Date and the completion of the
Reorganization that would be permitted to be incurred under the terms of the
Indenture, including any related notes, guarantees, collateral documents,
instruments and agreement executed in connection therewith, and in each case,
as amended, modified renewed, refunded, replaced or refinanced.
"Existing Indebtedness" means up to $5.0 million in aggregate principal
amount of Indebtedness of the Issuers and their Restricted Subsidiaries (other
than Indebtedness under the Credit Facility and the Notes) in existence on the
Issue Date, until such amounts are repaid.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, except for the provisions described
above under the captions "Certain Covenants--Restricted Payments" and "Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock", GAAP
shall be determined on the basis of such principles in effect on the Issue
Date.
"Governmental Authority" means any nation or government, any state or other
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to
government.
137
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America, and the payment for which the
United States pledges its full faith and credit.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the net payment
Obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements in the ordinary course of business designed to
protect such Person against fluctuations in commodity prices, interest rates or
currency exchange rates.
"Holder" means a Person in whose name a Note is registered.
"Indebtedness" means, with respect to any Person, without duplication, any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the balance deferred
and unpaid of the purchase price of any Property acquired by such Person or
representing any Hedging Obligations, except any such balance that constitutes
an accrued expense or trade or accounts payable, if and to the extent any of
the foregoing indebtedness (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all Indebtedness of others secured
by a Lien on any asset of such Person (whether or not such Indebtedness is
assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any Indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the face amount
thereof, in the case of any Indebtedness with respect to acceptances, letters
of credit and similar facilities, (ii) the accreted value thereof in the case
of any Indebtedness that does not require current payments of interest and
(iii) the principal amount thereof, together with any interest thereon that is
more than 30 days past due, in the case of any other Indebtedness; provided,
however, that, in each case, with respect to any Indebtedness of any Person
secured by a Lien on any asset of such Person and non-recourse to such Person,
the amount of such Indebtedness shall be the lesser of (A) the principal amount
thereof and (B) the fair market value of the Property subject to such Lien.
Notwithstanding the foregoing, the term "Indebtedness" shall not include
Indebtedness of the Issuers to Affiliates for which principal and interest
payments are not required to be made prior to the maturity of the Notes and
which is otherwise subordinated to the prior payment in full of the Notes.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other Obligations),
advances of assets or capital contributions (excluding commission, travel and
entertainment, moving, and similar advances to officers and employees made in
the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, together
with all items that are or would be classified as investments on a balance
sheet prepared in accordance with GAAP. If any of the Issuers or any of their
Restricted Subsidiaries sells or otherwise disposes of any Equity Interests of
any direct or indirect Restricted Subsidiary of any Issuer such that, after
giving effect to any such sale or disposition, such Person is no longer a
direct or indirect Restricted Subsidiary of any Issuer, such Issuer or such
Restricted Subsidiary, as the case may be, shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Restricted Subsidiary not sold or
disposed of in an amount determined as provided in the final paragraph of the
covenant described above under the caption "--Restricted Payments."
"Issue Date" means the date on which the Notes are originally issued.
"Issuers" means, initially, Michigan Holdings, Avalon Holdings and Finance
Holdings or any successor thereto; provided that subsequent to the
Reorganization, the Issuers shall be Avalon Holdings, as successor to Michigan
Holdings, and Finance Holdings or any successor thereto.
138
"Leverage Ratio" means the ratio of (i) the aggregate outstanding amount of
Indebtedness of each of the Issuers and their Restricted Subsidiaries as of the
date of calculation on a combined consolidated basis in accordance with GAAP
(subject to the terms described in the next paragraph) plus the aggregate
liquidation preference of all outstanding Disqualified Stock of the Issuers and
preferred stock of the Issuers' Restricted Subsidiaries (except preferred stock
issued to the Issuers or a Wholly Owned Subsidiary of the Issuers) on such date
to (ii) the aggregate Consolidated Cash Flow of the Issuers for the full fiscal
quarter ending on or prior to the date of determination multiplied by four.
For purposes of this definition, (i) the amount of Indebtedness which is
issued at a discount shall be deemed to be the accreted value of such
Indebtedness at the end of the quarter, whether or not such amount is the
amount then reflected on a balance sheet prepared in accordance with GAAP, and
(ii) the aggregate outstanding principal amount of Indebtedness of the Issuers
and their Subsidiaries and the aggregate liquidation preference of all
outstanding preferred stock of the Issuers' Subsidiaries for which such
calculation is made shall be determined on a pro forma basis as if the
Indebtedness and preferred stock giving rise to the need to perform such
calculation had been incurred and issued and the proceeds therefrom had been
applied, and all other transactions in respect of which such Indebtedness is
being incurred or preferred stock is being issued had occurred, on the first
day of the quarter. In addition to the foregoing, for purposes of this
definition, Consolidated Cash Flow shall be calculated on a pro forma basis
after giving effect to (i) the incurrence of the Indebtedness of such Person
and its Subsidiaries and the issuance of the preferred stock of such
Subsidiaries (and the application of the proceeds therefrom) giving rise to the
need to make such calculation and any incurrence (and the application of the
proceeds therefrom) or repayment of other Indebtedness, at any time subsequent
to the beginning of the quarter and on or prior to the date of determination,
as if such incurrence or issuance (and the application of the proceeds
thereof), or the repayment, as the case may be, occurred on the first day of
the quarter (except that, in making such computation, the amount of
Indebtedness under any revolving credit facility shall be computed based upon
the average balance of such Indebtedness at the end of each month during such
period) and (ii) any acquisition (including, without limitation, the
acquisitions of Cable Michigan, Amrac and Pegasus and any other acquisition
giving rise to the need to make such calculation as a result of such Person or
one of its Subsidiaries (including any Person that becomes a Subsidiary as a
result of such acquisition) incurring, assuming or otherwise becoming liable
for Indebtedness or such Person's Subsidiaries issuing preferred stock) at any
time on or subsequent to the first day of the quarter and on or prior to the
date of determination, as if such acquisition (including the incurrence,
assumption or liability for any such Indebtedness and the issuance of such
preferred stock and also including any Consolidated Cash Flow associated with
such acquisition) occurred on the first day of the quarter, giving pro forma
effect to any non-recurring expenses, non-recurring costs and cost reductions
within the first year after such acquisition the Issuers anticipate if the
Issuers deliver to the Trustee an officer's certificate executed by the chief
financial or accounting officer of any of the Issuers certifying to and
describing and quantifying with reasonable specificity such non-recurring
expenses, non-recurring costs and cost reductions. Furthermore, in calculating
Consolidated Interest Expense for purposes of the calculation of Consolidated
Cash Flow, (a) interest on Indebtedness determined on a fluctuating basis as of
the date of determination (including Indebtedness actually incurred on the date
of the transaction giving rise to the need to calculate the Leverage Ratio) and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness as in effect on the date of determination and (b) notwithstanding
(a) above, interest determined on a fluctuating basis, to the extent such
interest is covered by Hedging Obligations, shall be deemed to accrue at the
rate per annum resulting after giving effect to the operation of such
agreements.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in any asset and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Mercom" means Mercom, Inc., a Delaware corporation.
139
"Mercom Intercompany Loan" means the Term Credit Agreement between Mercom
and Cable Michigan, Inc. originally dated as of November 26, 1989, amended and
restated as of August 16, 1995, further amended and restated as of September
29, 1997 and as may be further amended from time to time; provided that any
such further amendment shall not modify the Mercom Intercompany Loan as in
effect as of September 29, 1997 in any material respect, taken as a whole,
adverse to the Issuers and their Subsidiaries or the Trustee or the Holders.
"Mercom Management Agreement" means the Management Agreement between Mercom
and Cable Michigan, Inc. dated as of January 1, 1997, as may be amended from
time to time; provided that any such amendment shall not modify the Mercom
Management Agreement as in effect as of January 1, 1997 in any material
respect.
"Merger" means the merger of Avalon Cable Michigan, Inc. with and into Cable
Michigan, Inc.
"Net Cash Proceeds" means (a) with respect to any Asset Sale, the aggregate
cash proceeds or Cash Equivalents received by the Issuers or any of their
Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-
cash consideration received in any Asset Sale), net of (i) all costs relating
to such Asset Sale (including, without limitation, legal, accounting,
investment banking and brokers fees, and sales and underwriting commissions)
and any relocation expenses incurred as a result thereof, taxes paid or payable
as a result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), (ii) any reserve established in
accordance with GAAP or amounts deposited in escrow for adjustment in respect
of the sale price of such asset or assets or for indemnities with respect to
any Asset Sale (provided that such amounts shall be Net Cash Proceeds to the
extent and at the time released or not required to be reserved) and (iii)
amounts required to be applied to the repayment of Indebtedness secured by a
Lien which is expressly permitted hereunder on any asset that is the subject of
such Asset Sale and (b) with respect to transactions or events other than Asset
Sales, the aggregate cash proceeds or Cash Equivalents received by the Issuers
or any of their Restricted Subsidiaries in connection therewith less the
reasonable fees, commissions and other out-of-pocket expenses incurred by the
Issuers or any of their Restricted Subsidiaries in connection with such
transaction or event and less any taxes paid or payable as a result thereof
(after taking into account any available tax credits or deductions and any tax
sharing arrangements).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary gain (but not loss),
together with any related provision for taxes on such extraordinary gain (but
not loss).
"Non-Recourse Debt" means Indebtedness (i) as to which none of the Issuers
nor any of their Restricted Subsidiaries (a) provides credit support of any
kind (including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise) or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any Indebtedness (other than the
Notes being offered hereby) of any of the Issuers or their Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of any of the Issuers or their
Restricted Subsidiaries.
"Obligations" means any principal, premium, if any, interest (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to any Issuer or any of their Restricted
140
Subsidiaries whether or not a claim for post-filing interest is allowed in such
proceeding), penalties, fees, charges, expenses, indemnifications,
reimbursement obligations, damages (including Liquidated Damages), guarantees
and other liabilities or amounts payable under the documentation governing any
Indebtedness or in respect thereof.
"Pegasus" means, collectively, Pegasus Cable Television, Inc. and Pegasus
Cable Television of Connecticut, Inc.
"Permitted Business" means any business engaged in by the Issuers or their
Restricted Subsidiaries as of the Issue Date or any business reasonably
related, ancillary or complementary thereto.
"Permitted Investments" means (a) any Investment in any Issuer or in any
Restricted Subsidiary of the Issuers; (b) any Investment in Cash Equivalents
constituting Cash Equivalents at the time made; (c) any Investment by the
Issuers or any of their Restricted Subsidiaries in a Person engaged in a
Permitted Business, if as a result of such Investment (i) such Person becomes a
Wholly-Owned Subsidiary of any Issuer or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, any of the Issuers or any of their
Restricted Subsidiaries; (d) any Restricted Investment made as a result of the
receipt of non-cash consideration from an Asset Sale that was made in
compliance with the covenant described above under the caption "Repurchase at
the Option of Holders--Asset Sales"; (e) any acquisition of assets solely in
exchange for the issuance of Equity Interests (other than Disqualified Stock)
of any of the Issuers; (f) other Investments by the Issuers or any of their
Restricted Subsidiaries in any Person having an aggregate fair market value
(measured as of the date made and without giving effect to subsequent changes
in value), when taken together with all other Investments made pursuant to this
clause (f) that are at the time outstanding, not to exceed $10.0 million; (g)
Investments arising in connection with Hedging Obligations that are incurred in
the ordinary course of business, for the purpose of fixing or hedging currency,
commodity or interest rate risk (including with respect to any floating rate
Indebtedness that is permitted by the terms of the Indenture to be outstanding)
in connection with the conduct of the business of the Issuers and their
Restricted Subsidiaries; (h) prior to the completion of the Mercom Acquisition,
the Mercom Intercompany Loan; and (i) any Investment existing on the Issue Date
and any amendment, modification, restatement, supplement, extension, renewal,
refunding, replacement, refinancing, in whole or in part, thereof.
"Permitted Investors" means the collective reference to ABRY and its Control
Investment Affiliates, including ABRY III.
"Permitted Liens" means (i) Liens securing Indebtedness under the Credit
Facility or other senior Indebtedness if such Indebtedness was permitted by the
terms of the Indenture to be incurred, (ii) Liens securing Indebtedness of any
Restricted Subsidiary of any of the Issuers if such Indebtedness was permitted
by the terms of the Indenture to be incurred; (iii) Liens securing Hedging
Obligations with respect to Indebtedness permitted by the Indenture to be
incurred; (iv) Liens on property of a Person existing at the time such Person
is merged into or consolidated with any of the Issuers or any of their
Restricted Subsidiaries; provided that such Liens were not created in
contemplation of such merger or consolidation and do not extend to any assets
other than those of the Person merged into or consolidated with such Issuer;
(v) Liens on property existing at the time of acquisition thereof by any of the
Issuers or any of their Restricted Subsidiaries, provided that such Liens were
not created in contemplation of such acquisition and only extend to the
property so acquired; (vi) Liens existing on the Issue Date; (vii) Liens to
secure any Permitted Refinancing Indebtedness incurred to refinance any
Indebtedness secured by any Lien referred to in the foregoing clauses (ii)
through (vi), as the case may be, at the time the original Lien became a
Permitted Lien; (viii) Liens in favor of any of the Issuers or any of their
Restricted Subsidiaries; (ix) Liens incurred in the ordinary course of business
of the Issuers or any of their Restricted Subsidiaries with respect to
obligations that do not exceed the greater of $15.0 million or 5% of Total
Assets in the aggregate at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of advances
or credit (other than trade credit in the ordinary course of business) and (b)
do not in the aggregate materially detract from the value of the property or
materially impair
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the use thereof in the operation of business by such Issuer or such Restricted
Subsidiary; (x) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds, deposits to secure the performance
of bids, trade contracts, government contracts, leases or licenses or other
obligations of a like nature incurred in the ordinary course of business
(including, without limitation, landlord Liens on leased properties); (xi)
Liens for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently prosecuted, provided that any reserve or
other appropriate provision as shall be required to conform with GAAP shall
have been made therefor; (xii) Liens to secure Indebtedness (including Capital
Lease Obligations) permitted by clause (vi) of the second paragraph of the
covenant described above under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock" covering only the assets acquired with such
Indebtedness; (xiii) carriers', warehousemen's, mechanics', landlords',
materialmen's, repairmen's or other like Liens arising in the ordinary course
of business in respect of obligations not overdue for a period in excess of 60
days or which are being contested in good faith by appropriate proceedings
promptly instituted and diligently prosecuted; provided that any reserve or
other appropriate provision as shall be required to conform with GAAP shall
have been made therefor; (xiv) easements, rights-of-way, zoning and similar
restrictions and other similar encumbrances or title defects incurred, or
leases or subleases granted to others, in the ordinary course of business,
which do not in any case materially detract from the value of the Property
subject thereto or do not interfere with or adversely affect in any material
respect the ordinary conduct of the business of the Issuers and their
Restricted Subsidiaries taken as a whole; (xv) Liens in favor of customs and
revenue authorities to secure payment of customs duties in connection with the
importation of goods in the ordinary course of business and other similar Liens
arising in the ordinary course of business; (xvi) leases or subleases granted
to third Persons not materially interfering with the ordinary course of
business of the Issuers or any of their Restricted Subsidiaries; (xvii) Liens
(other than any Lien imposed by ERISA or any rule or regulation promulgated
thereunder) incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance, and other types
of social security; (xviii) deposits made in the ordinary course of business to
secure liability to insurance carriers; (xix) Liens to secure Indebtedness
permitted under the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; provided, that any such Lien
encumbers only the assets so purchased with the proceeds thereof; (xx) any
attachment or judgment Lien not constituting an Event of Default under clause
(vii) of the first paragraph of the section described above under the caption
"Events of Default and Remedies"; (xxi) any interest or title of a lessor or
sublessor under any operating lease; (xxii) Liens under licensing agreements
for use of Intellectual Property entered into in the ordinary course of
business; (xxiii) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual, or warranty requirements of any of the
Issuers or any of their Restricted Subsidiaries, including rights of offset and
set-off; (xxiv) bankers' Liens in respect of deposit accounts; (xxv) Liens
created under the Indenture; (xxvi) Liens imposed by law incurred by the
Issuers or their Restricted Subsidiaries in the ordinary course of business;
and (xxvii) any renewal of or substitution for any Lien permitted by clauses
(i) through (xxvi), provided, however, that with respect to Liens incurred
pursuant to this clause (xxvii), the principal amount secured has not increased
nor the Liens extended to any additional property (other than proceeds of the
property in question).
"Permitted Refinancing Indebtedness" means any Indebtedness of any of the
Issuers or any of their Restricted Subsidiaries issued in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of such Issuer or such Restricted Subsidiary (other
than intercompany Indebtedness); provided that either: (A) the principal amount
(or accreted value, if applicable) of such Permitted Refinancing Indebtedness
does not exceed the principal amount of (or accreted value, if applicable),
plus accrued and unpaid interest on, any Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of reasonable fees and
expenses incurred in connection therewith); (B) for Indebtedness other than
Indebtedness incurred pursuant to the Senior Credit Facility, such Permitted
Refinancing Indebtedness has a final maturity date the same as or later than
the final maturity date of, and has a Weighted Average Life to Maturity equal
to or greater than the Weighted Average Life to Maturity of, the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; (C) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the
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Notes, such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and is subordinated in right of payment to,
the Notes on terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (D) such Indebtedness
is incurred either by the Issuer or the Restricted Subsidiary who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded or by the parent company of such obligor.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, Governmental Authority or any other entity.
"Principal" means (i) Permitted Investors and (ii) the members of management
of the Issuers or any of the Subsidiaries of the Issuers as of the Issue Date,
in each case, together with any spouse or immediate family member (including
adoptive children), estate, heirs, executors, personal representatives and
administrators of such Person.
"Reorganization" means the related series of substantially simultaneous
transactions pursuant to which (i) substantially all the assets of Avalon
Michigan Inc. (other than, at the option of Avalon Michigan Inc., the Capital
Stock of Mercom and any Subsidiary of Avalon Michigan Inc. organized for
purposes of consummating the Mercom Acquisition) and Mercom (other than, at the
option Avalon Michigan Inc., the Capital Stock of Wholly-Owned Subsidiaries of
Mercom) are transferred to Avalon Michigan LLC; (ii) substantially all of the
liabilities of Avalon Michigan Inc. and Mercom (other than liabilities
hereunder and, at the option of Avalon Michigan Inc., intercompany debt) are
transferred to Avalon Michigan LLC; (iii) Michigan Holdings ceases to be an
Issuer and together with Avalon Michigan becomes a guarantor under the
Indenture and (iv) certain Indebtedness of Avalon New England shall be assumed
by Avalon Michigan Inc.
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary; provided that, on the Issue
Date, all Subsidiaries of each of the Issuers shall be Restricted Subsidiaries
of each such Issuer.
"Senior Subordinated Notes" means the Senior Subordinated Notes due 2008 of
the Company Issuers, as co-obligors, issued under the Indenture dated as of
December 10, 1998.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1 Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the Issue Date.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the credit agreement or other
original documentation governing such Indebtedness, and shall not include any
contingent obligations to repay, redeem or repurchase any such interest or
principal prior to the date originally scheduled for the payment thereof.
"Strategic Equity Investment" means a cash contribution to the equity
capital of any of the Issuers or a purchase from any such Issuer of common
Equity Interests (other than Disqualified Stock), in either case by or from a
Strategic Equity Investor and for aggregate cash consideration of at least
$25.0 million.
"Strategic Equity Investor" means, as of any date, any Person (other than an
Affiliate of any of the Issuers) engaged in a Permitted Business.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the
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occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or indirectly,
by such Person and (ii) any partnership (a) the sole general partner or the
managing general partner of which is such Person or an entity described in
clause (i) and related to such Person or (b) the only general partners of which
are such Person or of one or more entities described in clause (i) and related
to such Person (or any combination thereof).
"Total Assets" means the total combined consolidated assets of the Issuers
and their Restricted Subsidiaries, as shown on the most recent balance sheets
(excluding the footnotes thereto) of the Issuers.
"Total Revenues" means the total combined consolidated revenues of the
Issuers and their Restricted Subsidiaries, as shown on the most recent balance
sheets (excluding the footnotes thereto) of the Issuers.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by the
Board of Directors of the applicable Issuer as an Unrestricted Subsidiary
pursuant to a Board Resolution; but only to the extent that such Subsidiary:
(a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any
agreement, contract, arrangement or understanding with such Issuer or any
Restricted Subsidiary of such Issuer unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to such Issuer or
such Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of such Issuer; (c) is a Person with respect to
which none of the Issuers nor any of their Restricted Subsidiaries has any
direct or indirect obligation (x) to subscribe for additional Equity Interests
or (y) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; and (d) has
not guaranteed or otherwise directly or indirectly provided credit support for
any Indebtedness of the Issuers or any of their Restricted Subsidiaries. The
Board of Directors of the Issuers may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation shall
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the
Issuers of any outstanding Indebtedness of such Unrestricted Subsidiary and
such designation shall only be permitted if (i) such Indebtedness is permitted
pursuant to the provisions described above under the caption "Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock",
calculated on a pro forma basis as if such designation had occurred at the
beginning of the reference period, and (ii) no Default or Event of Default
would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Restricted Subsidiary of
such Person all of the outstanding Capital Stock and other Equity Interests of
which shall at the time be owned by such Person or by one or more Wholly Owned
Subsidiaries of such Person.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary describes material United States federal income tax
consequences of the exchange of old notes for new notes pursuant to the
exchange offer and the ownership and disposition of the new notes. The
discussion is a summary and does not consider all aspects of U.S. federal
income taxation that may be relevant to the purchase, ownership and disposition
of the new notes by a prospective investor in light of such investor's personal
circumstances. This discussion also does not address the U.S. federal income
tax consequences of ownership of notes not held as capital assets within the
meaning of Section 1221 of the U.S. Internal Revenue Code of 1986, as amended
(the "Code"), or the U.S. federal income tax consequences to investors subject
to special treatment under the U.S. federal income tax laws, such as dealers in
securities or foreign currency, tax-exempt entities, financial institutions,
insurance companies, persons that hold the notes as part of a straddle, a
hedging or a conversion or constructive sale transaction, persons that have a
"functional currency" other than the U.S. dollar, and investors in pass-through
entities. In addition, this discussion does not describe any tax consequences
arising under U.S. gift and estate taxes or out of the tax laws of any state,
local or foreign jurisdiction.
Furthermore, the discussion below is based upon the provisions of the Code,
and the regulations, rulings and judicial decisions thereunder as of the date
hereof, and such authorities may be repealed, revoked or modified, possibly on
a retroactive basis, so as to result in United States federal income tax
consequences different from those discussed below. Persons considering the
purchase, ownership or disposition of the new notes should consult their own
tax advisors concerning the United States federal income tax consequences in
light of their particular situations as well as any consequences arising under
the laws of any other taxing jurisdiction.
The exchange of old notes for new notes pursuant to the exchange offer will
not be treated as an "exchange" for federal income tax purposes because the new
notes will not be considered to differ materially in kind or extent from the
old notes. Rather, the new notes received by a holder will be treated as a
continuation of the old notes in the hands of such holder. As a result, there
will be no federal income tax consequences to holders exchanging old notes for
new notes pursuant to the exchange offer.
Exchange of Old Notes
The exchange of old notes for new notes with terms identical to those of the
old notes and the filing of a registration statement with respect to the resale
of the old notes will not be a taxable event to holders of the old notes.
Consequently, as a result of such an exchange or such a filing, no gain or loss
will be recognized by a holder, the holding period of the new note will include
the holding period of the old note and the basis of the new note will be the
same as the basis of the old note immediately before the exchange. The issuers
are obligated to pay liquidated damages to the holders of the old notes under
certain circumstances. Any such payments should be treated for tax purposes as
interest, taxable to holders as such payments are received or accrued in
accordance with the holder's method of accounting for federal income tax
purposes.
In any event, persons considering the exchange of old notes for new notes
should consult their own tax advisors concerning the United States federal
income tax consequences in light of their particular situations as well as any
consequences arising under the laws of any other taxing jurisdiction.
Payments of Interest
Except as set forth below, interest on a new note will generally be taxable
to a United States Holder as ordinary income from domestic sources at the time
it is paid or accrued in accordance with the United States Holder's method of
accounting for tax purposes. As used herein, a "United States Holder" means a
holder of a new note that is:
. a citizen or resident of the United States,
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. a corporation or partnership created or organized in or under the laws of
the United States or any political subdivision thereof,
. an estate the income of which is subject to United States federal income
taxation regardless of its source or
. a trust which is subject to the supervision of a court within the United
States and the control of one or more United States persons as described
in section 7701(a)(30) of the Code.
A "Non-United States Holder" is a holder that is not a United States Holder.
Original Issue Discount
The new notes will bear original issue discount in an amount equal to the
difference between their stated redemption price at maturity (the sum of all
payments to be made on the new note) and their "issue price." United States
Holders should be aware that they generally must include original issue
discount in gross income as it accrues; regardless of their regular method of
accounting for federal income tax purposes, and in advance of the receipt of
cash attributable to that income. However, United States Holders of such new
notes generally will not be required to include separately in income cash
payments received on the new notes, even if denominated as interest.
This summary is based upon final Treasury regulations addressing debt
instruments issued with original issue discount.
The "issue price" of a new note will be the first price at which a
substantial amount of the particular offering of old notes to which such new
note relates was sold (other than to an underwriter, placement agent or
wholesaler).
The amount of original issue discount includible in income by the initial
United States Holder is the sum of the "daily portions" of original issue
discount with respect to the new note for each day during the taxable year or
portion of the taxable year in which such United States Holder held such new
note (including, in the case of the taxable year in which such holder exchanged
old notes for new notes, each day during such taxable year in which such holder
held such old notes) ("accrued original issue discount"). The daily portion is
determined by allocating to each day in any "accrual period" a pro rata portion
of the original issue discount allocable to that accrual period. The "accrual
period" may be of any length and may vary in length over the terms of the new
note, provided that each accrual period is no longer than one year and each
scheduled payment of principal or interest occurs on the first day or the final
day of an accrual period. The amount of original issue discount allocable to
any accrual period is an amount equal to the product of the new note's adjusted
issue price at the beginning of such accrual period and its yield to maturity
(determined on the basis of compounding at the close of each accrual period and
properly adjusted for the length of the accrual period). Original issue
discount allocable to a final accrual period is the difference between the
amount payable at maturity and the adjusted issue price at the beginning of the
final accrual period. The "adjusted issue price" of a new note at the beginning
of any accrual period is equal to its issue price increased by the accrued
original issue discount for each prior accrual period and reduced by any
payments made on such new note on or before the first day of the accrual
period. Under these rules, a United States Holder will have to include in
income increasingly greater amounts of original issue discount in successive
accrual periods. The issuers are required to provide information returns
stating the amount of original issue discount accrued on new notes held of
record by persons other than corporations and other exempt holders.
United States Holders may be able to elect to treat all interest on any new
note as original issue discount and calculate the amount includible in gross
income under the constant yield method described above. For the purposes of
this election, interest includes stated interest, acquisition discount,
original issue discount, de minimis original issue discount and unstated
interest. The election is to be made for the taxable year in which the United
States Holder acquired the old note to which a new note relates, and may not be
revoked without the consent of the Internal Revenue Service. United States
Holders should consult with their own tax advisors about this election and its
availability.
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Sale, Exchange, Redemption and Retirement of New Notes
A United States Holder's tax basis in a new note will, in general, be the
United States Holder's cost therefor, increased by the amount of original issue
discount previously included in income with respect to such new note and
reduced by any cash payments on the new note (including, in each case, original
issue discount included and cash payments made with respect to the old note for
which such new note was exchanged). Upon the sale, exchange, redemption,
retirement or other disposition of a new note, a United States Holder will
recognize gain or loss equal to the difference between the amount realized upon
the sale, exchange, redemption, retirement or other disposition and the
adjusted tax basis of the new note. Such gain or loss will be capital gain or
loss. Capital gains of individuals derived in respect of capital assets held
for more than one year are eligible for reduced rates of taxation. The
deductibility of capital losses is subject to limitations.
Non-United States Holders
For purposes of the following discussion, interest, dividends and gain on
the sale, exchange or other disposition of a new note will be considered "U.S.
trade or business income" if such income or gain is:
. effectively connected with the conduct of a U.S. trade or business and
. in the case of a qualified resident of a country having an applicable
income tax treaty with the United States containing a permanent
establishment provision, attributable to a U.S. permanent establishment
(or to a fixed base) in the United States.
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) A new note beneficially owned by an individual who at the time of
death is a Non-United States Holder will not be subject to United States
federal estate tax as a result of such individual's death, provided that
such individual does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of any of the issuers
entitled to vote within the meaning of section 871(h)(3) of the Code and
provided that the interest payments with respect to such new note would not
have been, if received prior to the time of such individual's death, U.S.
trade or business income to such individual.
(b) (i) No withholding of United States federal income tax will be
required with respect to the payment by the Issuers or any paying agent of
principal or interest on a new note owned by a Non-United States Holder,
provided that:
(A) the beneficial owner does not actually or constructively own 10%
or more of the total combined voting power of all classes of stock of
any of the issuers entitled to vote (or, in the case of any issuer
which is a limited liability company, 10% or more of the capital or
profits interest in such issuer) within the meaning of section
871(h)(3) of the Code and the regulations promulgated thereunder,
(B) the beneficial owner is not a controlled foreign corporation
that is related to any of the issuers as described in Section 864(d)(4)
of the Code,
(C) the beneficial owner is not a bank whose receipt of interest on
a new note is described in section 881(c)(3)(A) of the Code, and
(D) the beneficial owner satisfies the statement requirement
(described generally below) set forth in section 871(h) and section
881(c) of the Code and the regulations promulgated thereunder (the
"Portfolio Interest Exception").
(ii) To satisfy the requirement referred to in (b)(i)(D) above, the
beneficial owner of such new note, or a financial institution holding the
new note on behalf of such owner, must provide, in accordance with
specified procedures, a paying agent of any of the issuers with a statement
to the effect that the beneficial owner is not a United States person.
Currently, these requirements will be met if (1) the beneficial owner
provides its name and address, and certifies, under penalties of perjury,
that it is not a United States person (which certification may be made on
an Internal Revenue Service Form W-8 (or successor form)) or (2) a
financial institution holding the new note on behalf of the beneficial
owner certifies, under penalties or
147
perjury, that such statement has been received by it and furnishes a paying
agent with a copy thereof. Under recently finalized Treasury regulations
(the "Final Regulations"), the statement requirement referred to in
(b)(i)(D) above may also be satisfied with other documentary evidence for
interest paid after December 31, 1999, with respect to an offshore account
or through certain foreign intermediaries.
(iii) No withholding of United States federal income tax will be
required with respect to any gain or income realized by a Non-United States
Holder upon the sale, exchange or other disposition of a new note.
(iv) If a Non-United States Holder cannot satisfy the requirements of
the Portfolio Interest Exception described in (i) above, payments of
interest made to such Non-United States Holder will be subject to a 30%
withholding tax unless the beneficial owner of the new note provides the
issuers or their paying agent, as the case may be, with a properly executed
(1) IRS Form 1001 (or successor form) claiming an exemption from
withholding under the benefit of a tax treaty or (2) IRS Form 4224 (or
successor form) stating that interest paid on the new note is not subject
to withholding tax because it is U.S. trade or business income to the
beneficial owner. Under the Final Regulations, Non-United States Holders
will generally be required to provide IRS Form W-8 instead of IRS Form 1001
and IRS Form 4224, although alternative documentation may be applicable in
certain situations.
(c) If interest, including original issue discount, on the new note is
U.S. trade or business income to the beneficial owner, the Non-United
States Holder, although exempt from the withholding tax discussed above,
will be subject to United States federal income tax on such interest,
including original issue discount, on a net income basis in the same manner
as if it were a United States Holder. In addition, if such holder is a
foreign corporation, it may be subject to a branch profits tax equal to 30%
of its effectively connected earnings and profits for the taxable year,
subject to adjustments. For this purpose, interest, including original
issue discount, on a new note will be included in such foreign
corporation's earnings and profits.
(d) Any gain or income realized upon the sale, exchange, redemption,
retirement or other disposition of a new note generally will not be subject
to United States federal income tax unless (i) such gain or income is U.S.
trade or business income, or (ii) in the case of a Non-United States Holder
who is an individual, such individual is present in the United States for
183 days or more in the taxable year of such sale, exchange, retirement or
other disposition, and certain other conditions are met.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to certain
payments of principal, interest and original issue discount paid on new notes
and to the proceeds of the sale of a new note made to United States Holders
other than certain exempt recipients (such as corporations). A 31% backup
withholding tax will apply to such payments if the United States Holder fails
to provide a correct taxpayer identification number or certification of foreign
or other exempt status or fails to report in full dividend and interest income.
In general, no information reporting or backup withholding will be required
with respect to payments made by the issuers or any paying agent to Non-United
States Holders if a statement described in (b)(i)(D) under "Non-United States
Holders" has been received (and the payor does not have actual knowledge that
the beneficial owner is a United States person).
In addition, backup withholding and information reporting may apply to the
proceeds of the sale of a new note within the United States or conducted
through certain U.S. related financial intermediaries unless the statement
described in (b)(i)(D) under "Non-United States Holders" has been received (and
the payor does not have actual knowledge that the beneficial owner is a United
States person) or the holder otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be returned or credited against the holder's U.S.
Federal income tax liability, provided that the required information is
furnished to the IRS.
Holders of new notes should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such exemption.
148
PLAN OF DISTRIBUTION
A Broker-Dealer who holds old notes that are Transfer Restricted Securities
and that were acquired for its own account as a result of market-making
activities or other trading activities (other than those acquired directly from
the issuers or their predecessors) may exchange such old notes in the exchange
offer; provided however, that each such Participating Broker-Dealer may be
deemed an "underwriter" under the Securities Act and therefore must deliver a
prospectus in connection with any resales of new notes received on account of
such old notes in the exchange offer. Accordingly, each Participating Broker-
Dealer that receives new notes for its own account pursuant to the exchange
offer must acknowledge that it will deliver a prospectus in connection with any
resale of such new notes. This prospectus, as it may be amended or supplemented
from time to time, may be used by a Participating Broker-Dealer in connection
with the resale of new notes received in exchange for old notes where such old
notes were acquired as a result of market-making activities or other trading
activities. The issuers have agreed that for a period of 180 days from the
consummation of the exchange offer, they will make this prospectus, as amended
or supplemented, available to any Participating Broker-Dealer for use in
connection with any such resale.
The issuers will not receive any proceeds from any sales of the new notes by
Participating Broker Dealers. New notes received by Participating Broker-
Dealers for their own account pursuant to the exchange offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the new notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such new notes. Any Participating Broker-Dealer that resells the new notes
that were received by it for its own account pursuant to the exchange offer and
any broker or dealer that participates in a distribution of such new notes may
be deemed to be an "underwriter" within the meaning of the Securities Act and
any profit on any such resale of new notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation
under the Securities Act. The letter of transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
With respect to resales of the new notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third parties,
the issuers believe that a holder or other person who receives new notes,
whether or not such person is the holder (other than a person that is an
"affiliate" of any of the issuers within the meaning of Rule 405 under the
Securities Act) who receives new notes in exchange for old notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement or understanding with any person to
participate, in the distribution of the new notes, will be allowed to resell
the new notes to the public without further registration under the Securities
Act and without delivering to the purchasers of the new notes a prospectus that
satisfies the requirements of Section 10 of the Securities Act. However, if any
holder acquires new notes in the exchange offer for the purpose of distributing
or participating in a distribution of the new notes, such holder cannot rely on
the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction and such a secondary resale transaction
should be covered by an effective registration statement containing the selling
security holder information required by Item 507 or 508, as applicable, of
Regulation S-K under the Securities Act, unless an exemption from registration
is otherwise available. Further, each Participating Broker-Dealer that receives
new notes for its own account in exchange for old notes, where such old notes
were acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such new notes. The issuers have
agreed that, for a period of up to one year from the consummation of the
exchange offer, it will make this prospectus available to any Participating
Broker-Dealer for use in connection with any such resale.
149
LEGAL MATTERS
Certain legal matters relating to the issuance of the new notes will be
passed upon for the issuers by Kirkland & Ellis, Chicago, Illinois.
AVAILABLE INFORMATION
The issuers have filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement," which term shall encompass all amendments,
exhibits, annexes and schedules thereto) pursuant to the Securities Act, and
the rules and regulations promulgated thereunder, covering the exchange offer
contemplated hereby. This prospectus does not contain all the information set
forth in the Registration Statement. For further information with respect to
the issuers and the exchange offer, reference is made to the Registration
Statement. Statements made in this prospectus as to the contents of any
contract, agreement, or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the document or matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The issuers are not currently subject to the periodic reporting and other
informational requirements of the Securities Exchange Act. Upon the
effectiveness of the Registration Statement, the issuers will become subject to
the periodic reporting and other informational requirements of the Securities
Exchange Act, and in accordance therewith, will be required to file periodic
reports and other information with the SEC. The issuers have agreed that,
whether or not they are required to do so by the rules and regulations of the
SEC, for so long as any of the Notes remain outstanding, the issuers, on a
combined consolidated basis, will furnish to the holders of the Notes:
. quarterly and annual financial statements substantially equivalent to
financial statements that would have been included in a filing with the
SEC on Forms 10-Q and 10-K if the issuers were required to file such
financial information, including a "Management's Discussion and Analysis
of Financial Condition and Results of Operations" that describes the
financial condition and results of operations of the Issuers and, with
respect to the annual information only, reports thereon by the issuers'
independent public accountants, and
. all information that would be required to be filed with the SEC on Form
8-K if the issuers were required to file such reports.
In addition, for so long as any of the Notes remain outstanding, the issuers
have agreed to furnish to the holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered by Rule 144A(d)(4) under the Securities Act.
The Registration Statement may be inspected at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the SEC located at 7 World Trade Center,
Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may
be obtained from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. The SEC maintains a web site
at http://www.sec.gov that contains reports and other information regarding
registrants, like Avalon Cable Holdings, that file electronically with the SEC.
EXPERTS
The consolidated financial statements of Avalon Cable of Michigan Holdings,
Inc. and Subsidiaries as of December 31, 1997 and 1998 and for the period from
September 4, 1997 (inception) through December 31, 1997, and for the year ended
December 31, 1998 included in this prospectus, have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
150
The consolidated financial statements of Cable Michigan Inc. and
Subsidiaries as of December 31, 1997 and November 5, 1998, and for the year
ended December 31, 1997 and the period from January 1, 1998 through November 5,
1998, included in this prospectus, have been audited so included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Avalon Cable LLC as of December 31,
1998 and 1997 and for the period from September 4, 1997 (inception) through
December 31, 1997 and for the year ended December 31, 1998 included in this
prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Amrac Clear View, a Limited Partnership as of
May 28, 1998 and for the period from January 1, 1998 through May 28, 1998,
included in this prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Amrac Clear View, a Limited Partnership as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997, included in this prospectus, have been so included in
reliance on the report of Greenfield, Altman, Brown, Berger & Katz, P.C.,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The combined financial statements of Pegasus Cable Television of
Connecticut, Inc. and the Massachusetts operations of Pegasus Cable Television,
Inc. as of December 31, 1996 and 1997 and for each of the three years in the
period ended December 31, 1997, included in this prospectus, have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of Taconic CATV as of December 31, 1997 and 1998
and for the years then ended have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements of Avalon Cable of Michigan, Inc. as
of December 31, 1998 and 1997, and for the period from September 4, 1997
(inception) through December 31, 1997 and for the year ended December 31, 1998,
included in this prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Avalon Cable of Michigan Holdings,
Inc. as of December 31, 1997 and 1998, and for the period from September 4,
1997 (inception) through December 31, 1997, and for the year ended December 31,
1998, included in this prospectus, have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
151
INDEX TO THE FINANCIAL STATEMENTS
Page
----
Avalon Cable LLC and Subsidiaries
Report of Independent Accountants ...................................... F-3
Consolidated Balance Sheet as of December 31, 1998 and 1997............. F-4
Consolidated Statement of Operations for the year end December 31, 1997
and for the period from September 4, 1997 (inception) through December
31, 1997............................................................... F-5
Consolidated Statements of Changes in Members' Interest from September
4, 1997 (inception) through December 31, 1998.......................... F-6
Consolidated Statement of Cash Flows for the year end December 31, 1997
and for the period from September 4, 1997 (inception) through December
31, 1997............................................................... F-7
Notes to the Consolidated Financial Statements.......................... F-8
Consolidated Balance Sheet as of March 31, 1999......................... F-20
Consolidated Statement of Operations for the quarter ended March 31,
1999................................................................... F-21
Consolidated Statement of Changes in Members' Interest for the quarter
ended March 31, 1999................................................... F-22
Consolidated Statement of Cash Flows for the quarter ended March 31,
1999................................................................... F-23
Notes to Consolidated Financial Statements.............................. F-24
Avalon Cable of Michigan Holdings, Inc. and Subsidiaries
Report of Independent Accountants ...................................... F-28
Consolidated Balance Sheets as of December 31, 1998 .................... F-29
Consolidated Statement of Operations and Changes in Accumulated Deficit
for the year ended December 31, 1997 and for the period from September
4, 1997 (inception) through December 31, 1997.......................... F-30
Consolidated Statement of Shareholder's Equity for the period from
September 4, 1997 (inception) through December 31, 1998................ F-31
Consolidated Statement of Cash Flows for the year ended December 31,
1997 and for the period from September 4, 1997 (inception) through
December 31, 1997...................................................... F-32
Notes to the Consolidated Financial Statements.......................... F-33
Consolidated Balance Sheet as of March 31, 1999......................... F-46
Consolidated Statement of Operations for the quarter ended March 31,
1999................................................................... F-47
Consolidated Statement of Changes in Shareholders' Equity for the
quarter ended March 31, 1999........................................... F-48
Consolidated Statement of Cash Flows for the quarter ended March 31,
1999................................................................... F-49
Notes to Consolidated Financial Statements.............................. F-50
Cable Michigan, Inc. and Subsidiaries
Report of Independent Accountants....................................... F-54
Consolidated Balance Sheets as of December 31, 1997 and November 5,
1998................................................................... F-55
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and for the period from January 1, 1998 through November 5,
1998................................................................... F-56
Consolidated Statements of Changes in Shareholders' Deficit for the
years ended December 31, 1996, 1997 and for the period from January 1,
1998 through November 5, 1998.......................................... F-57
Consolidated Statement of Cash Flows for the years ended December 31,
1996, 1997 and for the period from January 1, 1998 through November 5,
1998................................................................... F-58
Notes to Consolidated Financial Statements.............................. F-60
F-1
INDEX TO THE FINANCIAL STATEMENTS--(Continued)
Page
-----
Amrac Clear View, A Limited Partnership
Report of Independent Accountants...................................... F-73
Balance Sheet as of May 28, 1998....................................... F-74
Statement of Operations for the period from January 1, 1998 through May
28, 1998.............................................................. F-75
Statement of Changes in Partners' Equity (Deficit) for the period from
January 1, 1998 through May 28, 1998.................................. F-76
Statement of Cash Flows for the period from January 1, 1998 through May
28, 1998.............................................................. F-77
Notes to Financial Statements.......................................... F-78
Amrac Clear View, A Limited Partnership
Independent Auditors' Report........................................... F-82
Balance Sheets as of December 31, 1996 and 1997........................ F-83
Statements of Net Earnings for the years ended December 31, 1995, 1996
and 1997.............................................................. F-84
Statements of Changes in Partners' Equity (Deficit) for the years ended
December 31, 1995, 1996 and 1997...................................... F-85
Statements of Cash Flows for the years ended December 31, 1995, 1996
and 1997.............................................................. F-86
Notes to Financial Statements.......................................... F-87
Pegasus Cable Television, Inc.
Report of Independent Accountants...................................... F-90
Combined Balance Sheets at December 31, 1996 and 1997 and June 30,
1998.................................................................. F-91
Combined Statement of Operations for the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 1998.................. F-92
Combined Statements of Changes in Stockholder's Deficit for the three
years ended December 31, 1997 and the six months ended June 30, 1998.. F-93
Combined Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 and for the six months ended June 30, 1998........ F-94
Notes to Combined Financial Statements................................. F-95
Taconic Technology Corp.
Independent Auditors' Report........................................... F-101
Balance Sheets at December 31, 1997 and 1998 and March 31, 1999
(unaudited)........................................................... F-102
Statements of Operations and Component Equity for the two years ended
December 31, 1997 and 1998 and three months ended March 31, 1998 and
1999, (unaudited)..................................................... F-103
Statements of Cash Flows for the years ended December 31, 1997 and 1998
and three months ended March 31, 1998 and 1999, (unaudited)........... F-104
Notes to Financial Statements.......................................... F-105
Financial Statements of Guarantor
Avalon Cable of Michigan, Inc. and Subsidiaries
Report of Independent Accountants...................................... F-109
Consolidated Balance Sheet as of December 31, 1998 and 1997............ F-110
Consolidated Statements of Operations.................................. F-111
Consolidated Statement of Shareholders' Equity for the year ended
December 31, 1997 and for the period from September 4, 1997
(inception) through December 31, 1997................................. F-112
Consolidated Statement of Cash Flows for the year ended December 31,
1997 and for the period from September 4, 1997 (inception) through
December 31, 1997..................................................... F-113
Notes to Consolidated Financial Statements............................. F-114
Consolidated Balance Sheet as of March 31, 1999........................ F-126
Consolidated Statement of Operations for the quarter ended March 31,
1999.................................................................. F-127
Consolidated Statement of Changes in Shareholder's Equity for the
quarter ended March 31, 1999.......................................... F-128
Consolidated Statement of Cash Flows for the quarter ended March 31,
1999.................................................................. F-129
Notes to Consolidated Financial Statements............................. F-130
F-2
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.
PricewaterhouseCoopers LLP
New York, New York
March 30, 1999, except for Note 12, as to which the date is May 13, 1999
F-3
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
December 31,
----------------
1998 1997
--------- -----
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 member's interest................................... 151,252 4
--------- -----
Total liabilities and member's interest................... $ 590,098 $ 504
========= =====
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in thousands)
For the period
For the year from September 4,
ended 1997 (inception)
December 31, through December 31,
1998 1997
------------ --------------------
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
======== ====
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST
From the Period from September 4, 1997 (inception) through December 31, 1998
(dollars in thousands, except share data)
Class A Class B-1 Accumulated Total
-------------- ---------------- Earnings Members'
Units $ Units $ (Deficit) Interest
------ ------- ------- -------- ----------- ------------
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
====== ======= ======= ======== ======== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
For the period
September 31,
For the Year 1997
Ended (inception)
December 31, December 31,
1998 1997
------------ --------------
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 $--
========= ====
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
December 31, 1998
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-8
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
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-9
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
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:
Vehicles...................................................... 5 years
Cable plant and equipment..................................... 5-12 years
Office furniture and equipment................................ 5-10 years
Buildings and improvements.................................... 10-25 years
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:
Cable franchises.............................................. 13-15 years
Goodwill...................................................... 15 years
Non-compete agreement......................................... 5 years
F-10
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
December 31, 1998
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 is paid to the holders
thereof (such distributions being the Company's "Priority Distributions"). So
long as any portion of the
F-11
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
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 as determined through the
use of an independent appraisal. 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-12
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
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.
December 31, 1998
-----------------
(Unaudited)
Revenues................................................ $ 96,751
========
Loss from operations.................................... $ (5,292)
========
Net loss................................................ $(22,365)
========
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:
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
========
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:
1998
--------
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
========
Amortization expense was $6,342 for the year ended December 31, 1998.
F-13
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
7. Accounts Payable and Accrued Expenses
At December 31, 1998, accounts payable and accrued expenses consist of the
following:
Accounts payable................................................. $ 5,321
Accrued corporate expenses....................................... 404
Accrued programming costs........................................ 2,388
Taxes payable.................................................... 1,383
Other............................................................ 2,150
-------
$11,646
=======
8. Debt
At December 31, 1998, Long-term debt consists of the following:
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
========
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.
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
F-14
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
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-15
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
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:
Year Percentage
---- ----------
2003........................................ 104.688%
2004........................................ 103.125%
2005........................................ 101.563%
2006 and thereafter......................... 100.000%
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-16
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
Year Percentage
---- ----------
2003........................................................... 105.938%
2004........................................................... 103.958%
2005........................................................... 101.979%
2006 and thereafter............................................ 100.000%
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 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.
F-17
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:
1998
----
Current
Federal............................................................ $--
State.............................................................. --
----
Total Current.................................................... --
----
Deferred
Federal............................................................ 171
State.............................................................. 15
----
Total Deferred................................................... 186
----
Total provision for income taxes................................. $186
====
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:
1998
-------
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
=======
Tax Net
Operating Expiration
Year Losses Date
---- --------- ----------
1998................................................. $922 2018
Temporary differences that give rise to significant portion of deferred tax
assets and liabilities at December 31 are as follows:
1998
-------
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)
=======
F-18
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
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.
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-19
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
Assets
Current assets
Cash................................................. $ 13,227 $ 9,288
Subscriber receivables, less allowance
for doubtful accounts of $957 and $70............... 6,210 5,862
Accounts receivable--affiliate....................... -- 124
Deferred income taxes................................ -- 479
Prepaid expenses and other current assets............ 741 580
-------- --------
Total current assets............................... 20,178 16,333
Property, plant and equipment, net................... 115,200 111,421
Intangible assets, net............................... 473,323 462,117
Other assets......................................... 94 227
-------- --------
Total assets....................................... $608,795 $590,098
======== ========
Liabilities and Members' Interest
Current liabilities
Current portion of notes payable..................... $ 20 $ 20
Accounts payable and accrued expenses................ 18,197 11,646
Accounts payable, net--affiliate..................... 3,388 2,023
Deferred revenue..................................... 3,363 3,171
-------- --------
Total current liabilities.......................... 24,968 16,860
Note payable, net of current portion................. 442,727 402,949
Note payable--affiliate.............................. -- 3,341
Deferred income taxes................................ -- 1,841
-------- --------
Total liabilities.................................. 467,695 424,991
Minority interest...................................... -- 13,855
Commitments and contingencies (Note 5)
Members' interests
Members' capital..................................... 166,630 166,630
Accumulated deficit.................................. (25,530) (15,378)
-------- --------
Total members' interest............................ 141,100 151,252
-------- --------
Total liabilities and members' interest............ $608,795 $590,098
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands)
For the Quarter For the Quarter
Ended Ended
March 31, 1999 March 31, 1998
--------------- ---------------
(Unaudited)
Revenue
Basic services.......................... $ 20,027 $--
Premium services........................ 1,966 --
Other................................... 2,584 --
-------- ----
Total revenues........................ 24,577 --
Operating expenses
Selling, general and administrative..... 4,202 --
Programming............................. 6,819 --
Technical and operations................ 2,800 --
Depreciation and amortization........... 10,839 --
-------- ----
Loss from operations.................... (83) --
Other income (expense)
Interest income......................... 299 1
Interest expense........................ (11,730) --
-------- ----
Income (loss) before income taxes....... (11,514) 1
(Benefit) for income taxes.............. (1,362) --
-------- ----
Net income (loss)....................... $(10,152) $ 1
======== ====
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST
(In thousands, except share data)
For the Quarter Ended March 31, 1999 (unaudited)
----------------------------------------------------
Class A Class B-1
-------------- ----------------
Total
Accumulated Members'
Units $ Units $ Deficit Interest
------ ------- ------- -------- ----------- --------
(Unaudited)
Balance at December 31,
1998................... 45,000 $45,000 575,690 $121,630 $(15,378) $151,252
Net loss for the quarter
ended March 31, 1999... -- -- -- -- (10,152) (10,152)
------ ------- ------- -------- -------- --------
Balance at March 31,
1999................... 45,000 $45,000 575,690 $121,630 $(25,530) $141,100
====== ======= ======= ======== ======== ======== ===
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
For the Quarter For the Quarter
Ended Ended
March 31, March 31,
1999 1998
--------------- ---------------
(Unaudited)
Cash flows from operating activities
Net income (loss)............................ $(10,152) $ 1
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization.............. 10,839 --
Accretion of Senior Discount Notes......... 3,278 --
Changes in operating assets and liabilities
Increase in subscriber receivables........... 29 --
Increase in prepaid expenses and other as-
sets........................................ (21) (1)
Increase in accounts payable and accrued ex-
penses...................................... 6,492 --
Increase in accounts payable, net--affiliate. 1,365 --
Increase in deferred revenues................ 131 --
Decrease in deferred income taxes, net....... (1,362) --
-------- ----
Net cash provided by operating activities.. 10,599 --
-------- ----
Cash flows from investing activities
Capital expenditures......................... (4,269) --
Payments for acquisitions.................... (35,550) --
-------- ----
Net cash used in investing activities...... (39,819) --
-------- ----
Cash flows from financing activities
Note payable--affiliate...................... (3,341) --
Proceeds from credit facility................ 36,500 --
-------- ----
Net cash provided by financing activities.. 33,159 --
-------- ----
Increase in cash............................... 3,939 --
Cash, beginning of period...................... 9,288 --
-------- ----
Cash, end of period........................ $ 13,227 $--
======== ====
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands)
March 31, 1999
1. Description of Business
Avalon Cable LLC ("the Company"), 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 the 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) an $18,000 promissory
note from Avalon Cable Holdings LLC ("Avalon Holdings"), which was used to make
a $62,800 cash contribution to Avalon New England.
The cash contribution received by Avalon New England was used to (i)
extinguish existing indebtedness of $29,600 and (ii) fund a $33,200 loan to
Avalon Holdings Finance which matures on December 31, 2001.
On December 10, 1998, Avalon received a dividend distribution from Avalon
New England in the amount of $18,206, which was used by Avalon to pay off the
promissory note payable to Avalon Holdings, plus accrued interest.
Avalon 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-24
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands)--(Continued)
March 31, 1999
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, which then transferred those
assets and liabilities to its wholly-owned subsidiary Avalon Michigan;
. Avalon Michigan now operates the Michigan cluster replacing Avalon Cable
of Michigan, Inc.;
. Avalon Cable of Michigan Holdings, Inc. ceased to be an obligor on the
exchanged notes and together with Avalon Cable of Michigan, Inc. became
a guarantor of the obligations of the Company under the exchanged notes;
. Avalon Michigan became an additional obligor on the Senior Subordinated
Notes replacing Avalon Cable of Michigan, Inc.; and
. Avalon Cable of Michigan, Inc. ceased to be an obligor on the Senior
Subordinated Notes and the credit facility and became a guarantor of the
obligations of Avalon Michigan under the Senior Subordinated Notes and
the credit facility.
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) 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 New England
and Avalon Michigan's cable systems offer customer packages of basic and
premium cable programming services which are offered at a per channel charge or
are
packaged together to form a tier of services offered at a discount from the
combined channel rate. Avalon New England and Avalon Michigan cable systems
also provide premium cable services to their customers for an extra monthly
charge. Customers generally pay initial connection charges and fixed monthly
fees for cable programming and premium cable services, which constitute the
principal sources of revenue for Avalon New England and Avalon Michigan.
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. Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain financial information has been condensed and certain
footnote disclosures have been omitted. Such information and disclosures are
normally included in financial statements prepared in accordance with generally
accepted accounting principles.
The consolidated financial statements herein include the accounts of the
Company and its wholly-owned subsidiaries.
These condensed financial statements should be read in conjunction with the
Company's audited financial statements as of December 31, 1998 and notes
thereto included elsewhere herein.
The financial statements as of March 31, 1999 and for the three month period
then ended are unaudited; however, in the opinion of management, such
statements include all adjustments (consisting solely of normal and recurring
adjustments except for the acquisition of Cross Country Cable, LLC ("Cross
Country"), Nova
F-25
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands)--(Continued)
March 31, 1999
Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P.
("Nova Cable"), Novagate Communication Corporation ("Novagate") R/Com. L.C.,
the Mercom Merger and the contribution of assets and liabilities by Avalon
Cable of Michigan, Inc.) necessary to present fairly the financial information
included therein.
3. Merger and Acquisitions
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 paid in conjunction with the Mercom acquisition, excluding fees
and expenses was $21,900. The purchase price was allocated as follows:
approximately $13,800 to the elimination of minority interest, $1,170 to
property, plant and equipment, $6,700 to cable franchises and the excess of
consideration paid over the fair market value of the net assets acquired, or
goodwill, of $240.
In March 1999, Avalon Cable of Michigan Inc. acquired the cable television
systems of Nova Cable for approximately $7,800, excluding transaction fees.
On January 21, 1999, the Company through its subsidiary, Avalon New England
subsidiaries, acquired Novagate for a purchase price of $2,900.
On March 26, 1999, the Company through its subsidiary, Avalon Michigan,
acquired the assets of R/Com, L.C., for a total purchase price of approximately
$450.
In January 1999, the Company acquired all of the issued and outstanding
Common Stock of Cross Country for a purchase price of approximately $2,500,
excluding transaction fees.
The acquisitions have been accounted for as purchases and the results of the
companies acquired have been included in the accompanying financial statements
since their acquisition dates. Accordingly, the consideration was allocated to
the net assets based on their respective fair market values. The excess of the
consideration paid over the estimated fair market values of the net assets
acquired was $11,041 and is being amortized using the straight line method over
15 years.
Avalon New England has a definitive agreement to purchase all of the cable
systems of Taconic Technology Corporation for approximately $8,525 (excluding
transaction fees). The merger is expected to close in the second quarter of
1999.
4. Income Taxes
Upon the closure of the Mercom merger, Mercom was dissolved as a separate
taxable entity which resulted in a change in tax status from a taxable entity
to a nontaxable entity. As a result, the Company recognized a tax benefit of
$1,362 in its results of operations and eliminated its deferred taxes, net in
the balance sheet.
5. Commitments and Contingencies
In connection with the acquisition of Mercom, former shareholders of Mercom
holding approximately 731,894 Mercom common shares or approximately 15.3% of
all outstanding Mercom common shares gave notice of their election to exercise
appraisal rights as provided by Delaware law. In addition, with respect to
209,893 of those shares, the Company received notice of election from
beneficial holders of Mercom common
F-26
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands)--(Continued)
March 31, 1999
shares and not from holders of record. The Company believes that the notice
with respect to the 209,893 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 does not know
whether or the extent to which the former shareholders which gave such notice
will continue to pursue appraisal rights and seek an appraisal proceeding under
Delaware law or choose to abandon these efforts and accept the consideration
payable in the Mercom merger. If these former shareholders continue to pursue
their appraisal rights 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 to the appraisal subject to
the appraisal proceedings together with a fair rate of interest. The Company
could be ordered by the Delaware court 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 have already provided
for the consideration of $12.00 per Mercom common share due under the terms of
our merger with Mercom with respect to these shares but have 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 not have a material adverse effect on the Company.
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended, and the Telecommunications
Act of 1996. The Company has either settled challenges or accrued for
anticipated exposures related to rate regulation; however, there is no
assurance that there will not be further additional challenges to its rates.
In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the financial condition or results of operations of
the Company.
6. 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-27
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.
PricewaterhouseCoopers LLP
New York, New York
March 30, 1999, except for Note 13, as to which the date is May 13, 1999
F-28
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
December 31,
--------------
1998 1997
-------- ----
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
======== ====
The accompanying notes are an integral part of
these consolidated financial statements.
F-29
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
For the period
For the year September 4, 1997
ended (inception) through
December 31, 1998 December 31, 1997
----------------- -------------------
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) $ --
======= =====
The accompanying notes are an integral part of
these consolidated financial statements.
F-30
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
(in thousands, except share amounts)
Common Additional Total
Shares Common Paid-in Accumulated Shareholders'
Outstanding Stock Capital Deficit Equity
----------- ------ ---------- ----------- -------------
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
=== ==== ======= ======= =======
The accompanying notes are an integral part of
these consolidated financial statements.
F-31
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
For the
period from
September 4,
1997
For the year (inception)
ended through
December 31, December 31,
1998 1997
------------ ------------
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....................................... -- $--
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
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-33
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-34
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:
Buildings and improvements....................................... 10-25 years
Cable plant and equipment........................................ 5-12 years
Vehicles......................................................... 5years
Office furniture and equipment................................... 5-10 years
F-35
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands except per share data)
December 31, 1998
Intangible assets
Intangible assets represent the estimated fair value of cable franchises and
goodwill resulting from acquisitions. Cable franchises are amortized over a
period ranging from 13 to 15 years on a straight-line basis. Goodwill is the
excess of the purchase price over the fair value of the net assets acquired,
determined through an independent appraisal, and is amortized over 15 years
using the straight-line method. Deferred financing costs represent direct costs
incurred to obtain long-term financing and are amortized to interest expense
over the term of the underlying debt utilizing the effective interest method.
Accounting for impairments
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121--"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121").
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. In performing the review for
recoverability, the Company estimates the net future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of
the expected net future cash flows (undiscounted and without interest charges)
is less than the carrying amount of the asset, an impairment loss is
recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles expected to be held and used is based on the fair
value of the asset.
No impairment losses have been recognized by the Company pursuant to SFAS
121.
Fair value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
a. The Company estimates that the fair value of all financial
instruments at December 31, 1998 does not differ materially from the
aggregate carrying values of its financial instruments recorded in the
accompanying balance sheet. The fair value of the notes payable-affiliate
are considered to be equal to carrying values since the Company believes
that its credit risk has not changed from the time this debt instrument was
executed and therefore, would obtain a similar rate in the current market.
b. The fair value of the cash and temporary cash investments
approximates fair value because of the short maturity of these instruments.
Income taxes
The Company and Mercom file separate consolidated federal income tax
returns. The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109--"Accounting for Income Taxes". The statement
requires the use of an asset and liability approach for financial reporting
purposes. The asset and liability approach requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of
temporary differences between financial reporting basis and tax basis of assets
and liabilities. If it is more likely than not that some portion or all of a
deferred tax asset will not be realized, a valuation allowance is recognized.
F-36
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands except per share data)
December 31, 1998
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 as determined through the
use of an independent appraisal. 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 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:
December 31,
1998
------------
(Unaudited)
Revenue................................... $ 96,751
========
Loss from operations...................... $ (5,292)
========
Net loss.................................. $(22,365)
========
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
F-37
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands except per share data)
December 31, 1998
December 31, 1998, the Company incurred $41 of transaction costs related to the
acquisition of Taconic. This merger is expected to close in the second quarter
of 1999.
4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
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
========
Depreciation expense was $1,781 for the year ended December 31, 1998.
5. Intangible Assets
Intangible assets consist of the following:
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
========
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:
Accounts payable................................................. $ 5,321
Accrued corporate expenses....................................... 404
Accrued cable programming costs.................................. 2,388
Accrued taxes.................................................... 1,383
Other............................................................ 2,150
-------
$11,646
=======
F-38
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:
1998
-------
Current
Federal........................................................ $ 243
State.......................................................... --
-------
Total Current................................................ 243
-------
Deferred
Federal........................................................ (2,757)
State.......................................................... (240)
-------
Total Deferred............................................... (2,997)
-------
Total (benefit) for income taxes............................. $(2,754)
=======
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:
1998
-------
(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...................................... (2,754)
=======
Tax Net
Operating Expiration
Year Losses Date
---- --------- ----------
1998................................................. $10,360 2018
Temporary differences that give rise to significant portion of deferred tax
assets and liabilities at December 31 are as follows:
1998
-------
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)
-------
F-39
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands except per share data)
December 31, 1998
1998
--------
Subtotal........................................................ (80,811)
--------
Valuation allowance............................................. --
--------
Total deferred taxes.......................................... $(80,811)
========
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:
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
========
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.
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.
F-40
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 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 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.
F-41
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands except per share data)
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:
Year Percentage
---- ----------
2003 104.688%
2004 103.125%
2005 101.563%
2006 and thereafter 100.000%
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 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,
F-42
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands except per share data)
December 31, 1998
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:
Year Percentage
---- ----------
2003........................................................... 105.938%
2004........................................................... 103.958%
2005........................................................... 101.979%
2006 and thereafter............................................ 100.000%
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-43
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:
Avalon
Cable
Mercom LLC Total
------- ------- -------
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
======= ======= =======
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
F-44
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands except per share data)
December 31, 1998
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
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-45
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
Assets
Cash.................................................. $ 13,227 $ 9,288
Accounts receivable, net of allowance for doubtful
accounts of $957 and $943............................ 6,210 5,862
Prepayments and other current assets.................. 1,447 1,388
Accounts receivable from related parties.............. -- 124
Deferred income taxes................................. -- 377
-------- --------
Current assets.................................... 20,884 17,039
Property, plant and equipment, net.................... 115,200 111,421
Intangible assets, net................................ 473,323 462,117
Deferred charges and other assets..................... 1,169 1,302
-------- --------
Total assets...................................... $610,576 $591,879
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Current portion of notes payable.................... $ 20 $ 20
Accounts payable and accrued expenses............... 20,669 11,646
Advance billings and customer deposits.............. 3,363 3,171
Accounts payable--affiliate......................... 3,388 2,023
-------- --------
Current liabilities............................... 27,440 16,860
Long-term debt........................................ 442,727 402,949
Notes payable--affiliates............................. -- 3,341
Deferred income taxes................................. 71,668 80,811
-------- --------
Total liabilities................................. 541,835 503,961
-------- --------
Commitments and contingencies (Note 5)
Minority interest..................................... 46,840 61,836
Stockholders' equity
Common stock........................................ -- --
Additional paid-in capital.......................... 35,000 35,000
Accumulated deficit................................. (13,099) (8,918)
-------- --------
Total stockholders' equity........................ 21,901 26,082
-------- --------
Total liabilities and shareholders' equity........ $610,576 $591,879
======== ========
The accompanying notes are an integral part of these financial statements.
F-46
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands)
For the Quarter For the Quarter
Ended Ended
March 31, 1999 March 31, 1998
--------------- ---------------
(Unaudited)
Revenue
Basic services............................... $ 20,027 $ --
Premium services............................. 1,966 --
Other........................................ 2,584 --
-------- -------
Total Revenue.............................. 24,577 --
Operating expenses
Selling, general and administrative.......... 4,202 --
Programming.................................. 6,819 --
Technical and operations..................... 2,800 --
Depreciation and amortization................ 10,839 --
-------- -------
Loss from operations........................... (83) --
Interest income................................ 299 1
Interest expense............................... (11,730) --
-------- -------
Income loss before income taxes................ (11,514) 1
Benefit from income taxes...................... 6,192 --
-------- -------
Income (loss) before minority interest and
extraordinary item............................ (5,322) 1
Minority interest in loss of consolidated
entity........................................ 1,141 --
-------- -------
Net income (loss)............................ $ (4,181) $ 1
======== =======
The accompanying notes are an integral part of these financial statements
F-47
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
For the Quarter Ended March 31, 1999
-------------------------------------------------------
Common Additional Total
Shares Common Paid-in Accumulated Shareholders'
Outstanding Stock Capital Deficit Equity
----------- ------ ---------- ----------- -------------
(Unaudited)
Balance, December 31,
1998................. 100 $ -- $35,000 $ (8,918) $26,082
Net loss for the quar-
ter ended
March 31, 1999....... -- -- -- (4,181) (4,181)
--- ----- ------- --------- -------
Balance, March 31,
1999................. 100 $ -- $35,000 $ (13,099) $21,901
=== ===== ======= ========= =======
The accompanying notes are an integral part of these financial statements.
F-48
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
For the Quarter For the Quarter
Ended Ended
March 31, March 31,
1999 1998
--------------- ---------------
(Unaudited)
Cash flows from operating activities
Net income (loss)............................ $ (4,181) $ 1
Depreciation and amortization................ 10,839 --
Accretion of Senior Discount Notes........... 3,278 --
Increase (decrease) in minority interest..... (1,141) --
Net change in certain assets and liabilities,
net of business acquisitions
Increase in accounts receivable............ 29 --
Increase in prepayment and other assets.... (21) (1)
Increase in accounts payable and accrued
expenses.................................. 6,492 --
Increase in deferred revenue............... 131 --
Increase in accounts payable, net-
affiliate................................. 1,365 --
Deferred income taxes, net................. (6,192) --
-------- ----
Net cash provided by operating
activities.............................. 10,599 --
-------- ----
Cash flows from investing activities
Additions to property, plant and equipment... (4,269) --
Payment for acquisitions..................... (35,550) --
-------- ----
Net cash used in investing activities.... (39,819) --
-------- ----
Cash flows from financing activities
Notes payable-affiliate...................... (3,341) --
Proceeds from the issuance of the Credit
Facility.................................... 36,500 --
-------- ----
Net cash provided by financing
activities.............................. 33,159 --
-------- ----
Net increase in cash........................... 3,939 --
Cash at beginning of the period................ 9,288 --
-------- ----
Cash at end of the period................ $ 13,227 $--
======== ====
The accompanying notes are an integral part of these financial statements.
F-49
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(In thousands)
March 31, 1999
1. 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. 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.
On March 26, 1999, after the acquisition of Mercom, 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:
. The Company contributed the Senior Discount Notes and associated debt
finance costs to Avalon Cable LLC and became a guarantor of the Senior
Discount Notes.
F-50
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(In thousands)
March 31, 1999
. 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, excluding the Senior Discount
Notes and associated debt finance costs, to its wholly-owned subsidiary,
Avalon Cable of Michigan LLC.
. Avalon Cable of Michigan LLC has become the operator of the Michigan
cluster replacing Avalon Michigan;
. Avalon Cable of Michigan LLC is an obligor on the Senior Subordinated
Notes replacing Avalon Michigan; and
. Avalon Michigan is a guarantor of the obligations of Avalon Cable of
Michigan LLC under the Senior Subordinated Notes. Avalon Michigan does
not have significant assets, other than its 88% investment in Avalon
Cable LLC at March 31, 1999.
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 becomes 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 Cable
of New England LLC (Avalon New England), a wholly-owned subsidiary of Avalon
Cable LLC.
The Company 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 Michigan LLC and Avalon New England provide cable services to various
areas in Michigan and New England, 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 acquisition of various cable operating
companies. Avalon Holdings Finance conducts no other activities.
2. Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain financial information has been condensed and certain
footnote disclosures have been omitted. Such information and disclosures are
normally included in financial statements prepared in accordance with generally
accepted accounting principles.
These condensed financial statements should be read in conjunction with the
Company's audited financial statements at December 31, 1998 and notes thereto
included elsewhere herein.
The financial statements as of March 31, 1999 and for the three month period
then ended are unaudited; however, in the opinion of management, such
statements include all adjustments (consisting solely of normal and recurring
adjustments except for the acquisition of Cross Country Cable, LLC ("Cross
Country"), Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova
Cablevision VII, L.P. ("Nova Cable"), Novagate Communication Corporation
("Novagate"), R/Com. L.C., the Mercom Acquisition and the contribution of
assets and liabilities by Avalon Cable LLC) necessary to present fairly the
financial information included therein.
F-51
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
3. Merger and Acquisitions
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. The purchase price was allocated as
follows: approximately $13,800 to the elimination of minority interest, $1,170
to property, plant and equipment, $6,700 to cable franchises and the excess of
consideration paid over the fair market value of the net assets acquired, or
goodwill, of $240.
In March 1999, Avalon Cable of Michigan Inc. acquired the cable television
systems of Nova Cable for approximately $7,800, excluding transaction fees.
On January 21, 1999, the Company through its subsidiary, Avalon Cable of New
England, LLC and subsidiaries, acquired Novagate for a purchase price of
$2,900.
On March 26, 1999, the Company through its subsidiary, Avalon Cable of
Michigan, LLC, acquired the assets of R/Com, L.C., for a total purchase price
of approximately $450.
In January 1999, the Company acquired all of the issued and outstanding
Common Stock of Cross Country for a purchase price of approximately $2,500,
excluding transaction fees.
The acquisition have been accounted for as purchases and the results of the
companies acquired have been included in the accompanying financial statements
since their acquisition dates. Accordingly, the consideration was allocated to
the net assets based on their respective fair market values. The excess of the
consideration paid over the estimated fair market values of the net assets
acquired was $11,041 and is being amortized using the straight line method over
15 years.
Avalon New England has a definitive agreement to purchase all of the cable
systems of Taconic Technology Corporation for approximately $8,525 (excluding
transaction fees). The merger is expected to close in the second quarter of
1999.
4. Minority interest
The activity in minority interest for the quarter ended March 31, 1999 is as
follow:
Avalon
Cable
Mercom LLC Total
-------- ------- -------
Balance at December 31, 1998........................ $ 13,855 $47,981 $61,836
Purchase of the minority interest of Mercom......... (13,855) -- (13,855)
Loss allocated to minority interest................. -- (1,141) (1,141)
-------- ------- -------
-- $46,840 $46,840
======== ======= =======
5. Commitments and Contingencies
In connection with the acquisition of Mercom, former shareholders of Mercom
holding approximately 731,894 Mercom common shares or approximately 15.3% of
all outstanding Mercom common shares gave
F-52
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
notice of their election to exercise appraisal rights as provided by Delaware
law. In addition, with respect to 209,893 of those shares, the Company received
notice of election from beneficial holders of Mercom common shares and not from
holders of record. The Company believes that the notice with respect to the
209,893 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 whether or the extent to
which the former shareholders which gave such notice will continue to pursue
appraisal rights and seek an appraisal proceeding under Delaware law or choose
to abandon these efforts and accept the consideration payable in the Mercom
merger. If these former shareholders continue to pursue their appraisal rights
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 have already provided for the
consideration of $12.00 per Mercom common share due under the terms of our
merger with Mercom with respect to these shares but have 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 not have a material adverse effect on the Company.
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended, and the Telecommunications
Act of 1996. The Company has either settled challenges or accrued for
anticipated exposures related to rate regulation; however, there is no
assurance that there will not be further additional challenges to its rates.
In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the financial condition or results of operations of
the Company.
6. 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 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 a change of control to be waived.
F-53
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Avalon Cable of Michigan, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and changes in shareholders' deficit and
of cash flows present fairly, in all material respects, the financial position
of Cable Michigan, Inc. and subsidiaries (collectively, the "Company") at
December 31, 1996 and 1997 and November 5, 1998, and the results of their
operations and their cash flows for each of the two years ended December 31,
1996 and 1997 and the period from January 1, 1998 to November 5, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 30, 1999
F-54
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, November 5,
ASSETS 1997 1998
------ ------------ -----------
(dollars in thousands)
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
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-55
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the
Period from
For the Years Ended January 1,
December 31, 1998 to
-------------------- November 5,
1996 1997 1998
--------- --------- -----------
(dollars in thousands except
per share and share amounts)
Revenues..................................... $ 76,187 $ 81,299 $ 74,521
Costs and expenses, excluding management fees
and depreciation and amortization........... 40,593 44,467 41,552
Management fees.............................. 3,498 3,715 3,156
Depreciation and amortization................ 31,427 32,082 28,098
Merger related expenses...................... -- -- 5,764
--------- --------- ---------
Operating income............................. 669 1,035 (4,049)
Interest income.............................. 127 358 652
Interest expense............................. (15,179) (11,751) (8,034)
Gain on sale of Florida cable system......... -- 2,571 --
Other (expense), net......................... (736) (738) (937)
--------- --------- ---------
(Loss) before income taxes................... (15,119) (8,525) (12,368)
(Benefit) from income taxes.................. (5,712) (4,114) (1,909)
--------- --------- ---------
(Loss) before minority interest and equity in
unconsolidated entities..................... (9,407) (4,411) (10,459)
Minority interest in loss (income) of
consolidated entity......................... 1,151 53 (75)
--------- --------- ---------
Net (Loss)............................... $ (8,256) $ (4,358) $ (10,534)
========= ========= =========
Basic and diluted earnings per average common
share
Net (loss) to shareholders................. $ (1.20) $ (.63) $ (1.45)
Average common shares and common stock
equivalents outstanding................... 6,864,799 6,870,528 6,891,932
The accompanying notes are an integral part of these consolidated financial
statements.
F-56
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
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)
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)
========= ====== ==== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-57
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years
Ended December 31, For the Period from
------------------- January 1, 1998 to
1996 1997 November 5, 1998
-------- --------- -------------------
(dollars in thousands)
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
======== ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-58
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
For the
For the Years Period from
Ended December January 1,
31, 1998 to
--------------- November 5,
1996 1997 1998
------- ------- -----------
(dollars in thousands)
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest......................................... $15,199 $11,400 $7,777
Income taxes..................................... 29 370 315
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-59
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.
F-60
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
RCN's corporate services group has historically provided substantial support
services such as finance, cash management, legal, human resources, insurance
and risk management. Prior to the Distribution, the corporate office of C-TEC
allocated the cost for these services pro rata among the business units
supported primarily based on assets; contribution to consolidated earnings
before interest, depreciation, amortization, and income taxes; and number of
employees. In the opinion of management, the method of allocating these costs
is reasonable; however, such costs are not necessarily indicative of the costs
that would have been incurred by the Company on a stand-alone basis.
CTE, RCN and the Company have entered into certain agreements subsequent to
the Distribution, and governing various ongoing relationships, including the
provision of support services between the three companies, including a
distribution agreement and a tax-sharing agreement.
The fee per year for support services from RCN will be 4.0% of the revenues
of the Company plus a direct allocation of certain consolidated cable
administration functions of RCN. The direct charge for customer service along
with the billing service and the cable guide service will be a pro rata share
(based on subscribers) of the expenses incurred by RCN to provide such customer
service and to provide such billing and cable guide service for RCN and the
Company.
CTE has agreed to provide or cause to be provided to RCN and the Company
certain financial data processing services for a transitional period after the
Distribution. The fees for such services will be an allocated portion (based on
relative usage) of the cost incurred by CTE to provide such financial data
processing services to all three groups.
2. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and temporary cash investments
For purposes of reporting cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be temporary cash investments. Temporary cash investments are stated at
cost, which approximates market.
Property, plant and equipment and depreciation
Property, plant and equipment reflects the original cost of acquisition or
construction, including payroll and related costs such as taxes, pensions and
other fringe benefits, and certain general administrative costs.
Depreciation is provided on the straight-line method based on the useful
lives of the various classes of depreciable property. The average estimated
lives of depreciable cable property, plant and equipment are:
Buildings.................................................... 12-25 years
Cable television distribution equipment...................... 8.5-12 years
Vehicles..................................................... 5 years
Other equipment.............................................. 12 years
Maintenance and repair costs are charged to expense as incurred. Major
replacements and betterments are capitalized. Gain or loss is recognized on
retirements and dispositions.
F-61
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible assets
Intangible assets are amortized on a straight-line basis over the expected
period of benefit ranging from 5 to 19.3 years. Intangible assets include cable
franchises. The cable systems owned or managed by the Company are constructed
and operated under fixed-term franchises or other types of operating
authorities (referred to collectively herein as "franchises") that are
generally nonexclusive and are granted by local governmental authorities. The
provisions of these local franchises are subject to federal regulation. Costs
incurred to obtain or renew franchises are capitalized and amortized over the
term of the applicable franchise agreement.
Accounting for impairments
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121--"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121").
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. In performing the review for
recoverability, the Company estimates the net future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of
the expected net future cash flows (undiscounted and without interest charges)
is less than the carrying amount of the asset, an impairment loss is
recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles expected to be held and used is based on the fair
value of the asset.
No impairment losses have been recognized by the Company pursuant to SFAS
121.
Revenue recognition
Revenues from cable programming services are recorded in the month the
service is provided. Installation 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.
Diluted earnings (loss) per share is computed based on net income (loss)
divided by the weighted average number of shares of common stock outstanding
during the period after giving effect to convertible securities considered to
be dilutive common stock equivalents. The conversions of stock options during
periods in which the Company incurs a loss from continuing operations is not
assumed since the effect is anti-dilutive. The number of stock options which
would have been converted in 1997 and in 1998 and had a dilutive effect if the
Company had income from continuing operations are 55,602 and 45,531,
respectively.
F-62
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For periods prior to October 1, 1997, during which the Company was a wholly
owned subsidiary of C-TEC, earnings (loss) per share was calculated by dividing
net income (loss) by one-fourth the average common shares of C-TEC outstanding,
based upon a distribution ratio of one share of Company common stock for each
four shares of C-TEC common equity owned.
Income taxes
The Company and Mercom file separate consolidated federal income tax
returns. Prior to the Distribution, income tax expense was allocated to C-TEC's
subsidiaries on a separate return basis except that C-TEC's subsidiaries
receive benefit for the utilization of net operating losses and investment tax
credits included in the consolidated tax return even if such losses and credits
could not have been used on a separate return basis. The Company accounts for
income taxes using Statement of Financial Accounting Standards No. 109--
"Accounting for Income Taxes". The statement requires the use of an asset and
liability approach for financial reporting purposes. The asset and liability
approach requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between financial
reporting basis and tax basis of assets and liabilities. If it is more likely
than not that some portion or all of a deferred tax asset will not be realized,
a valuation allowance is recognized.
Reclassification
Certain amounts have been reclassified to conform with the current year's
presentation.
3. Business Combination and Dispositions
The Agreement between Avalon Cable of Michigan Holdings, Inc. and the
Company permitted the Company to agree to acquire the 1,822,810 shares
(approximately 38% of the outstanding stock) of Mercom that it did not own (the
"Mercom Acquisition"). On September 10, 1998 the Company and Mercom entered
into a definitive agreement (the "Mercom Merger Agreement") providing for the
acquisition by the Company of all of such shares at a price of $12.00 per
share. The Company completed this acquisition in March 1999. The total
estimated consideration payable in conjunction with the Mercom Acquisition,
excluding fees and expenses was $21,900.
In March 1999, Avalon Michigan Inc. acquired the cable television systems of
Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII,
L.P. for approximately $7,800, excluding transaction fees.
In July 1997, Mercom sold its cable system in Port St. Lucie, Florida for
cash of approximately $3,500. The Company realized a pretax gain of $2,571 on
the transaction.
4. Property, Plant and Equipment
December 31, November 5,
1997 1998
------------ -----------
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
======== ========
Depreciation expense was $15,728, $16,431 and $14,968 for the years ended
December 31, 1996 and 1997, and the period from January 1, 1998 to November 5,
1998, respectively.
F-63
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Intangible Assets
Intangible assets consist of the following at:
December 31, November 5,
1997 1998
------------ -----------
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
======== ========
Amortization expense charged to operations for the years ended December 31,
1996 and 1997 was $15,699 and $15,651, respectively, and $13,130 for the period
from January 1, 1998 to November 5, 1998.
6. Income Taxes
The income tax provision (benefit) in the accompanying consolidated
financial statements of operations is comprised of the following:
1996 1997 1998
------- ------- -------
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)
======= ======= =======
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:
Period from
Year ended January 1,
December 31, 1998 to
----------------- November 11,
1996 1997 1998
-------- ------- ------------
(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)
======== ======= ========
F-64
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mercom, which files a separate consolidated income tax return, has the
following net operating losses available:
Tax Net
Operating Expiration
Year Losses Date
---- --------- ----------
1992................................................. $ 435 2007
1995................................................. $2,713 2010
In 1997, Mercom was liable for Federal Alternative Minimum Tax (AMT). At
December 31, 1997 and at November 5, 1998, the cumulative minimum tax credits
are $141 and $141, respectively. This amount can be carried forward
indefinitely to reduce regular tax liabilities that exceed AMT in future years.
Temporary differences that give rise to a significant portion of deferred
tax assets and liabilities are as follows:
December 31, November 5,
1997 1998
------------ -----------
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)
======== ========
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:
December 31, November 5,
1997 1998
------------ -----------
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
======== ========
F-65
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Credit Facility
The Company had an outstanding line of credit with a banking institution for
$3 million. No amounts were outstanding under this facility.
The Company has in place two secured credit facilities (the "Credit
Facilities") pursuant to a single credit agreement with a group of lenders for
which First Union National Bank acts as agent (the "Credit Agreement"), which
was effective as of July 1, 1997. The first is a five-year revolving credit
facility in the amount of $65,000 (the "Revolving Credit Facility"). The second
is an eight-year term credit facility in the amount of $100,000 (the "Term
Credit Facility").
The interest rate on the Credit Facilities will be, at the election of the
Company, based on either a LIBOR or a Base Rate option (6.25% at November 5,
1998) (each as defined in the Credit Agreement).
The entire amount of the Term Credit Facility has been drawn and as of
November 5, 1998, $100,000 of the principal was outstanding thereunder. The
entire amount of the Revolving Credit Facility is available to the Company
until June 30, 2002. As of November 5, 1998, $20,000 of principal was
outstanding thereunder. Revolving loans may be repaid and reborrowed from time
to time.
The Term Credit Facility is payable over six years in quarterly
installments, from September 30, 1999 through June 30, 2005. Interest only is
due through June 1999. The Credit Agreement is currently unsecured.
The Credit Agreement contains restrictive covenants which, among other
things, require the Company to maintain certain debt to cash flow, interest
coverage and fixed charge coverage ratios and place certain limitations on
additional debt and investments. The Company does not believe that these
covenants will materially restrict its activities.
Term Loan
On September 30, 1997, the Company assumed all obligations of CTE under a
$15 million credit facility extended by a separate group of lenders for which
First Union National Bank also acts as agent (the "$15 Million Facility"). The
$15 Million Facility matures in a single installment on June 30, 1999 and is
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
F-66
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
principal was outstanding. The borrowings under the term credit agreement are
eliminated in the Company's consolidated balance sheet.
8. Common Stock and Stock Plans
The Company has authorized 25,000,000 shares of $1 par value common stock,
and 50,000,000 shares of $1 par value Class B common stock. The Company also
has authorized 10,000,000 shares of $1 par value preferred stock. At November
5, 1998, 6,901,432 common shares are issued and outstanding.
In connection with the Distribution, the Company Board of Directors (the
"Board") adopted the Cable Michigan, Inc. 1997 Equity Incentive Plan (the "1997
Plan"), designed to provide equity-based compensation opportunities to key
employees when shareholders of the Company have received a corresponding
benefit through appreciation in the value of Cable Michigan Common Stock.
The 1997 Plan contemplates the issuance of incentive stock options, as well
as stock options that are not designated as incentive stock options,
performance-based stock options, stock appreciation rights, performance share
units, restricted stock, phantom stock units and other stock-based awards
(collectively, "Awards"). Up to 300,000 shares of Common Stock, plus shares of
Common Stock issuable in connection with the Distribution related option
adjustments, may be issued pursuant to Awards granted under the 1997 Plan.
All employees and outside consultants to the Company and any of its
subsidiaries and all Directors of the Company who are not also employees of the
Company are eligible to receive discretionary Awards under the 1997 Plan.
Unless earlier terminated by the Board, the 1997 Plan will expire on the
10th anniversary of the Distribution. The Board or the Compensation Committee
may, at any time, or from time to time, amend or suspend and, if suspended,
reinstate, the 1997 Plan in whole or in part.
Prior to the Distribution, certain employees of the Company were granted
stock option awards under C-TEC's stock option plans. In connection with the
Distribution, 380,013 options covering Common Stock were issued. Each C-Tec
option was adjusted so that each holder would hold options to purchase shares
of Commonwealth Telephone Enterprise Common Stock, RCN Common Stock and Cable
Michigan Common 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.
F-67
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information relating to the Company stock options is as follows:
Weighted
Average
Number of Exercise
Shares Price
--------- --------
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
The range of exercise prices for options outstanding at November 5, 1998 was
$8.46 to $31.25.
No compensation expense related to stock option grants was recorded in 1997.
For the period ended November 5, 1998 compensation expense in the amount of
$161 was recorded relating to services rendered by the Board.
Under the term of the Merger Agreement the options under the 1997 Plan vest
upon the closing of the merger and each option holder will receive $40.50 per
option.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its stock options under the fair value method of SFAS 123. The fair value
of these options was estimated at the date of grant using a Black Scholes
option pricing model with the following weighted average assumptions for the
period ended November 5, 1998. The fair value of these options was estimated at
the date of grant using a Black Scholes option pricing model with weighted
average assumptions for dividend yield of 0% for 1996, 1997 and 1998; expected
volatility of 39.5% for 1996, 38.6% prior to the Distribution and 49.8%
subsequent to the Distribution for 1997 and 40% for 1998; risk-free interest
rate of 5.95%, 6.52% and 5.68% for 1996, 1997 and 1998 respectively, and
expected lives of 5 years for 1996 and 1997 and 6 years for 1998.
The weighted-average fair value of options granted during 1997 and 1998 was
$4.19 and $14.97, respectively.
F-68
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net earnings and earnings per share were as follows:
For the Years For the Period
Ended from January 1,
December 31, 1998
---------------- to November 5,
1996 1997 1998
------- ------- ---------------
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)
In November 1996, the C-TEC shareholders approved a stock purchase plan for
certain key executives (the "Executive Stock Purchase Plan" or "C-TEC ESPP").
Under the C-TEC ESPP, participants may purchase shares of C-TEC Common Stock in
an amount of between 1% and 20% of their annual base compensation and between
1% and 100% of their annual bonus compensation and provided, however, that in
no event shall the participant's total contribution exceed 20% of the sum of
their annual compensation, as defined by the C-TEC ESPP. Participant's accounts
are credited with the number of share units derived by dividing the amount of
the participant's contribution by the average price of a share of C-TEC Common
Stock at approximately the time such contribution is made. The share units
credited to participant's account do not give such participant any rights as a
shareholder with respect to, or any rights as a holder or record owner of, any
shares of C-TEC Common Stock. Amounts representing share units that have been
credited to a participant's account will be distributed, either in a lump sum
or in installments, as elected by the participant, following the earlier of the
participant's termination of employment with the Company or three calendar
years following the date on which the share units were initially credited to
the participant's account. It is anticipated that, at the time of distribution,
a participant will receive one share of C-TEC Common Stock for each share unit
being distributed.
Following the crediting of each share unit to a participant's account, a
matching share of Common Stock is issued in the participant's name. Each
matching share is subject to forfeiture as provided in the C-TEC ESPP. The
issuance of matching shares will be subject to the participant's execution of
an escrow agreement. A participant will be deemed to be the holder of, and may
exercise all the rights of a record owner of, the matching shares issued to
such participant while such matching shares are held in escrow. Shares of
restricted C-TEC Common Stock awarded under the C-TEC ESPP and share units
awarded under the C-TEC ESPP that relate to C-TEC Common Stock were adjusted so
that following the Distribution, each such participant was credited with an
aggregate equivalent value of restricted shares of common stock of CTE, the
Company and RCN. In September 1997, the Board approved the Cable Michigan, Inc.
Executive Stock Purchase Plan, ("the "Cable Michigan ESPP"), with terms
substantially the same as the C-TEC ESPP. The number of shares which may be
distributed under the Cable Michigan ESPP as matching shares or in payment of
share units is 30,000.
10. Pensions and Employee Benefits
Prior to the Distribution, the Company's financial statements reflect the
costs experienced for its employees and retirees while included in the C-TEC
plans.
Through December 31, 1996, substantially all employees of the Company were
included in a trusteed noncontributory defined benefit pension plan, maintained
by C-TEC. Upon retirement, employees are provided a monthly pension based on
length of service and compensation. C-TEC funds pension costs to the extent
necessary to meet the minimum funding requirements of ERISA. Substantially, all
employees of C-TEC's Pennsylvania cable television operations (formerly Twin
Country Trans Video, Inc.) were covered by an underfunded plan which was merged
into C-TEC's overfunded plan on February 28, 1996.
F-69
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The information that follows relates to the entire C-TEC noncontributory
defined benefit plan. The components of C-TEC's pension cost are as follows for
1996:
Benefits earned during the year (service costs)................... $ 2,365
Interest cost on projected benefit obligation..................... 3,412
Actual return on plan assets...................................... (3,880)
Other components--net............................................. (1,456)
Net periodic pension cost......................................... $ 441
The following assumptions were used in the determination of the consolidated
projected benefit obligation and net periodic pension cost (credit) for
December 31, 1996:
Discount Rate......................................................... 7.5%
Expected long-term rate of return on plan assets...................... 8.0%
Weighted average long-term rate of compensation increases............. 6.0%
The Company's allocable share of the consolidated net periodic pension costs
(credit), based on the Company's proportionate share of consolidated annualized
salaries as of the valuation date, was approximately $10 for 1996. These
amounts are reflected in operating expenses. As discussed below, no pension
cost (credit) was recognized in 1997.
In connection with the restructuring, C-TEC completed a comprehensive study
of its employee benefit plans in 1996. As a result of this study, effective
December 31, 1996, in general, employees of the Company no longer accrue
benefits under the defined benefit pension plans and became fully vested in
their benefit accrued through that date. C-TEC notified affected participants
in December 1996. In December 1996, C-TEC allocated pension plan assets of
$6,984 and the related liabilities to a separate plan for employees who no
longer accrue benefits after sum distributions. The allocation of assets and
liabilities resulted in a curtailment/settlement gain of $4,292. The Company's
allocable share of this gain was $855. This gain results primarily from the
reduction of the related projected benefit obligation. The curtailed plan has
assets in excess of the projected benefit obligation.
C-TEC sponsors a 401(k) savings plan covering substantially all employees of
the Company who are not covered by collective bargaining agreements.
Contributions made by the Company to the 401(k) plan are based on a specific
percentage of employee contributions. Contributions charged to expense were
$128 in 1996. Contributions charged to expense in 1997 prior to the
Distribution were $107.
In connection with the Distribution, the Company established a qualified
saving plan under Section 401(k) of the Code. Contributions charged to expense
in 1997 were $53. Contributions charged to expense for the period from January
1, 1998 to November 5, 1998 were $164.
11. Commitments and Contingencies
Total rental expense, primarily for office space and pole rental, was $984,
$908 and $1,077 for the year ended December 31, 1996, 1997 and for the period
from January 1, 1998 to November 5, 1998, respectively. Rental commitments are
expected to continue to approximate $1 million a year for the foreseeable
future, including pole rental commitments which are cancelable.
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended, and the Telecommunications
Act of 1996. The Company has either settled challenges or accrued for
anticipated exposures related to rate regulation; however, there is no
assurance that there will not be further additional challenges to its rates.
The 1996 statements of operations include charges aggregating approximately
$833 relating to cable rate regulation liabilities. No additional charges were
incurred in the year ended December 31, 1997 and for the period from January 1,
1998 to November 5, 1998.
F-70
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the financial condition or results of operations of
the Company.
The Company has agreed to indemnify RCN and C-TEC and their respective
subsidiaries against any and all liabilities which arise primarily from or
relate primarily to the management or conduct of the business of the Company
prior to the effective time of the Distribution. The Company has also agreed to
indemnify RCN and C-TEC and their respective subsidiaries against 20% of any
liability which arises from or relates to the management or conduct prior to
the effective time of the Distribution of the businesses of C-TEC and its
subsidiaries and which is not a true C-TEC liability, a true RCN liability or a
true Company liability.
The Tax Sharing Agreement, by and among the Company, RCN and C-TEC (the "Tax
Sharing Agreement"), governs contingent tax liabilities and benefits, tax
contests and other tax matters with respect to tax returns filed with respect
to tax periods, in the case of the Company, ending or deemed to end on or
before the Distribution date. Under the Tax Sharing Agreement, adjustments to
taxes that are clearly attributable to the Company group, the RCN group, or the
C-TEC group will be borne solely by such group. Adjustments to all other tax
liabilities will be borne 50% by C-TEC, 20% by the Company and 30% by RCN.
Notwithstanding the above, if as a result of the acquisition of all or a
portion of the capital stock or assets of the Company, the Distribution fails
to qualify as a tax-free distribution under Section 355 of the Internal Revenue
Code, then the Company will be liable for any and all increases in tax
attributable thereto.
13. Affiliate and Related Party Transactions
The Company has the following transactions with affiliates:
For the Year
Ended For the Period
------------- Ended
1996 1997 November 5, 1998
------ ------ ----------------
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
In addition, RCN has agreed to obtain programming from third party suppliers
for Cable Michigan, the costs of which will be reimbursed to RCN by Cable
Michigan. In those circumstances where RCN purchases third party programming on
behalf of both RCN and the Company, such costs will be shared by each company,
on a pro rata basis, based on each company's number of subscribers.
At December 31, 1997 and November 5, 1998, the Company has accounts
receivable from related parties of $166 and $396 respectively, for these
transactions. At December 31, 1997 and November 5, 1998, the Company has
accounts payable to related parties of $1,560 and $343 respectively, for these
transactions.
The Company had a note payable to RCN Corporation of $147,567 at December
31, 1996 primarily related to the acquisition of the Michigan cable operations
and its subsequent operations. The Company repaid approximately $110,000 of
this note payable in 1997. The remaining balance was transferred to
shareholder's net investment in connection with the Distribution.
F-71
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Off Balance Sheet Risk and Concentration of Credit Risk
The Company places its cash and temporary investments with high credit
quality financial institutions. The Company also periodically evaluates the
creditworthiness of the institutions with which it invests. The Company does,
however, maintain unsecured cash and temporary cash investment balances in
excess of federally insured limits.
The Company's trade receivables reflect a customer base centered in the
state of Michigan. The Company routinely assesses the financial strength of its
customers; as a result, concentrations of credit risk are limited.
15. Disclosures about Fair value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
a. The fair value of the revolving credit agreement is considered to be
equal to carrying value since the debt re-prices at least every six months
and the Company believes that its credit risk has not changed from the time
the floating rate debt was borrowed and therefore, would obtain similar
rates in the current market.
b. The fair value of the cash and temporary cash investments
approximates fair value because of the short maturity of these instruments.
16. Quarterly Information (Unaudited)
The Company estimated the following quarterly data based on assumptions
which it believes are reasonable. The quarterly data may differ from quarterly
data subsequently presented in interim financial statements.
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
Revenue................................. $20,734 $22,311 $22,735 $ 8,741
Operating income before depreciation,
amortization, and management fees...... 9,043 10,047 10,185 12,277
Operating income (loss)................. 7,000 (3,324) (674) (7,051)
Net (loss).............................. (1,401) (5,143) (2,375) (1,615)
Net (loss) per average Common Share..... (0.20) (0.75) (0.34) (.23)
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 $ (.16)
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-72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers
of Avalon Cable of New England LLC
In our opinion, the accompanying balance sheet and the related statements of
operations, partners' equity (deficit) and of cash flows present fairly, in all
material respects, the financial position of Amrac Clear View, a Limited
Partnership, (the "Partnership"), as of May 28, 1998 and the results of its
operations and its cash flows for the period ended May 28, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 11, 1998
F-73
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
BALANCE SHEET
May 28, 1998
ASSETS
Current Assets
Cash and cash equivalents......................................... $ 415,844
Subscribers and other receivables, net of allowance for doubtful
accounts of $16,445.............................................. 45,359
Prepaid expenses and other current assets......................... 129,004
----------
Total current assets............................................ 590,207
Property, plant and equipment, net.................................. 483,134
----------
$1,073,341
==========
LIABILITIES AND PARTNERS' EQUITY
Accounts payable.................................................... $ 57,815
Accrued expenses.................................................... 84,395
----------
Total current liabilities....................................... 142,210
----------
Commitments and contingencies (Note 7)
Partners' equity.................................................... 931,131
----------
$1,073,341
==========
The accompanying notes are an integral part of these financial statements.
F-74
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
For the period from January 1, 1998 through May 28, 1998
Revenue:
Basic services...................................................... $651,878
Premium services.................................................... 78,365
Other............................................................... 49,067
--------
779,310
--------
Operating expenses:
Programming......................................................... 193,093
Selling, general and administrative................................. 151,914
Technical and operations............................................ 98,628
Depreciation and amortization....................................... 47,268
Management fees..................................................... 41,674
--------
Income from operations................................................ 246,733
Interest income....................................................... 2,319
Interest (expense).................................................... (1,871)
--------
Net income............................................................ $247,181
========
The accompanying notes are an integral part of these financial statements.
F-75
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIT)
For the period from January 1, 1998 through May 28, 1998
Class A Class B Investor
General Limited Limited Limited
Partner Partner Partner Partners Total
------- ------- ------- -------- --------
Partners' (deficit) equity at
December 31, 1997................ $(6,756) $(6,756) $(2,703) $700,165 $683,950
Net income........................ 6,180 6,180 2,472 232,349 247,181
------- ------- ------- -------- --------
Partners' equity at May 28, 1998.. $ (576) $ (576) $ (231) $932,514 $931,131
------- ------- ------- -------- --------
The accompanying notes are an integral part of these financial statements.
F-76
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
For the period from January 1, 1998 through May 28, 1998
Cash flows from operating activities
Net income........................................................ $ 247,181
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization................................... 47,268
Changes in operating assets and liabilities:
Decrease in subscribers and other receivables................... 21,038
Increase in prepaid expenses and other current assets........... (52,746)
Increase in accounts payable.................................... 9,866
Increase in accrued expenses.................................... 3,127
---------
Net cash provided by operating activities................... 275,734
---------
Cash flows for investing activities
Capital expenditures.............................................. (61,308)
---------
Cash flows for financing activities
Repayment of long-term debt....................................... (560,500)
---------
Net increase in cash and cash equivalents........................... (346,074)
---------
Cash and cash equivalents, beginning of the period.................. 761,918
---------
Cash and cash equivalents, end of the period........................ $ 415,844
=========
Supplemental disclosures
Cash paid during the period for:
Interest........................................................ $ 6,939
=========
The accompanying notes are an integral part of these financial statements.
F-77
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. Organization and Nature of Business
The Partnership is a Massachusetts limited partnership created pursuant to a
Limited Partnership Agreement, dated as of October 1, 1986, as amended (the
"Partnership Agreement"), by and among (1) Amrac Telecommunications as the
general partner (the "General Partner"), (2) Clear View Cablevision, Inc. as
the class A limited partner (the "Class A Limited Partner"), (3) Schuparra
Properties, Inc., as the class B limited partner (the "Class B Limited
Partner"), and (4) those persons admitted to the Partnership from time to time
as investor limited partners (the "Investor Limited Partner").
The Partnership provides cable television service to the towns of Hadley and
Belchertown located in western Massachusetts. At May 28, 1998, the Partnership
provided services to approximately 5,100 customers residing in those towns.
The Partnership's cable television systems offer customer packages of basic
and cable programming services which are offered at a per channel charge or are
packaged together to form a tier of services offered at a discount from the
combined channel rate. The Partnership's cable television systems also provide
premium television services to their customers for an extra monthly charge.
Customers generally pay initial connection charges and fixed monthly fees for
cable programming and premium television services, which constitute the
principal sources of revenue for the Partnership.
On October 7, 1997, the Partnership entered into a definitive agreement with
Avalon Cable of New England LLC ("Avalon New England") whereby Avalon New
England would purchase the assets and operations of the Partnership for
$7,500,000. This transaction was consummated and became effective on May 29,
1998. The assets and liabilities at May 28, 1998, have not been adjusted or
reclassified to reflect this transaction.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect the reported amounts of assets and liabilities and the
disclosure for contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reported period. Actual results may vary from estimates used.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments purchased with
an initial maturity of three months or less.
Revenue Recognition
Revenue is recognized as cable television services are provided.
Concentration of Credit Risk
Financial instruments which potentially expose the Partnership to a
concentration of credit risk include cash, cash equivalents and subscriber and
other receivables. The Partnership does not believe that such deposits are
subject to any unusual credit risk beyond the normal credit risk associated
with operating its business. The Partnership extends credit to customers on an
unsecured basis in the normal course of business. The Partnership maintains
reserves for potential credit losses and such losses, in the aggregate, have
not historically exceeded management's expectations.
F-78
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment is stated at cost. Initial subscriber installation
costs, including material, labor and overhead costs, are capitalized as a
component of cable plant and equipment. Depreciation is computed for financial
statement purposes using the straight-line method based upon the following
lives:
Cable plant and equipment................................... 10 years
Office furniture and equipment.............................. 5 to 10 years
Vehicles.................................................... 6 years
Financial Instruments
The Partnership estimates that the fair value of all financial instruments
at May 28, 1998 does not differ materially from the aggregate carrying values
of its financial instruments recorded in the accompanying balance sheet.
Income Taxes
The Partnership is not subject to federal and state income taxes.
Accordingly, no recognition has been given to income taxes in the accompanying
financial statements of the Partnership since the income or loss of the
Partnership is to be included in the tax returns of the individual partners.
Allocation of Profits and Losses and Distributions of Cash Flow
Partnership profits and losses (other than those arising from capital
transactions, described below) and distributions of cash flow are allocated 94%
to the Investor Limited Partners, 2.5% to the Class A Limited Partner, 1% to
the Class B Limited Partner and 2.5% to the General Partner until Payout (as
defined in the Partnership Agreement) and after Payout, 65% to the Investor
Limited Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited
Partner and 15% to the General Partner.
Partnership profits and capital transactions are allocated first, in
proportion to the partners' respective capital accounts until their respective
account balances are zero and second, in proportion to any distributed cash
proceeds resulting from the capital transaction and third, any remaining
profit, if any, is allocated 65% to the Investor Limited Partners, 15% to the
Class A Limited Partner, 5% to the Class B Limited Partner, and 15% to the
General Partner.
Partnership losses from capital transactions are allocated first, in
proportion to the partners' respective capital accounts until their respective
account balances are zero and, second, any remaining loss, if any, is allocated
65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to
the Class B Limited Partner, and 15% to the General Partner.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components in financial
statements. SFAS No. 130 states that comprehensive income includes reported net
income of a company, adjusted for items that are currently accounted for as
direct entries to equity, such as the net unrealized gain or loss on securities
available for sale. SFAS No. 130 is effective for both interim and annual
periods beginning after December 15, 1997. Management does not anticipate that
adoption of SFAS No. 130 will have a material effect on the financial
statements.
F-79
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which establishes standards for reporting
by public companies about operating segments of their business. SFAS No. 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for periods
beginning after December 15, 1997. Management does not anticipate that the
adoption of SFAS No. 131 will have a material effect on the financial
statements.
3. Prepaid Expenses and Other Current Assets
At May 28, 1998, prepaid expenses and other current assets consist of the
following:
Deferred transaction costs...................................... $ 91,024
Other........................................................... 37,980
--------
$129,004
========
Deferred transaction costs consist primarily of attorney fees related to the
sale of assets of the Partnership (Note 1).
4. Property, Plant and Equipment
At May 28, 1998, property, plant and equipment consists of the following:
Cable plant and equipment.................................... $ 3,460,234
Office furniture and equipment............................... 52,531
Vehicles..................................................... 32,468
-----------
3,545,233
Accumulated depreciation..................................... (3,062,099)
-----------
$ 483,134
===========
Depreciation expense was $47,018 for the period from January 1, 1998 through
May 28, 1998.
5. Accrued Expenses
At May 28, 1998, accrued expenses consist of the following:
Accrued compensation and benefits................................ $17,004
Accrued programming costs........................................ 24,883
Accrued legal costs.............................................. 25,372
Other............................................................ 17,136
-------
$84,395
=======
6. Long-Term Debt
The Partnership repaid its term loan, due to a bank, on January 15, 1998.
Interest on the loan was paid monthly and accrued at the bank's prime rate plus
2% (10.5% at December 31, 1997). The loan was collateralized by substantially
all of the assets of the Partnership and a pledge of all partnership interests.
The total principal outstanding at December 31, 1997 was $560,500.
F-80
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Commitments and Contingencies
The Partnership rents poles from utility companies for use in its
operations. These rentals amounted to approximately $15,918 of rent expense
during the period. While rental agreements are generally short-term, the
Partnership anticipates such rentals will continue in the future. The
Partnership leases office facilities and various items of equipment under
month-to-month operating leases. Rental expense under operating leases amounted
to $8,171 during the period.
The operations of the Partnership are subject to regulation by the Federal
Communications Commission and various franchising authorities.
From time to time the Partnership is also involved with claims that arise in
the normal course of business. In the opinion of management, the ultimate
liability with respect to these claims will not have a material adverse effect
on the operations, cash flows or financial position of the Partnership.
8. Related Party Transactions
The General Partner provides management services to the Partnership for
which it receives a management fee of 5% of revenue. The General Partner also
allocates, in accordance with a management agreement, certain general,
administrative and payroll costs to the Partnership. For the period from
January 1, 1998 through May 28, 1998, management fees totaled $41,674 and
allocated general, administrative and payroll costs totaled $3,625, which are
included in selling general and administrative expenses.
The Partnership believes that these fees and allocations were made on a
reasonable basis. However, the amounts paid are not necessarily indicative of
the level of expenses that might have been incurred had the Partnership
contracted directly with third parties. The Partnership has not attempted to
obtain quotes from third parties to determine what the cost of obtaining such
services from third parties would have been.
F-81
INDEPENDENT AUDITORS' REPORT
To the Partners of
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
We have audited the accompanying balance sheets of Amrac Clear View, a
Limited Partnership as of December 31, 1996 and 1997, and the related
statements of net earnings, changes in partners' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on the financial statements based
on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Amrac Clear View, a Limited
Partnership as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
Greenfield, Altman, Brown, Berger & Katz, P.C.
Canton, Massachusetts
February 13, 1998
F-82
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
BALANCE SHEETS
At December 31, 1996 and 1997
ASSETS 1996 1997
------ ---------- ----------
Current assets:
Cash and cash equivalents............................... $ 475,297 $ 761,918
Subscribers and other receivables, net of allowance for
doubtful accounts of $2,500 in 1996 and $3,000 in 1997. 49,868 66,397
Prepaid expenses:
Legal................................................. -- 53,402
Miscellaneous......................................... 28,016 20,633
---------- ----------
Total current assets................................ 553,181 902,350
---------- ----------
Property and equipment, net of accumulated depreciation
$2,892,444 in 1996 and $3,015,081 in 1997................ 473,438 468,844
---------- ----------
Other assets:
Franchise cost, net of accumulated amortization of
$6,757 in 1996 and $7,417 in 1997...................... 3,133 2,473
Deferred financing costs, net of accumulated
amortization of $60,247 in 1996 and $73,447 in 1997.... 13,200 --
---------- ----------
16,333 2,473
---------- ----------
$1,042,952 $1,373,667
========== ==========
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Current liabilities:
Current maturities of long-term debt.................... $ 356,500 $ 397,500
Accounts payable--trade................................. 34,592 47,949
Accrued expenses:
Utilities............................................... 59,668 --
Miscellaneous........................................... 50,074 81,268
---------- ----------
Total current liabilities........................... 500,834 526,717
---------- ----------
Long-term debt, net of current maturities................. 488,000 163,000
---------- ----------
Commitments and contingencies (Note 4)
Partners' equity.......................................... 54,118 683,950
---------- ----------
$1,042,952 $1,373,667
========== ==========
See notes to financial statements
F-83
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENTS OF NET EARNINGS
For the years ended December 31, 1995, 1996 and 1997
1995 1996 1997
---------- ---------- ----------
Revenues.................................... $1,701,322 $1,807,181 $1,902,080
Less cost of service........................ 644,736 656,881 687,433
---------- ---------- ----------
Net revenues................................ 1,056,586 1,150,300 1,214,647
---------- ---------- ----------
Operating expenses excluding management fees
and depreciation and amortization.......... 330,574 388,284 351,031
Management fees............................. 94,317 96,742 101,540
Depreciation and amortization............... 330,913 340,166 136,497
---------- ---------- ----------
755,804 825,192 589,068
---------- ---------- ----------
Earnings from operations.................... 300,782 325,108 625,579
---------- ---------- ----------
Other expenses (income):
Interest income........................... (7,250) (23,996)
Interest expense.......................... 130,255 98,603 70,738
Utility refunds........................... (50,995)
---------- ---------- ----------
130,255 91,353 (4,253)
---------- ---------- ----------
Net earnings................................ $ 170,527 $ 233,755 $ 629,832
========== ========== ==========
See notes to financial statements
F-84
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIT)
For the years ended December 31, 1995, 1996 and 1997
Class A Class B Investor
General Limited Limited Limited
Partner Partner Partner Partners Total
-------- -------- -------- --------- ---------
Partners' deficit at
December 31, 1994......... $(31,012) $(31,012) $(12,405) $(211,905) $(286,334)
Net earnings for the year.. 4,263 4,263 1,705 160,296 170,527
Partners' distributions
during the year........... (1,596) (1,596) (638) (60,000) (63,830)
-------- -------- -------- --------- ---------
Partners' deficit at
December 31, 1995......... (28,345) (28,345) (11,338) (111,609) (179,637)
Net earnings for the year.. 5,844 5,844 2,337 219,730 233,755
-------- -------- -------- --------- ---------
Partners' equity (deficit)
at December 31, 1996...... (22,501) (22,501) (9,001) 108,121 54,118
Net earnings for the year.. 15,745 15,745 6,298 592,044 629,832
-------- -------- -------- --------- ---------
Partners' equity (deficit)
at December 31, 1997...... $ (6,756) $ (6,756) $ (2,703) $ 700,165 $ 683,950
======== ======== ======== ========= =========
See notes to financial statements
F-85
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1995, 1996 and 1997
1995 1996 1997
--------- --------- ---------
Cash flows from operating activities
Net earnings................................ $ 170,527 $ 233,755 $ 629,832
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization............. 330,913 340,166 136,497
Changes in assets and liabilities:
(Increase) decrease in:
Subscribers and other receivables....... 4,573 (12,093) (16,529)
Prepaid expenses........................ (3,378) (9,468) (46,019)
Increase (decrease) in accounts payable
and accrued expenses..................... (66,424) 69,262 (15,117)
--------- --------- ---------
Net cash provided by operating
activities........................... 436,211 621,622 688,664
--------- --------- ---------
Cash flows for investing activities
Purchases of equipment...................... (116,794) (74,879) (118,043)
--------- --------- ---------
Cash flows for financing activities
Repayment of long-term debt................. (239,250) (260,750) (284,000)
Distributions to partners................... (63,830)
--------- --------- ---------
Net cash used by financing activities. (303,080) (260,750) (284,000)
--------- --------- ---------
Net increase in cash and cash equivalents..... 16,337 285,993 286,621
Cash and cash equivalents, beginning of year.. 172,967 189,304 475,297
--------- --------- ---------
Cash and cash equivalents, end of year........ $ 189,304 $ 475,297 $ 761,918
========= ========= =========
Supplemental disclosures
Cash paid during the year for:
Interest.................................. $ 133,540 $ 94,038 $ 73,124
========= ========= =========
See notes to financial statements
F-86
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1995, 1996 and 1997
1. Summary of Business Activities and Significant Accounting Policies:
This summary of significant accounting policies of Amrac Clear View, a
Limited Partnership (the "Partnership"), is presented to assist in
understanding the Partnership's financial statements. The financial statements
and notes are representations of the Partnership's management, which is
responsible for their integrity and objectivity. The accounting policies
conform to generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary from the estimates
that were used.
Operations:
The Partnership provides cable television service to the residents of the
towns of Hadley and Belchertown in western Massachusetts.
Credit concentrations:
The Partnership maintains cash balances at several financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. At various times during the year the Partnership's
cash balances exceeded the federally insured limits.
Concentration of credit risk with respect to subscriber receivables are
limited due to the large number of subscribers comprising the Partnership's
customer base.
Property and equipment/depreciation:
Property and equipment are carried at cost. Minor additions and renewals are
expensed in the year incurred. Major additions and renewals are capitalized.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. Total depreciation for the years ended
December 31, 1995, 1996 and 1997 was $321,872, $331,707 and $122,637,
respectively.
Other assets/amortization:
Amortizable assets are recorded at cost. The Partnership amortizes
intangible assets using the straight-line method over the useful lives of the
various items. Total amortization for the years ended December 31, 1995, 1996
and 1997 was $9,041, $8,459 and $13,860, respectively.
Cash equivalents:
For purposes of the statements of cash flows, the Partnership considers all
short-term instruments purchased with a maturity of three months or less to be
cash equivalents. There were no cash equivalents at December 31, 1995 and 1997.
Cash equivalents at December 31, 1996, amounted to $300,000.
Advertising:
The Partnership follows the policy of charging the costs of advertising to
expense as incurred. Advertising expense was $1,681, $1,781 and $2,865 for the
years ended December 31, 1995, 1996 and 1997, respectively.
F-87
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income taxes:
The Partnership does not incur a liability for federal or state income
taxes. The current income or loss of the Partnership is included in the taxable
income of the partners, and therefore, no provision for income taxes is
reflected in the financial statements.
Revenues:
The principal sources of revenues are the monthly charges for basic and
premium cable television services and installation charges in connection
therewith.
Allocation of profits and losses and distributions of cash flow:
Partnership profits and losses, (other than those arising from capital
transactions, described below), and distributions of cash flow are allocated
94% to the Investor Limited Partners, 2.5% to the Class A Limited Partner, 1%
to the Class B Limited Partner and 2.5% to the General Partner until Payout (as
defined in the Partnership Agreement) and after Payout, 65% to the Investor
Limited Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited
Partner and 15% to the General Partner.
Partnership profits from capital transactions are allocated first, in
proportion to the partners' respective capital accounts until their respective
account balances are zero and second, in proportion to any distributed cash
proceeds resulting from the capital transaction and third, any remaining
profit, if any, is allocated 65% to the Investor Limited Partners, 15% to the
Class A Limited Partner, 5% to the Class B Limited Partner, and 15% to the
General Partner.
Partnership losses from capital transactions are allocated first, in
proportion to the partners' respective capital accounts until their respective
account balances are zero and, second, any remaining loss, if any, is allocated
65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to
the Class B Limited Partner, and 15% to the General Partner.
2. Property and Equipment:
Property and equipment consists of the following at December 31:
1996 1997
--------- ---------
Cable plant and equipment............................. 3,274,684 3,391,750
Office furniture and equipment........................ 63,373 64,350
Vehicles.............................................. 27,825 27,825
--------- ---------
3,365,882 3,483,925
========= =========
Depreciation is provided over the estimated useful lives of the above items
as follows:
Cable plant and equipment..... 10 years
Office furniture and
equipment.................... 5-10 years
Vehicles...................... 6 years
3. Long-Term Debt:
The Partnership's term loan, due to a bank, is payable in increasing
quarterly installments through June 30, 1999. Interest on the loan is paid
monthly and accrues at the bank's prime rate plus 2% (10.5% at December 31,
1997). The loan is collateralized by substantially all of the assets of the
Partnership and a pledge of all partnership interests. The total principal
outstanding at December 31, 1997 was $560,500.
F-88
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Annual maturities are as follows:
1998............................. 397,500
1999............................. 163,000
-------
560,500
=======
The loan agreement contains covenants including, but not limited to,
maintenance of certain debt ratios as well as restrictions on capital
expenditures and investments, additional indebtedness, partner distributions
and payment of management fees. The Partnership was in compliance with all
covenants at December 31, 1996 and 1997. In 1995, the Partnership obtained,
from the bank, unconditional waivers of the following covenant violations: (1)
to make a one-time cash distribution of $63,830, (2) to increase the capital
expenditure limit to $125,000, and (3) to waive certain other debt ratio and
investment restrictions, which were violated during the year.
4. Commitments and Contingencies:
The Partnership rents poles from utility companies in its operations. These
rentals amounted to approximately $31,000, $39,500 and $49,000 for the years
ended December 31, 1995, 1996 and 1997, respectively. While rental agreements
are generally short-term, the Partnership anticipates such rentals will
continue in the future.
The Partnership leases a motor vehicle under an operating lease that expires
in December 1998. The minimum lease cost for 1998 is approximately $6,000.
5. Related-Party Transactions:
The General Partner provides management services to the Partnership for
which it receives a management fee of 5% of revenue. The General Partner also
allocates, in accordance with a management agreement, certain general,
administrative and payroll costs to the Partnership. For the years ended
December 31, 1995, 1996 and 1997, management fees totaled $87,800, $90,242 and
$95,040, respectively and allocated general, administrative and payroll costs
totaled $7,200, $7,450 and $8,700, respectively. During each year the
Partnership also incurred tap audit fees payable to the General Partner
totaling $4,000. At December 31, 1996, the balance due from the General Partner
was $12,263. The balance due to Amrac Telecommunications at December 31, 1997
was $4,795.
6. Subsequent Events:
On October 7, 1997, the Partnership entered into an agreement with another
cable television service provider to sell all of its assets for $7,500,000. The
Partnership received, in escrow, $250,000, which shall be released as
liquidating damages if the closing fails to occur solely as a result of a
breach of the agreement. As of December 31, 1997, the Partnership incurred
$53,402 in legal costs associated with the sale which are included in prepaid
expenses. Subject to certain regulatory approvals, it is anticipated that the
transaction will be consummated in the Spring of 1998.
On January 15, 1998, the Partnership paid, prior to the maturity date, its
outstanding term loan due to a bank as described in Note 3.
F-89
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers of
Avalon Cable of New England LLC
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, changes in stockholder's deficit and cash
flows present fairly, in all material respects, the financial position of the
Combined Operations of Pegasus Cable Television of Connecticut, Inc. and the
Massachusetts Operations of Pegasus Cable Television, Inc. at December 31, 1996
and 1997 and June 30, 1998, and the results of their operations, changes in
stockholder's deficit and their cash flows for each of the three years in the
period ended December 31, 1997 and for the six months ended June 30, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 30, 1999
F-90
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND
THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
COMBINED BALANCE SHEETS
December 31,
------------------------ June 30,
ASSETS 1996 1997 1998
------ ----------- ----------- -----------
Current assets:
Cash and cash equivalents............. $ 389,097 $ 1,092,084 $ 1,708,549
Accounts receivable, less allowance
for doubtful accounts at December 31,
1996 and 1997 and June 30, 1998 of
$11,174, $3,072 and $0, respectively. 140,603 116,112 144,653
Prepaid expenses and other............ 62,556 90,500 92,648
----------- ----------- -----------
Total current assets................ 592,256 1,298,696 1,945,850
Property and equipment, net............. 4,164,545 3,565,597 3,005,045
Intangible assets, net.................. 2,174,084 2,096,773 1,939,904
Accounts receivable, affiliates......... 4,216,682 5,243,384 5,692,013
Deposits and other...................... 436,382 456,135 406,135
----------- ----------- -----------
Total assets........................ $11,583,949 $12,660,585 $12,988,947
=========== =========== ===========
