<PAGE>
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 June 30, 1995
-------------------------------------------------
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 or 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)
- --------------------------------------------------------------------------------
(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 July 31, 1995.
Common Stock 2,393,530 shares
This Form 10-Q consists of 20 sequentially numbered pages.
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1995 and December 31, 1994 3
Condensed Consolidated Statements of Operations -
Quarters and Six Months Ended June 30,
1995 and 1994 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-17
PART II. OTHER INFORMATION
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18-19
SIGNATURES 20
2
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
-------- ------------
<S> <C> <C>
ASSETS:
Cash & temporary cash investments $1,717 $96
Accounts receivable:
Trade, net of reserve for doubtful accounts of $29 and $23 at
June 30, 1995 and December 31, 1994, respectively 245 264
Other 22 187
Prepaid expenses and other 137 150
Property, plant and equipment 38,977 38,583
Less - accumulated depreciation 23,439 22,132
------- --------
Net property, plant and equipment 15,538 16,451
Intangible assets - net of accumulated amortization of $2,222 and $2,068
at June 30, 1995 and December 31, 1994, respectively 2,521 2,675
------- --------
Total Assets $20,180 $19,823
======== ========
LIABILITIES AND SHAREHOLDERS' CAPITAL DEFICIENCY:
Accounts payable, trade $178 $298
Accounts payable, related parties 1,197 534
Notes payable, related party 2,287 --
Other liabilities 2,181 1,861
Accrued litigation costs 2,874 4,400
Debt 24,693 25,926
------- --------
Total Liabilities 33,410 33,019
------- --------
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 June 30, 1995
and December 31, 1994 2,393 2,393
Additional paid-in capital 5,512 5,512
Accumulated deficit (21,135) (21,101)
------- --------
Total Shareholders' Capital Deficiency (13,230) (13,196)
------- --------
Total Liabilities and Shareholders' Capital Deficiency $20,180 $19,823
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales $3,541 $3,200 $6,844 $6,362
------ ------ ------ ------
Cost and expenses 2,173 1,925 4,276 3,892
Depreciation and amortization 766 757 1,529 1,525
------ ------ ------ ------
Total operating expenses 2,939 2,682 5,805 5,417
------ ------ ------ ------
Operating income 602 518 1,039 945
------ ------ ------ ------
Other (Income) Expenses:
Interest income (16) (7) (22) (14)
Other expense (income) 0 (2) 44 (16)
Interest expense 557 540 1,051 1,022
------ ------ ------ ------
Total other expenses, net 541 531 1,073 992
------ ------ ------ ------
Income (loss) before income tax 61 (13) (34) (47)
Provision for income taxes -- -- -- --
------ ------ ------ ------
Net income (loss) $61 ($13) ($34) ($47)
====== ====== ====== ======
Net income (loss) per average common
share $0.03 ($0.01) ($0.01) ($0.02)
====== ====== ====== ======
Weighted Average Common Shares
Outstanding (in thousands) 2,393 2,393 2,393 2,393
====== ====== ====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1995 1994
------- -------
<S> <C> <C>
Net Cash Provided By Operating Activities $1,022 $1,329
------ ------
Cash Flows From Investing Activities -
Expansion, improvements and other (455) (569)
------ ------
Cash Flows From Financing Activities -
Repayment of bank loans (1,233) (1,008)
Note payable, related party 2,287 --
------ ------
Net cash provided by (used in) financing activities 1,054 (1,008)
------ ------
Net increase (decrease) in cash & temporary cash investments 1,621 (248)
Cash & temporary cash investments, January 1, 96 989
------ ------
Cash & temporary cash investments, June 30, $1,717 $ 741
====== ======
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $ 648 $ 915
Taxes -- --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
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 1994 Annual Report to the
Securities and Exchange Commission on Form 10-K, as amended on June 28, 1995 and
further amended on July 11, 1995. 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, 1995.
(2) GOING CONCERN
The condensed consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The existing debt and equity of
the Company is not adequate to provide resources for the viable operation of the
business. While the existing debt and equity of the Company is not adequate to
provide resources for the viable operation of the business, the Company has
pursued measures to raise additional capital and restructure its debt. These
measures include the completion, on August 10, 1995, of a stock rights offering
and the negotiation of a commitment letter from the Company's bank to
restructure its debt, subject to certain conditions. These matters are more
fully described in Notes 3 and 6, as well as the Liquidity and Capital Resources
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company must be able to generate cash to service its debt, either as
currently structured or based on the terms of the commitment letter, if
executed, to repay amounts of approximately $2.8 million owed to a former
officer under the terms of a settlement agreement and to make the capital
expenditures necessary to remain competitive. As a result of these factors,
there remains doubt about the Company's ability to continue as a going concern.
6
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
(3) DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
June 30 December 31
1995 1994
---- ----
<S> <C> <C>
Credit Agreement $19,693 $20,926
Demand Note 5,000 5,000
------- -------
Total $24,693 $25,926
======= =======
</TABLE>
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 1992, 1993 and 1994 to restructure
the mandatory repayments due at December 31, 1992, December 31, 1993 and
December 31, 1994, respectively. The restructured payments due at year end 1992
and 1993 have been paid in full, as restructured. The original amount due on
December 31, 1994 was $3,024. The December 1994 restructuring required principal
payments of $1,250 on December 31, 1994 and $887 on each of March 31, 1995 and
June 30, 1995. The December 31, 1994 and March 31, 1995 payments have been
repaid. The Company obtained a waiver related to the $887 payment due on June
30, 1995 and repaid $346. C-TEC Corporation ("C-TEC"), which owns 43.63% of the
Company's outstanding Common Stock loaned $887 to the Company to enable it to
make the principal payment of $887 scheduled for March 31, 1995. The loan from
C-TEC bears interest at a rate equal to the weighted average effective rate
charged by the Company's bank under the Credit Agreement for the relevant period
and is payable on demand. The remaining amount owed of $541 is currently due on
August 31, 1995. This payment is subject to change depending upon the outcome of
refinancing the Company's debt discussed below. On June 30, 1995 the Company had
borrowings outstanding under the Credit Agreement of $19,693 at a weighted
average effective rate of 7.7%. The Credit Agreement contained a revolving
credit period which expired on December 31, 1991.
At June 30, 1995 the Company was in compliance with all other covenants
associated with its Credit Agreement.
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. At June 30, 1995, the effective interest rate was 10.75%. The
outstanding balance is due upon demand.
Debt is secured by a pledge of the stock of the Company's subsidiaries.
7
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
On June 13, 1995, the Company and its bank, Morgan Guaranty Trust Company
("Morgan Guaranty") entered into a Commitment Letter (the "Commitment Letter")
pursuant to which the parties agreed, subject to certain conditions, to amend
the Credit Agreement dated November 26, 1989, as previously amended (the "Credit
Agreement"), between the Company and Morgan Guaranty, and to enter into an
additional 364-day facility as described below. Subject to the terms and
conditions of the Commitment Letter, and based on outstanding borrowings as of
June 30, 1995 (i) the Credit Agreement will be amended to be a 7.5 year
amortizing term loan of approximately $24,693 with a final maturity of December
31, 2002, (the "Term Loan") and (ii) Morgan Guaranty and the Company will enter
into a 364-day revolving credit facility of $2,000 maturing 364 days after the
date of such facility. Indebtedness of $5,000 evidenced by a demand note held by
Morgan Guaranty (the "Morgan Demand Note") will be refinanced as follows: (a)
the Morgan demand note will be canceled and (b) the amount outstanding under the
Term Loan will be increased by $5,000 from $19,693 to $24,693. The Company will
be required to repay $5,693 in the second half of 1995. Thereafter, the Term
Loan will be required to be paid in equal quarterly installments. The Company,
as stated above, has previously pledged the common stock of its operating
subsidiaries to secure its obligation under the Credit Agreement. Such pledge
will continue and will secure the obligations under both the Credit Agreement
and the 364-Day Facility. If the Credit Agreement is amended according to the
terms and conditions of the Commitment Letter the Company will endeavor to
supplement this pledge by granting to Morgan Guaranty a first lien on certain
material assets of the Company and its subsidiaries.
The obligation of Morgan Guaranty to so amend the Credit Agreement, and to enter
into the 364-Day facility, in accordance with the Commitment Letter is subject
to certain conditions, the most significant of which is that the gross proceeds
to the Company from the equity rights offering, discussed more fully in Note 6,
must be at least $8,500. There can be no assurance that these conditions will be
satisfied.
(4) INCOME TAXES
The provision (benefit) for income taxes is different from the amounts computed
by applying the U. S. statutory federal tax rate of 34% primarily due to losses
producing no current federal tax benefits due to uncertainty of realization.
8
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
Temporary differences and carryforwards which give rise to a significant portion
of deferred tax assets and liabilities at June 30, 1995 and December 31, 1994
are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
---- ----
<S> <C> <C>
Net operating loss carryovers $ 4,404 $ 3,329
Alternative minimum tax credits 13 13
Reserves 324 1,515
Other, net 298 311
------- -------
Total deferred assets 5,039 5,168
------- -------
Property, plant and equipment 2,847 2,971
Intangible assets 163 161
------- -------
Total deferred liabilities 3,010 3,132
------- -------
Subtotal 2,029 2,036
Valuation allowance (2,029) (2,036)
------- -------
Total deferred taxes $ - $ -
======= =======
</TABLE>
A valuation allowance has been provided for the portion of the deferred tax
assets which, in the opinion of management is not likely to be utilized. The net
change in the valuation allowance was a decrease of $7 for the six months ended
June 30, 1995.
(5) RELATED PARTY TRANSACTIONS
The Company has two demand notes outstanding with C-TEC, a stockholder of the
Company, in the amount of $2,287 at June 30, 1995. The demand notes enabled the
Company to make the scheduled principal payment of $887 owed under its Credit
Agreement on March 31, 1995, and $1,400 in June 1995 in fulfillment of a
settlement agreement entered into with a former officer of the Company. Both
demand notes from C-TEC bear interest at 6.875% at June 30, 1995, which rate is
equal to the weighted average effective rate charged by the Company's bank under
the Credit Agreement for the relevant period and are payable on demand.
9
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
(6) SUBSEQUENT EVENTS - STOCK RIGHTS OFFERING
On August 10, 1995, the Company completed the rights offering, resulting in
anticipated net proceeds, after deducting issuance costs, of approximately
$8,100. Shareholders of record at the close of business on July 20, 1995 were
entitled to one right for every share of Common Stock held. Rights holders were
able to purchase for a price of $3.60 per share, one share of Common Stock for
each right held.
The Company expects to use the net proceeds from the rights offering to (i)
repay $5 million of outstanding indebtedness to Morgan Guaranty under a credit
agreement, and (ii) to repay approximately $2.3 million of outstanding
indebtedness to C-TEC under two demand notes. The remaining proceeds will be
used for general corporate purposes, including capital expenditures.
10
<PAGE>
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, 1994.
Results of Operations
For the three months ended June 30, 1995, the Company had net income of $61 as
compared to a $13 net loss for the comparable period in 1994. This represents an
increase of $74 or 569% between periods. The Company's net loss for the six
months ended June 30, 1995 decreased $13 or 28% from the comparable period in
1994. This represents an improvement of $0.04 and $0.01 per average common share
for the three and six month periods respectively.
Sales for the three months ended June 30, 1995, increased by $341 or 10.7% over
the comparable period in 1994 while sales for the first six months ended June
30, 1995 increased $482 or 7.6%. The increase is primarily due to an additional
2,481 average basic subscribers per month during the first six months of 1995
compared to the same period in 1994 amounting to $187 and $353 of increased
basic revenues for the three and six months, respectively. In addition, a basic
rate increase implemented during April 1995 added approximately $85 in sales
between quarters. Also contributing to the increase was $54 and $111 of
additional premium revenue for the three and six months ended June 30, 1995 as
compared to the same periods in 1994 due to program package restructuring during
the second quarter of 1994.
Total costs and expenses, exclusive of depreciation and amortization, for the
three and six month period ended June 30, 1995, increased by $248 or 12.9% and
$384 or 9.9%, respectively, when compared to the same periods in 1994. The
increases for the three and six month periods were primarily due to increases in
programming costs. Increases in programming costs are directly related to
additional basic and premium customers and basic channels as well as increases
in programming rates from suppliers.
Other expenses increased by $60 for the six month period due to an additional
accrual of $52 in the first quarter of 1995 for the liability related to the
Lahey lawsuit.
11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in Thousands, Except Per Share Data)
Liquidity and Capital Resources
The Company does not have liquid assets to repay all of its outstanding
obligations at June 30, 1995 or any available lines of credit or other
significant sources of liquidity. While the existing debt and equity of the
Company is not adequate to provide resources for the viable operation of the
business, the Company has pursued measures to raise additional capital and
restructure its debt. These measures include the completion, on August 10, 1995,
of a stock rights offering and the negotiation of a commitment letter from the
Company's bank to restructure its debt, subject to certain conditions. These
matters are more fully discussed below. The Company has increased its available
cash balance by $1,621 since December 31, 1994. Cash and temporary cash
investments were $1,717 at June 30, 1995 as compared to $96 at December 31,
1994. Excess cash generated by operations over capital expenditures in the first
six months accounted for $567 of the increase. The remaining increase in cash of
$1,054 was generated by borrowings from C-TEC. As discussed below, due to cash
flow concerns the Company borrowed the funds from C-TEC for both repayment of
its $887 principal payment due on March 31, 1995 and its $1,400 obligation due
to a former officer on July 1, 1995 pursuant to a settlement agreement entered
into on April 19, 1995. The settlement pertained to a lawsuit commenced in 1988,
relating to Mr. Lahey's termination as president of Communications and Cable
Vision, Inc., a subsidiary of the Company. The Company agreed to pay Mr. Lahey
$4.3 million over a four year time frame in full satisfaction of all claims
related to the above litigation. The Company paid Mr. Lahey $100 and $1.4
million in April and June, 1995, respectively, as stipulated in the settlement
agreement. Under the settlement agreement, C-TEC ensured payment of the $1.4
million in a timely manner in the event the Company lacked sufficient funds.
Except for the $1.4 million, C-TEC does not guarantee the Company's performance
under the settlement agreement. The remaining $2.8 million will be paid in equal
installments over a four year period on or about July 1 of each of the
subsequent years.
The Company's outstanding debt, including the Notes owed to C-TEC at June 30,
1995 was $26,980. The Company's bank agreed to allow the Company to restructure
a principal payment of $3,024 due in December of 1994, into three installments
of $1,250, $887 and $887, due in December 1994, March and June 1995,
respectively. The December 1994 and March 1995 installments have been repaid as
restructured. However, due to cash flow concerns, the March 1995 payment was
made from funds loaned to the Company by C-TEC. The Company obtained a waiver
for the principal payment of $887 due on June 30, 1995. The Company repaid $346
on June 30, 1995. The payment was made from available cash balances of the
Company. The Company was in compliance with all other covenants of its Credit
Agreement at June 30, 1995.
On June 13, 1995, the Company and its bank, Morgan Guaranty Trust Company
("Morgan Guaranty") entered into a Commitment Letter (the "Commitment Letter")
pursuant to which they agreed, subject to certain conditions, to amend the
Credit Agreement dated November 26, 1989,
12
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in Thousands, Except Per Share Data)
Liquidity and Capital Resources, continued
as previously amended (the "Credit Agreement"), between the Company and Morgan
Guaranty, and to enter into an additional 364-day facility as discussed in
Note 3.
In April 1995, the Company filed a registration statement with the Securities
and Exchange Commission ("SEC") to register up to 2,393,530 shares of its Common
Stock that were offered for sale to shareholders in a rights offering. On
July 13, 1995, the Company's registration statement became effective. The
Company distributed non-transferable subscription rights to holders of shares of
its Common Stock to subscribe for and purchase shares of its Common Stock at a
subscription price of $3.60 per share. Shareholders of record at the close of
business on July 20, 1995 received one right for every share of Common Stock
held. Rights holders were entitled to purchase one share of Common Stock for
each right held. Each right also carried the right to "oversubscribe" at the
subscription price for shares of Common Stock that were not otherwise purchased
pursuant to the exercise of rights. The rights offering concluded on August 10,
1995.
C-TEC, which owns approximately 43.63 percent of the outstanding Common Stock,
exercised all of the rights it received in respect of the shares it holds at an
aggregate subscription price of $3.76 million and committed to oversubscribe for
all other available shares of Common Stock which were offered for sale in the
rights offering. The opportunity to exercise the right to oversubscribe was
available to all holders of rights on the same terms.
The Company expects to use the net proceeds from the rights offering, which will
be approximately $8.1 million after payment of fees and expenses, to (i) repay
$5 million of outstanding indebtedness to Morgan Guaranty under a credit
agreement, and (ii) to repay approximately $2.3 million of outstanding
indebtedness to C-TEC under two demand notes. The remaining proceeds will be
used for general corporate purposes, including capital expenditures.
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 has been impacted by the previous
elimination of capital projects due to the ongoing cash flow concerns and the
effect rate regulation has had on the Company in particular and the industry as
a whole. Although operating expenses continued to rise the Company has been
unable to raise its rates previously due to rate freezes and other factors
discussed in more detail in the Regulatory Matters below. The last rate increase
in the Company's Michigan operations prior to April 1995 was on July 1, 1992. In
April 1995 the Company instituted a basic rate increase according to the rules
and regulations established by the FCC which will provide an additional $500 in
revenues on an annualized basis.
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in Thousands, Except Per Share Data)
Liquidity and Capital Resources, continued
As noted earlier, the Company is currently in the process of restructuring both
the equity and debt of the Company. The Company has signed a commitment letter
with its bank and is currently working with its bank to finalize the agreement.
The Company must be able to generate cash to service its debt, either as
currently structured or based on the terms of the commitment letter, if
executed, to repay amounts of approximately $2.8 million owed to a former
officer under the terms of a settlement agreement and to make the capital
expenditures necessary to remain competitive. As a result of these factors,
there remains doubt about the Company's ability to continue as a going concern.
Regulatory Matters
The Company, like other operators of cable television systems, is subject to
regulation at the federal, state and local levels. Many aspects of such
regulation are currently the subject of judicial proceedings and administrative
or legislative proceedings or proposals. On October 5, 1992, Congress passed the
Cable Television Consumer Protection and Competition Act of 1992 (the "Act"),
which regulated certain subscriber rates and a number of other matters in the
cable industry, such as mandatory carriage of local broadcast stations and
retransmission consent, and which have increased the administrative costs of
complying with such regulations. 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 as defined in
the Act. Few municipalities served by the Company are subject to effective
competition. The FCC has delegated the responsibility of regulation of the basic
tier to the applicable franchise authority, provided such authority becomes
certified to regulate by the FCC.
The FCC's initial rules regulating cable television rates were effective
September 1, 1993, and the revised rate regulations were effective May 15, 1994.
All cable television rates except pay-per-view and premium channels are subject
to competitive benchmarks established by the FCC. Under the revised regulations,
cable operators' regulated rates generally must be reduced to 83 percent of
their September 30, 1992 levels adjusted forward by inflation and permitted
external costs. The reduction reflects the 17 percent "competitive differential"
between rates of systems that were and systems that were not subject to
effective competition on September 30, 1992, based on the results of the FCC's
statistical analysis of the data it had collected and evaluated in establishing
the initial benchmark rates. Under both the initial and revised scheme of
benchmark/price cap regulation, once the cable operator has reached the
regulated rate level, its rates remain capped at that level. Future rate
adjustments are permitted based on certain external costs incurred by the cable
operator, inflation and the cost of adding channels. External costs include
programming costs, excluding retransmission consent fees prior to October 6,
1994, as well as subscriber related taxes and franchise fees, and other
franchise requirements. A system with rates above the benchmarks may utilize a
cost-of-service showing to justify its
14
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in Thousands, Except Per Share Data)
Regulatory Matters, continued
rates and avoid a rate reduction. Equipment charges for basic tier services are
also subject to roll back to the level representing the cost of the equipment
including a reasonable profit. 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. The FCC, in its revised rate regulation, issued
additional criteria which addressed whether the manner in which regulated
program services were moved to unregulated a la carte services enhanced
subscriber choice or were an evasion of the FCC's rate regulation. If the a la
carte tier enhanced customer choice and satisfied the criteria established by
the FCC, the tier would be considered unregulated.
Additionally, the FCC issued its going forward rules, effective January 1, 1995.
Under the new going forward rules operators may continue to pass through the
cost of new channels plus a 7.5 percent mark-up. Alternatively, under the new
rules, which generally apply only to cable programming service tiers, operators
have the option of imposing a $0.20 per channel per month mark-up (limited to
$1.20 over the next two years and $1.40 over the next three years) for new
channels. In addition, under the new alternative, operators may pass through
increases in cable programming service costs (from May 15, 1994 through December
31, 1996) only in an amount not to exceed $0.30 per subscriber per month. Under
the new rules, operators also may add unregulated "new product tiers," composed
of new channels and/or channels that duplicate existing channels. Operators must
choose to make adjustments based on either the new rules or the old rules for
all channel additions after May 14, 1994. The Company has not had any channel
additions since May 14, 1994, and is in the process of determining which
alternative will be selected for future channel additions.
On June 5, 1995, the FCC released the text of a small system rate relief order
(the "Order"). The Order provides that "small systems" ( i.e. those with 15,000
or fewer subscribers) owned by "small cable companies" (i.e. serving 400,000 or
fewer subscribers) may file a very streamlined cost-of-service analysis to
justify their rates. The Company anticipates being classified as a small system
under these new rules. The full text of the Order is expected to be released in
August, 1995.
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. The Company restructured its
rates and channel offerings in 1993 and 1994 to comply with rate regulation and
minimize the negative impact on revenues.
15
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in Thousands, Except Per Share Data)
Regulatory Matters, continued
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 36% of the Company's
municipalities have filed to regulate basic cable service rates with 23% of
these municipalities currently certified to regulate basic rates. The FCC
regulates basic cable service rates in noncertified municipalities from which it
receives customer complaints.
With respect to the FCC's initial rules, 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
original Act. The Company believes it is in full compliance with the original
Act. The two letters of inquiry were terminated during the fourth quarter of
1994 since these franchises withdrew their complaints and accepted the Company's
settlement offer. The Company has been challenged on its existing regulated rate
structure by additional communities in Michigan which were not a part of the
FCC's letters of inquiry and has settled with all but one of these communities.
The Company has accrued an amount which represents the Company's best estimate
of its subscriber refund liability in Michigan. This amount represents a
reduction of the limited basic rate by $0.30 per month for each subscriber from
December 31, 1994, back to the date of initial regulation. This proposed
settlement with the Michigan communities was an effort to resolve the regulatory
issues and avoid possible extended litigation. Communities representing
approximately 69% of the Company's Michigan subscriber base have accepted the
proposed settlement offer which precludes challenges for various periods
extending beyond 1995. The Company has either settled challenges or accrued for
anticipated exposures related to initial rate regulation which was effective
September 1993.
The FCC issued new rate regulation guidelines which were effective May 1994. The
Company believes it is in compliance with the amended rate regulation
provisions; however, the Company has been notified that two complaints have been
filed to date, as discussed below, and there is no assurance that there will not
be additional challenges to its restructured rates.
The Company in 1994 also reduced rates charged for converters and remotes due to
the provision in the FCC rate regulations which requires cable operators to
charge for equipment at cost plus a reasonable profit.
The Company anticipates that certain provisions of the Act that do not relate to
rate regulation, such as the provisions relating to retransmission consent and
customer service standards, will reduce the operating margins of the Company.
16
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in Thousands, Except Per Share Data)
Regulatory Matters, continued
During the first quarter of 1995, the Company commenced basic rate increase
notifications to all of its Michigan subscribers. The rate increase was
implemented in April 1995. The increase was in conformity with the settlement
agreements discussed previously and the FCC going forward rules. One community
to date has filed a complaint with the FCC relative to the April rate increase
on the basic cable service tier. In addition, one subscriber to date, has filed
a complaint with the FCC relative to the April rate increase on the cable
programming service tier.
No assurances can be given at this time that the above matters will not have a
material adverse effect on the Company's business and results of operations in
the future. Also, no assurance can be given as to what other future actions
Congress, the FCC or other regulatory authorities may take or the effects
thereof on the cable industry in general or the Company in particular.
17
<PAGE>
Part II Other Information
Item 5. Other Information
In April 1995, the Company filed a registration statement with the Securities
and Exchange Commission ("SEC") to register up to 2,393,530 shares of its Common
Stock that were offered for sale to shareholders in a rights offering. On July
13, 1995, the Company's registration statement became effective. The Company
distributed non-transferable subscription rights to holders of shares of its
Common Stock to subscribe for and purchase shares of its Common Stock at a
subscription price of $3.60 per share. Shareholders of record at the close of
business on July 20, 1995 received one right for every share of Common Stock
held. Rights holders were entitled to purchase one share of Common Stock for
each right held. Each right also carried the right to "oversubscribe" at the
subscription price for shares of Common Stock that were not otherwise purchased
pursuant to the exercise of rights. The rights offering concluded on August 10,
1995.
C-TEC, which owns approximately 43.63 percent of the outstanding Common Stock,
exercised all of the rights it received in respect of the shares it holds at an
aggregate subscription price of $3.76 million and committed to oversubscribe for
all other available shares of Common Stock which were offered for sale in the
rights offering. The opportunity to exercise the right to oversubscribe was
available to all holders of rights on the same terms.
The Company expects to use the net proceeds from the rights offering, which will
be approximately $8.1 million after payment of fees and expenses, to (i) repay
$5 million of outstanding indebtedness to Morgan Guaranty under a credit
agreement, and (ii) to repay approximately $2.3 million of outstanding
indebtedness to C-TEC under two demand notes. The remaining proceeds will be
used for general corporate purposes, including capital expenditures.
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
(10.12) Waiver dated as of June 26, 1995, to Credit Agreement dated
as of November 26, 1989 by and between Registrant and Morgan
Guaranty Trust Company of New York
(27) Financial Data Schedule
(b). Reports on Form 8-K
The Company filed a Form 8-K on May 4, 1995 relative to a Settlement Agreement
and Mutual Release entered into on April 19, 1995 between Communications and
Cable Vision, Inc. and Mercom, Inc. and Kenneth E. Lahey. The settlement
pertained to outstanding litigation which commenced in 1988 with Mr. Lahey as
president of Communications and Cable Vision Inc. The Company agreed, subject to
certain terms and conditions as set forth in the Settlement Agreement and Mutual
Release, to pay Mr. Lahey $4.3 million over a 4 year time frame.
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
The Company filed a Form 8-K on June 14, 1995 to announce the signing of a
Commitment Letter with Morgan Guaranty Trust Company of New York on June 13,
1995 pursuant to which they agreed, subject to certain terms and conditions, to
amend the Credit Agreement dated November 26, 1989. The Credit Agreement will be
amended to be a 7.5 year amortizing term loan with final maturity of December
31, 2002. In addition, Morgan Guaranty and the Company will enter into a 364-day
revolving credit facility of $2,000,000 maturing 364 days after the date of such
facility.
19
<PAGE>
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: August 14, 1995 ----------------------------
Bruce Godfrey
Executive Vice President and
Chief Financial Officer
20
<PAGE>
Exhibit 10.12
WAIVER AGREEMENT
WAIVER AGREEMENT dated as of June 26, 1995 between MERCOM, INC., a
Delaware corporation (the "Borrower"), and MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, a New York State banking corporation (the "Bank").
WHEREAS, the Borrower and the Bank entered into a Credit Agreement dated
as of November 26, 1989 (as amended, supplemented or otherwise modified from
time to time, the "Credit Agreement");
WHEREAS, the Credit Agreement has been previously amended by an
amendment agreement dated as of November 26, 1989, two amendment agreements,
each dated as of April 5, 1990, and amendment agreements dated as of December
22, 1992, December 15, 1993 and December 23, 1994; and
WHEREAS, the Borrower wishes the Bank to waive compliance with certain
provision of the Credit Agreement in the manner herein set forth and the Bank is
willing to so waive such provision of the Credit Agreement;
NOW THEREFORE, the parties hereto agree as follows:
Section 1. Waiver of Credit Agreement
--------------------------
The Bank hereby waivers compliance with Sections 2.9(c) and 2.9(d) of
the Credit Agreement in order to permit the Borrower to repay on June 30, 1995 a
principal amount of the outstanding Loan equal to $346,333 (together with
accrued interest thereon); provided, that in the event the Borrower's proposed
--------
rights offering, pursuant to the Borrower's Amendment No. 1 to Registration
Statement on Form S-3, dated June 14, 1995, as filed with the Securities and
Exchange Commission (as such Registration Statement may be further amended),
shall not be effective as of August 31, 1995, the Borrower shall repay on August
31, 1995 a principal amount of the outstanding Loan equal to $540,667 (together
with accrued interest thereon).
Section 2. Miscellaneous
-------------
(a) Terms not defined herein are used as defined in the Credit
Agreement.
(b) This Waiver Agreement shall be effective as of the date hereof upon
receipt by the Bank of (i) a copy of this Waiver Agreement duly executed on
behalf of the Borrower and (ii) a certificate of a duly authorized officer of
the Borrower dated as of the date of the delivery of this Waiver Agreement to
the Bank to the effect that (1) no Default or Event of Default has occurred and
is continuing and (2) the representations and warranties contained in the Credit
Agreement are true with the same force and effect as if made on the date of such
certificate.
<PAGE>
(c) This Waiver Agreement shall not constitute a waiver of any other
provision of the Credit Agreement not expressly referred to herein, and shall
not be construed as a waiver or consent to any further or future action on the
part of the Borrower that would require a waiver or consent of the Bank. Except
as expressly waived hereby, the provisions of the Credit Agreement are and shall
remain in full force and effect.
(d) This Waiver Agreement may be executed by the parties hereto in any
number of counterparts, and all of such counterparts taken together shall be
deemed to constitute one and the same instrument.
(e) This Waiver Agreement shall be governed by and construed in
accordance with the law of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Waiver Agreement
to be duly executed as of the day first above written.
MERCOM, INC
By: /s/ Bruce Godfrey
-----------------------------------
Title: Executive Vice President
and Chief Financial Officer
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: /s/ Eugenia Wilds
-----------------------------------
Title: Vice President
2
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<PAGE>
<ARTICLE> 5
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This schedule contains summary financial information extracted from
Financial Statements as of and for the six months ended June 30, 1995 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
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<TOTAL-ASSETS> 20,180
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0
0
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