UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-17750
MERCOM, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2728175
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Carnegie Center
P.O. Box 8567
Princeton, New Jersey 08540-6215
(Address of principle executive offices)
(Zip Code)
(609) 734-3737
(Registrant's telephone number including area code)
46 Public Square P.O. Box 3000 Wilkes-Barre, Pennsylvania 18703-3000
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO ______
Indicate the number of shares outstanding of each of the issuer's
classes of common stock ($1.00 par value), as of October 31, 1994.
Common Stock 2,393,530 shares
This Form 10-Q consists of 18 sequentially numbered pages.
MERCOM, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1994 and December 31, 1993 3
Condensed Consolidated Statements of Operations -
Quarters and Nine Months Ended September 30,
1994 and 1993 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1994 and 1993 5
Notes to Condensed Consolidated Financial
Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
Part 1. Financial Information
Item 1. Financial Statements
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
September 30, December 31,
1994 1993
(Unaudited) (Audited)
ASSETS: ----------- -----------
Cash & temporary cash investments $ 950 $ 989
Accounts receivable, trade, net of
reserve for doubtful accounts
of $35 and $29 at September 30, 1994
and December 31, 1993, respectively 286 154
Prepaid expenses and other 244 167
Property, plant and equipment 38,251 37,494
Less - accumulated depreciation 21,485 19,548
------- -------
Net property, plant and equipment 16,766 17,946
Intangible assets - net of accumulated
amortization of $2,003 and $1,754
at September 30, 1994 and
December 31, 1993, respectively 2,739 2,988
Total Assets $20,985 $22,244
------- -------
LIABILITIES AND SHAREHOLDERS' CAPITAL DEFICIENCY:
Accounts payable $ 800 $ 925
Other liabilities 1,530 1,418
Accrued restructuring and litigation costs 4,084 4,255
Debt 27,176 28,184
------- -------
Total Liabilities 33,590 34,782
------- -------
SHAREHOLDERS' CAPITAL DEFICIENCY:
Preferred stock, $100 par value, 150,000 shares
authorized, none issued and outstanding
Common stock, $1 par value, 5,000,000 shares
authorized, 2,393,530, issued and outstanding
at September 30, 1994 and December 31, 1993 2,393 2,393
Additional paid-in capital 5,512 5,512
Accumulated deficit (20,510) (20,443)
------- -------
Total Shareholders' Capital Deficiency (12,605) (12,538)
------- -------
Total Liabilities and Shareholders'
Capital Deficiency $20,985 $22,244
======= =======
See accompanying notes to condensed consolidated financial statements.
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
Quarter Ended Sept 30, Nine Months Ended Sept 30,
---------------------- --------------------------
1994 1993 1994 1993
------ ------ ------ ------
Sales $3,214 $3,211 $9,576 $9,478
------ ------ ------ ------
Cost and expenses 1,941 1,849 5,833 5,660
Depreciation and amortization 746 794 2,271 2,419
------ ------ ------ ------
Total operating expenses 2,687 2,643 8,104 8,079
------ ------ ------ ------
Operating income 527 568 1,472 1,399
------ ------ ------ ------
Other (Income) Expenses:
Interest income (6) (5) (20) (15)
Other expense (income) 19 5 3 9
Interest expense 532 529 1,554 1,612
------ ------ ------ ------
Total other expenses, net 545 529 1,537 1,606
------ ------ ------ ------
Income (loss) before
income tax (18) 39 (65) (207)
Provision for income taxes 2 0 2 11
------ ------ ------ ------
Net income (loss) ($20) $39 ($67) ($218)
------ ------ ------ ------
Net income (loss) per
average common share ($0.01) $0.02 ($0.03) ($0.09)
------ ------ ------ ------
Weighted Average Common
Shares Outstanding
(in thousands) 2,393 2,393 2,393 2,393
------ ------ ------ ------
See accompanying notes to condensed consolidated financial statements.
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
Nine Months Ended Sept 30,
--------------------------
1994 1993
------ ------
Net Cash Provided By Operating Activities $1,839 $2,020
------ ------
Cash Flows From Investing Activities -
Expansion, improvements and other (870) (540)
------ ------
Cash Flows From Financing Activities -
Repayment of bank loans (1,008) (655)
------ ------
Net increase (decrease) in cash & temporary
cash investments (39) 825
Cash & temporary cash investments, January 1 989 376
------ ------
Cash & temporary cash investments, September 30 $950 $1,201
------ ------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $1,562 $1,677
Taxes $4 $11
See accompanying notes to condensed consolidated financial statements.
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
(1) RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, in
the opinion of management, such statements include all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation of the financial information. The condensed consolidated
financial statements should be read in conjunction with the annual
statements and notes thereto included in the Company's 1993 Annual Report
to the Securities and Exchange Commission on Form 10-K. The results of
operations for the interim periods are not necessarily indicative of the
results that might be expected for future interim periods or for the full
year ended December 31, 1994.
(2) GOING CONCERN
The condensed consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. However, substantial
doubt exists about the Company's ability to continue as a going concern
unless the debt and equity of the Company are restructured.
At September 30, 1994 the Company was in compliance with all covenants
associated with its Credit Agreement. However, the existing equity and
debt structure of the Company is not adequate to provide resources for the
viable operation of the business significantly beyond December 31, 1994.
The Company has no other available credit as of September 30, 1994.
In December 1992 the bank agreed to allow the Company to restructure a
principal payment of $1,008 due in December 1992 into three installments.
This principal payment has been paid in full, according to the terms
contained in the amended credit agreement. In December 1993, the bank
again agreed to allow the Company to restructure a principal payment of
$2,016 due in December 1993 into three installments. This principal
payment has again been paid in full, according to the terms contained in
the amended credit agreement. The remaining scheduled principal payment
amounts and due dates have not been restructured. Based on its latest
financial projections the Company will be unable to meet its principal
payment scheduled for December 1994, as currently structured, and meet its
other operating obligations unless it raises additional capital or the bank
agrees to restructure the debt. Management continues to investigate its
alternatives. However, there is no assurance that such alternatives will
be successful. Further, on December 27, 1993, the Company received an
adverse judgment in its appeal of the settlement awarded to a former
officer of the Company (Note 4.) The Company has decided not to appeal
this matter any further and has entered into negotiations with the former
officer to determine the parameters of the arbitration and appraisal
process for determination of the fair market value of the former officer's
stock. The liquidity of the Company will be materially and adversely
affected if the fair market value of the former officer's stock is
determined to approximate the amount asserted by the former officer and a
suitable restructuring of the Company's debt and equity structure is not
accomplished.
(3) DEBT
Debt consists of the following:
Sept 30, 1994 December 31, 1994
------------- -----------------
Credit Agreement $22,176 $23,184
Demand Note 5,000 5,000
------- -------
Total $27,176 $28,184
======= =======
The Company entered into a $25,000 Credit Agreement with a bank in November
1989. The agreement was amended in April 1990 to provide for borrowings up
to $27,000. The agreement was further amended in December 1993 to
restructure the mandatory repayment due at December 31, 1993. The Company
had borrowings outstanding under the Credit Agreement of $22,176 as of
September 30, 1994. The Credit Agreement contained a revolving credit
period which expired on December 31, 1991.
As stated above the Credit Agreement was amended in December 1993 to
restructure the mandatory repayment of $2,016 due at December 31, 1993,
into three installments due and paid on December 31, 1993, March 31, 1994
and June 30, 1994, respectively, according to the terms of the amended
credit agreement. Based on its latest financial projections the Company
will be unable to meet its principal payment of $3,024 scheduled for
December 1994, as currently structured, and meet its other operating
obligations unless it is able to obtain additional financing or the bank
agrees to restructure the debt.
The Company's interest rate swap agreement which was entered into in 1990
expired in September 1994. The agreement contained the following terms:
Company Company
Principal Pays Receives Expiration
--------- ------- -------- ----------
$10,000 9.36% 6 month USD-LIBOR September 1994
In April 1990, the Company obtained a credit facility commitment from a bank
providing for borrowings up to $5,000. The full commitment was borrowed by
the Company. The outstanding balance is due upon demand.
Debt is secured by a pledge of the stock of the Company's subsidiaries.
(4) LEGAL PROCEEDINGS
CCV, a subsidiary of the Company, is a party to a lawsuit commenced in 1988
encaptioned Communications and CableVision, Inc. and Michigan Energy
Resources Company v. Kenneth E. Lahey (File No. 88-8995-C2) filed in the
Circuit Court for the County of Ottawa, State of Michigan which relates to
the termination of Mr. Lahey's employment as president of CCV. Mr. Lahey
asserted that as a result of such termination he is entitled to the fair
market value of ten percent (10%) of the outstanding shares of CCV stock
(the "Lahey Stock") as of the date of his termination while the Company
asserted Mr. Lahey was only entitled to $50.
The trial court determined that Mr. Lahey was entitled to the fair market
value of the Lahey Stock and ordered, among other things, that an
arbitration and appraisal be held to determine the fair market value of
such shares. The Company appealed such order, but the Michigan Court of
Appeals upheld the trial court's findings in a Decision and Opinion dated
December 27, 1993. The Company has decided not to appeal this matter
further and has entered into negotiations with Lahey to determine the
parameters of the arbitration and appraisal process for determination of
the fair market value of the Lahey Stock. Mr. Lahey has asserted the fair
market value of the Lahey Stock is approximately $3,600 while the Company
asserts the fair market value to be significantly less. The Company will
be materially and adversely affected if the fair market value of the Lahey
Stock is determined to approximate the amount asserted by Lahey. This
would significantly and immediately affect the liquidity of the Company and
require a restructuring of its current capital structure. However, there
are no assurances that such a restructuring can be accomplished. In 1991
management accrued an amount which represents management's best estimate of
the Company's potential liability. There have been no significant
developments regarding this litigation during the first nine months of
1994. However, the arbitration and appraisal process is scheduled to take
place during the last quarter of 1994 and a decision is expected soon
thereafter.
(5) INCOME TAXES
The benefit for income taxes is different than the amounts computed by
applying the federal statutory rate of 34% primarily due to losses
producing no current federal tax benefits due to uncertainty of
realization.
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at September 30, 1994 and
December 31, 1993 are as follows:
Sept 1994 Dec. 1993 Sept 1994 Dec. 1993
Def. Tax Def. Tax Def. Tax Def. Tax
Assets Assets Liabilities Liabilities
------ ------ ----------- -----------
Net operating loss carryovers $3,296 $3,445 -- --
Alternative minimum tax credits 19 17 -- --
Contingencies 1,360 1,360 -- --
Property, plant, and equipment -- -- $3,005 $3,148
Intangible assets 12 11 172 156
All others 331 320 0 --
------ ------ ------ ------
Subtotal 5,018 5,153 3,177 3,304
Valuation allowance 1,841 1,849 -- --
------ ------ ------ ------
Total deferred taxes $3,177 $3,304 $3,177 $3,304
====== ====== ====== ======
The net change in the valuation allowance for deferred tax assets was a
decrease of $8 for the nine months ended September 30, 1994.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in Thousands, Except Per Share Data)
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1993.
Results of Operations
The Company's results from operations before income taxes for the three
months ended September 30, 1994 declined $57 or 146.2% and improved $142 or
68.6% for the nine months ended September 30, 1994 over the comparable
periods in 1993. This represents a decline of $0.02 and an improvement of
$0.06 per average common share for the three and nine month periods
respectively.
Sales for the three months ended September 30, 1994 remained relatively
constant over the comparable period in 1993 while sales for the nine months
ended September 30, 1994 increased by $98 or 1.0%. The increase is
primarily due to an additional 1,230 average basic subscribers per month
during the first nine months of 1994 compared to the same period in 1993
resulting in $143 and $305 of increased revenues for the three and nine
months, respectively. Also contributing to the increase is $70 of revenues
relating to the launch of a new programming service (Q2) in September 1994.
Partially offsetting these increases is a $119 accrual in September for
refunds to limited basic subscribers in anticipation of settlements of rate
regulation challenges by the local municipalities. Also included in 1994
results is a decrease in rental revenues of $28 and $126 for the three and
nine months ending September 30, 1994 as compared to the same periods in
1993. This decrease is primarily due to a reduction in the rental rate
charged for converters and remotes to cost as mandated by the FCC.
Total costs and expenses, exclusive of depreciation and amortization, for
the three and nine month period ended September 30, 1994, increased by $92
or 5.0% and $173 or 3.1%, respectively, when compared to the same periods
in 1993. For the three month period, the increase is primarily due to
increases in technical, programming and general and administrative expenses
of $42, $30 and $17, respectively. The additional expense for the nine
month period is primarily due to increases in technical, programming and
general and administrative expenses of $119, $57 and $22 respectively,
offset partially by a reduction of marketing expenses of $24. Technical
expenses increased primarily because of additional installations and
converter box replacements, increased pole rental costs, normal annual
salary increases and additional overtime due to vacancies in technical
staff. Increases in programming costs are directly related to additional
basic customers and basic channels as well as increases in programming
rates from suppliers. General and administrative expenses increased due to
additional legal expenses and payment of FCC dues as required by the Cable
Act. Partially offsetting these increases were decreased operating taxes
due to prior period overassessments which are corrected in the current
period. Decreases in marketing expenses are attributable to lower sales
commissions due to vacancies in commissioned staff.
Interest expense for the three months ended September 30, 1994, increased
by $3 or .6% when compared to the same period in 1993 and decreased by $58
or 3.6% for the nine months ended September 30, 1994. The increase for the
three months ended September 30, 1994 is primarily attributable to rising
interest rates during this period while the decrease for the nine months
ended September 30, 1994 is due primarily to a reduction in outstanding
debt which is offset partially by the effects of increasing interest rates.
The Company's future interest expense is subject to fluctuations in the
market rate of interest and therefore there is no assurance that the
Company's current level of interest expense is indicative of future trends.
Depreciation expense for the three and nine months ended September 30, 1994
decreased by $48 or 6.0% and $148 or 6.1%, respectively when compared to
the same periods in 1993. This decrease is primarily attributable to less
depreciation expense in the current period as assets become fully
depreciated and lower expenditure levels in the current period due to
curtailments in capital expenditures by the Company.
Liquidity and Capital Resources
The Company does not have liquid assets to repay all of its
outstanding obligations at September 30, 1994. The Company has decreased
its available cash balance by $39 since December 31, 1993. The Company had
cash and temporary cash investments of $950 at September 30, 1994 as
compared to $989 at December 31, 1993. The restructured debt payments of
$504 each in March and June are the largest contributors to the decrease
and are offset partially by excess cash generated by operations over
capital expenditures.
The Company's debt at September 30, 1994 was $27,176, which is a reduction
of $1,008 from December 31, 1993. The Company's bank agreed to allow the
Company to restructure a principal payment of $2,016 due in December of
1993, into three installments due in December 1993, March and June 1994.
The restructured payments have been paid in full. The remaining scheduled
principal payment amounts and due dates have not been restructured. The
next principal payment of $3,024 is due on December 31, 1994. The Company
was in compliance with all covenants of its Credit Agreement at September
30, 1994. However, based on the Company's latest financial projections,
the Company anticipates that cash provided by operations will not be
sufficient to fund the principal payment of debt due in December 1994 as
currently structured despite the elimination of many capital projects
scheduled for 1994 in its original budget because of the continuing
uncertainty about the financial condition of the Company.
The Company had no available lines of credit at September 30, 1994 or other
sources of liquidity other than the potential sale of its Florida cable
system. However, the Company has not recovered its investment in this
system and would consider the sale based only on the lack of other viable
options. The reductions in capital expenditures previously discussed along
with the impact regulation will have on future rate increases and operating
expenses could adversely affect future operating income, as discussed
further in "Impact to Company" under "Regulatory Issues". In addition, on
December 27, 1993, the Company received an adverse judgment in its appeal
of the settlement awarded to a former officer of the Company (Note 4). The
liquidity of the Company will be materially and adversely affected if the
fair market value is determined to approximate the amount asserted by the
former officer and a suitable recapitalization is not accomplished.
The existing debt, equity and working capital of the Company are not
adequately structured to allow for the operation of the business beyond
December 31, 1994. While there are no assurances that it will be able to
do so, management believes that it will reach a new agreement with the
Company's bank which will enable the Company to continue as a going
concern. Even if a restructuring is accomplished, however, there is no
assurance that the Company could meet the potential liability which would
result should the appraisal of the fair market value of the Lahey stock
approximate the amount asserted by the former officer. The Company must be
able to continue to manage its costs and increase its revenues through rate
increases, the offering of new products, and the expansion of its
territories. However, revenue growth is uncertain because of the
elimination of certain capital projects due to cash flow concerns and the
FCC regulations. See "Regulatory Issues" in the following section for a
more detailed discussion of rate regulation.
If the Company is to exist on a long term basis, it must generate sufficient
cash from operations to not only service the large interest burden
resulting from its debt but also to repay the debt under terms acceptable
to its bank. Operations must also be the source for the funding of capital
expenditures which will be necessary to remain competitive in the markets
which the Company now serves and to enter new markets. In short, in spite
of regulation and the lack of financing alternatives, operations must be
the source which not only sustains the Company, but which fuels its growth.
Due to these factors there remains substantial doubt about the Company's
ability to continue as a going concern.
REGULATORY ISSUES
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT
The Cable Television Consumer Protection and Competition Act of
1992 (the "Act"), enacted on October 5, 1992, and effective April 3, 1993,
regulates the cable television industry.
Basic Rate Regulation
The most significant provision of the Act requires the FCC to
establish rules to ensure that rates for basic services are reasonable for
subscribers in areas without effective competition. Basic service is the
level of programming which must be subscribed to in order to receive access
to any other tier of service. The basic service tier must, at a minimum,
include all "must-carry" channels; any public, educational, or governmental
access channels required by the franchiser; and all television signals
other than non-local satellite-delivered superstations. The FCC must
determine whether each cable system is subject to effective competition.
Effective competition is defined by the Act to exist if: (1) fewer
than 30 percent of the households in the franchise area subscribe to the
service of the current cable system; (2) the franchise area is served by
at least two unaffiliated multichannel video programming distributors, each
of which offers programming to at least 50 percent of the households and is
subscribed to by at least 15 percent of such households; or (3) a
multichannel video operator owned by a franchise authority offers service
to at least 50 percent of the households in the franchise area. The FCC
has announced that for those systems not subject to effective competition,
rates will be regulated jointly by the FCC and state and local governments.
The FCC has delegated the responsibility of regulation of the basic service
tier to the applicable local franchise authority. In order to regulate
rates, such authority must be certified by the FCC. In order to be
certified, the authority must apply for certification; have the legal
authority to regulate; and the franchise area must lack effective
competition. A franchise authority may choose not to regulate rates. A
local franchise authority that is certified must apply the FCC's benchmark
formula. A local franchise authority that lacks the legal authority to
regulate or the personnel to administer the regulation may request the FCC
to regulate basic rates.
The FCC has broad authority in adopting regulations to ensure that
rates are reasonable. The Act permits the FCC to determine what is a
"reasonable profit" for the cable operator. The factors which the FCC must
take into account in making this determination include, among other things,
rates for cable systems subject to effective competition; direct costs of
obtaining and providing basic tier service; capital and operating costs of
the cable operators, including programming costs; advertising revenues
received by the cable operator from basic tier service programming; and
certain franchise expenses. The FCC must establish criteria for
determining whether rates for service other than basic tier are reasonable
and must develop procedures for resolution of complaints and refund of
rates determined to be unreasonable.
On April 1, 1993, the FCC adopted its initial rules regulating cable
television rates. All cable television rates except pay-per-view and
premium channels were frozen until May 15, 1994. The initial rules, which
were in effect until May 15, 1994, permit the retiring and unbundling of
services as long as the overall rate per subscriber is not increased.
Rates for basic and tiered services are subject to benchmarks. A cable
system with rates above the benchmark was required to roll back its rates
to the systems rates as of September 30, 1992, plus an adjustment for
inflation since then. If the September 30, 1992 rate exceeds the
benchmark, the maximum rate reduction is ten percent of the rates in effect
at September 30, 1992. This ten percent reduction represents the
competitive differential calculated by the FCC in the initial rate order
between the rates charged by competitive and non-competitive cable systems.
A system with rates above the benchmark may utilize a cost-of-service
showing to justify its rates and avoid the rate reduction.
Equipment charges for basic tier service are also subject to
rollback to the level representing the cost of the equipment including a
reasonable profit (to be determined by the local franchise authority). In
cases where equipment has been included as part of a service tier at no
additional cost, it must be unbundled and a separate charge will be
allowed.
On February 22, 1994, the FCC adopted revised regulations that
became effective on May 15, 1994. Regulated cable rates that are in place
after May 15, 1994 will be evaluated under the new rules; rates in effect
before that date will be judged using the FCC's initial rules described
above. These revised regulations will require cable operators to reduce
their September 30, 1992 regulated rates to a new benchmark based on the
FCC's revised calculation of a 17 percent competitive differential.
Adjustments to the competitive differential may be made for (1) inflation
occurring between October 1, 1992 and September 30, 1993, (2) changes in
external costs that have occurred since the system became subject to
initial regulation at either the local level, the Federal level or February
28, 1994, whichever date is earliest and (3) changes that have resulted
from the addition or deletion of programming channels to regulated tiers
since September 30, 1992.
As a result of these revised rules, regulated cable operators will
have to apply the revised competitive differential by May 15, 1994, or,
subject to certain restrictions, by July 14, 1994. Cable systems that
relied on the benchmark approach to rate-setting under the initial rate
regulation structure may choose the benchmark approach or a cost-of-service
approach to justify their rates under the new rate regulation scheme.
Systems that do not make the rate reductions needed to bring their rates
down to the full reduction rate by May 15, 1994 will be subject to refund
liability unless they can successfully show, through a cost-of-service
showing that their costs justify higher rates.
The February 22, 1994 regulations also provide guidelines for
determining whether an "a la carte" package should be considered a rate
regulated tier, new cost-of-service standards, and the methodology for
passing through certain external costs, inflation and channel changes in
the future.
Anti-Buy Through
The Act prohibits cable operators from requiring subscribers to buy
any level of service other than basic tier to receive programming offered
on a per-channel or per-program basis.
Must-Carry
Cable operators are required by the Act to carry the signals of
qualified local commercial and non-commercial television stations which
demand carriage.
Retransmission Consent
The FCC requires cable operators to negotiate licenses with the
local commercial television stations whose programming the operator desires
the right to carry but which do not demand carriage.
Other Provisions
Other regulations under the Act include: (1) cable operators
customer service requirements; (2) limitations on indecent and
objectionable programming; (3) resolution of complaints relative to
unreasonable rates; (4) signal quality; (5) disposition of home wiring;
(6) limitations on ownership of cable systems; and (7) consumer electronics
equipment compatibility.
Various legal proceedings by other cable operators have commenced
regarding the constitutionality of several of the Act's provisions.
Impact to Company
In determining the impact of the initial FCC basic rate benchmark
rules on a Company's current system revenues, cable companies were
permitted, prior to September 1, 1993, to restructure their rates and
channel offerings as long as the overall rate per subscriber was not
increased. Management does not believe that the Company's current
restructured rates will be significantly affected by the initial rate
regulation because its systems are below the original FCC benchmarks and
the average rate per subscriber did not increase after restructuring, based
on operating results which have occurred subsequent to the September 1,
1993 effective date.
In November, 1993 the FCC issued letters of inquiry to the Company
and other cable operators to investigate the way in which regulated program
services were moved to unregulated a la carte offerings and whether these
and other changes were in compliance with the Act. The Company believes
that it is in full compliance with the original Act. However, in February
1994 the FCC issued new guidelines, which became effective in May, 1994,
for consideration of a la carte packages, indicating a more stringent
approach. The Company has responded to the letters of inquiry; however, to
date, there has been no response from the FCC.
The Company is continuing to evaluate the effect of FCC regulations
on its rates. All existing rates as well as future rate increases for
basic cable service must be approved by the local municipality if it has
certified to regulate basic cable service rates. To date, approximately
34% of the Company's municipalities have filed to regulate basic cable
service rates with 21% of these municipalities currently certified to
regulate basic rates. Fifty nine percent of the subscriber base, or
eighteen communities, which are certified to regulate basic rates, have
challenged the Company's existing regulated rate structure and the Company
is involved in ongoing negotiations with these communities. The September
financial statements reflect a proposed settlement offer of $119 to these
communities which reduces the limited basic rate by 30 cents per month for
each subscriber back to the date of initial regulation and freezes basic
rates until March 31, 1995. This proposed settlement with the communities
is an effort to resolve these regulatory issues and avoid possible extended
litigation. In addition, the Company has filed cost-of-service
justifications with all the communities which are certified to regulate
basic rates. Ultimately, the Company can succeed in preserving its rates
if (1) the a la carte channels are deemed to be unregulated, either by the
FCC or in court, (2) the cost-of-service justifications are upheld, either
by the FCC or in court, or (3) the benchmark rate calculations are defeated
in court.
In the future, cable rates subject to federal regulation may be raised
annually to recover inflationary increases, and quarterly to recover
increases in certain external costs including programming costs, excluding
retransmission consent fees prior to October 6, 1994, as well as subscriber
related taxes and franchise fees and other franchise requirements. Rate
increases on cable programming tier services may be passed through
automatically after giving the FCC thirty days' notice. It is impossible at
this time to quantify the financial impact of this new regulatory
environment on future operating results until regulators complete their
review of the Company's implementation of the Act and regulations
thereunder. However, it is likely that lower operating margins will exist
due to the financial impact to the Company of other provisions of the Act,
including increased operating expenses related to retransmission consent
prior to October 6, 1994, and to increased costs associated with customer
service and technical standards.
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
Item 6(a).
Exhibit 27. Financial Data Schedule
Item 6(b). No reports on Form 8-K were filed during the quarter ended
September 30, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
MERCOM, INC.
/s/ Bruce Godfrey
----------------------
DATE: November 14, 1994 Bruce Godfrey
Executive Vice President and
Chief Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MERCOM, INC. FOR THE QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 950
<SECURITIES> 0
<RECEIVABLES> 321
<ALLOWANCES> 35
<INVENTORY> 0
<CURRENT-ASSETS> 1,480
<PP&E> 38,251
<DEPRECIATION> 21,485
<TOTAL-ASSETS> 20,985
<CURRENT-LIABILITIES> 9,438
<BONDS> 24,152
<COMMON> 2,393
0
0
<OTHER-SE> (14,998)
<TOTAL-LIABILITY-AND-EQUITY> 20,985
<SALES> 0
<TOTAL-REVENUES> 9,576
<CGS> 0
<TOTAL-COSTS> 5,529
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 46
<INTEREST-EXPENSE> 1,554
<INCOME-PRETAX> (65)
<INCOME-TAX> 2
<INCOME-CONTINUING> (67)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (67)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
<FN>
Footnotes --
1. Mercom, Inc. utilizes an unclassified balance sheet, which is
a common practice in the cable television industry. The
amounts of Current-Asseets and Current-Liabilities included in
the Financial Data Schedule were derived from the unclassified
balance sheet based on assumptions of the reporting which
would be appropriate in the classified format.
2. Total-Costs excludes selling, general and administative
expenses.
</FN>
</TABLE>
