<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 September 30, 1995
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17750
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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
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 October 31, 1995.
Common Stock 4,787,060 shares
This Form 10-Q consists of 17 sequentially numbered pages.
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1995 and December 31, 1994 3
Condensed Consolidated Statements of Operations -
Quarters and Nine Months Ended September 30,
1995 and 1994 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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>
September 30, December 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS:
Cash & temporary cash investments $2,393 $96
Accounts receivable:
Trade, net of reserve for doubtful accounts of $32 and $23 at
September 30, 1995 and December 31, 1994, respectively 266 264
Other 35 187
Prepaid expenses and other 268 150
Property, plant and equipment 39,187 38,583
Less - accumulated depreciation 24,105 22,132
------------ ------------
Net property, plant and equipment 15,082 16,451
Intangible assets - net of accumulated amortization of $2,299 and $2,068
at September 30, 1995 and December 31, 1994, respectively 2,443 2,675
------------ ------------
Total Assets $20,487 $19,823
============ ============
LIABILITIES AND SHAREHOLDERS' CAPITAL DEFICIENCY:
Accounts payable, trade $451 $298
Accounts payable, related parties 1,046 534
Other liabilities 1,679 1,861
Accrued litigation costs 2,864 4,400
Debt 19,276 25,926
------------ ------------
Total Liabilities 25,316 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,
4,787,060 and 2,393,530, issued and outstanding at September 30,
1995 and December 31, 1994, respectively. 4,787 2,393
Additional paid-in capital 11,373 5,512
Accumulated deficit (20,989) (21,101)
------------ ------------
Total Shareholders' Capital Deficiency (4,829) (13,196)
------------ ------------
Total Liabilities and Shareholders' Capital Deficiency $20,487 $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 Sept 30, Nine Months Ended Sept 30,
---------------------- --------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $3,556 $3,214 $10,399 $9,576
-------- -------- -------- --------
Cost and expenses 2,186 1,941 6,462 5,834
Depreciation and amortization 743 747 2,272 2,272
-------- -------- -------- --------
Total operating expenses 2,929 2,688 8,734 8,106
-------- -------- -------- --------
Operating income 627 526 1,665 1,470
-------- -------- -------- --------
Other (Income) Expenses:
Interest income (31) (6) (53) (21)
Other expense (income) 0 19 44 3
Interest expense 512 531 1,563 1,553
-------- -------- -------- --------
Total other expenses, net 481 544 1,554 1,535
-------- -------- -------- --------
Income (loss) before income tax 146 (18) 111 (65)
Provision for income taxes -- 2 -- 2
-------- -------- -------- --------
Net income (loss) $146 ($20) $111 ($67)
======== ======== ======== ========
Net income (loss) per average common share $0.04 ($0.01) $0.04 ($0.03)
======== ======== ======== ========
Weighted Average Common Shares Outstanding (in thousands) 3,746 2,393 2,849 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>
Nine Months Ended Sept 30,
--------------------------
1995 1994
---- ----
<S> <C> <C>
Net Cash Provided By Operating Activities $1,356 $1,839
--------- ---------
Cash Flows From Investing Activities -
Expansion, improvements and other (664) (870)
--------- ---------
Cash Flows From Financing Activities -
Repayment of bank loans (6,650) (1,008)
Note payable, related party 2,287 --
Repayment of note payable, related party (2,287) --
Net proceeds from the issuance of common stock 8,255 --
--------- ---------
Net cash provided by (used in) financing activities 1,605 (1,008)
--------- ---------
Net increase (decrease) in cash & temporary cash investments 2,297 (39)
Cash & temporary cash investments, January 1, 96 989
--------- ---------
Cash & temporary cash investments, September 30, $2,393 $950
========= =========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $1,706 $1,562
Taxes -- $4
</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) DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
Sept 30 December 31
1995 1994
---- ----
<S> <C> <C>
Credit Agreement $19,276 $20,926
Demand Note - 5,000
------- -------
Total $19,276 $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 agreement was again amended in August, 1995
as discussed in more detail below. On September 30, 1995 the Company had
borrowings outstanding under the Credit Agreement of $19,276 at a weighted
average effective rate of 7.0%. The Credit Agreement contained a revolving
credit period which expired on December 31, 1991.
At September 30, 1995 the Company was in compliance with all covenants
associated with its Credit Agreement. The most restrictive covenant contained
in the amended Credit Agreement pertains to the debt to operating cash flow
ratio. The agreement in 1995 requires the company to maintain a debt to cash
flow ratio of less than five times. The ratio decreases in subsequent years per
the agreement.
6
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
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. This credit facility was refinanced in August 1995, as discussed below.
Debt is secured by a pledge of the stock of the Company's subsidiaries.
On August 16, 1995, the Company and its bank, Morgan Guaranty Trust Company
("Morgan Guaranty") amended and restated the Credit Agreement dated November 26,
1989, as previously amended (the "Credit Agreement"), between the Company and
Morgan Guaranty, and entered into an additional 364-day facility as described
below. The Credit Agreement was 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 Morgan Guaranty and the Company entered 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") was refinanced as follows: (a) the Morgan demand note was
canceled and (b) the amount outstanding under the Term Loan was increased by
$5,000 from $19,693 to $24,693. The Company was required by the amended Credit
Agreement to repay $5,417 in the third quarter of 1995. An additional payment of
$346 is payable on December 31, 1995. Thereafter, the annual amounts due under
the Term Loan, as reflected below, will be required to be paid in 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. The amended Credit Agreement
required the Company to supplement this pledge by granting to Morgan Guaranty a
first lien on certain material assets of the Company and its subsidiaries.
Maturities of the amended and restated Credit Agreement are as follows:
<TABLE>
<CAPTION>
Aggregate
Year Amounts
---- -------
<S> <C>
1996 1,500
1997 1,750
1998 2,100
1999 2,600
2000 3,750
Thereafter 7,230
</TABLE>
7
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
(3) 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.
Temporary differences and carryforwards which give rise to a significant portion
of deferred tax assets and liabilities at September 30, 1995 and December 31,
1994 are as follows:
<TABLE>
<CAPTION>
Sept 30, December 31,
1995 1994
---- -----
<S> <C> <C>
Net operating loss carryovers $ 4,295 $ 3,329
Alternative minimum tax credits 13 13
Reserves 321 1,515
Other, net 302 311
-------- --------
Total deferred assets 4,931 5,168
-------- --------
Property, plant and equipment 2,797 2,971
Intangible assets 164 161
-------- --------
Total deferred liabilities 2,961 3,132
-------- --------
Subtotal 1,970 2,036
Valuation allowance (1,970) (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 $66 for the nine months
ended September 30, 1995.
8
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
(4) RELATED PARTY TRANSACTIONS
The Company had amounts due to C-TEC Corporation, majority stockholder of the
Company, and C-TEC subsidiaries ("C-TEC") of $1,046 and $534 at September 30,
1995 and December 31, 1994, respectively, primarily related to management
services provided by C-TEC. The Company entered into a management agreement with
C-TEC in 1992, pursuant to which C-TEC will manage the Company's cable
television systems' operations. The management agreement was approved by the
Company's Board of Directors.
(5) STOCK RIGHTS OFFERING
On August 10, 1995, the Company completed the issuance of 2,393,530 shares of
Common Stock through a rights offering, resulting in net proceeds, after
deducting issuance costs, of $8,255. Shareholders of record at the close of
business on July 20, 1995 were entitled to one non-transferable 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.
9
<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 September 30, 1995, the Company had net income of
$146 as compared to a $20 net loss for the comparable period in 1994. This
represents an increase of $166 or 830% between periods. The Company had net
income for the nine months ended September 30, 1995 of $111 compared to a $67
net loss for the comparable period in 1994. This represents an increase of $178
or 266% between periods. The above reflects an improvement of $0.05 and $0.07
per average common share for the three and nine month periods respectively.
Sales for the three months ended September 30, 1995, increased by $342 or 10.6%
over the comparable period in 1994 while sales for the nine months ended
September 30, 1995 increased $823 or 8.6%. The increase is primarily due to an
additional 2,410 average basic subscribers per month during the first nine
months of 1995 compared to the same period in 1994 amounting to $148 and $473 of
increased basic revenues for the three and nine months, respectively. In
addition, a basic rate increase implemented during April 1995 added
approximately $188 and $217 in sales for the three and nine months,
respectively. Also contributing to the increase was $39 and $150 of additional
premium revenue for the three and nine months ended September 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 nine month period ended September 30, 1995, increased by $245 or 12.6%
and $628 or 10.8%, respectively, when compared to the same periods in 1994. The
increases for the three and nine 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 $41 for the nine month period due to an additional
accrual of $52 in the first quarter of 1995 for the liability related to the
Lahey lawsuit.
10
<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 has increased its available cash balance by $2,297 since
December 31, 1994. Cash and temporary cash investments were $2,393 at
September 30, 1995 as compared to $96 at December 31, 1994. Excess cash
generated by operations over capital expenditures in the first nine months
accounted for $692 of the increase. The remaining increase in cash of $1,605
was generated by a stock rights offering which concluded in August 1995.
The Company's outstanding debt at September 30, 1995 was $19,276. The Company
was in compliance with all covenants of its Credit Agreement at September 30,
1995.
On August 16, 1995, the Company and its bank, Morgan Guaranty Trust Company
("Morgan Guaranty") entered into an agreement pursuant to which they 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 entered 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 owned 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. C-TEC, after exercising
all of its rights and oversubscribing for other available shares of Common
Stock, now owns 61.92 percent of the outstanding shares of Common Stock.
The Company used a portion of the net proceeds from the rights offering, which
was approximately $8.2 million after payment of fees and expenses, to (i) repay
$5.1 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.
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, continued
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. Revenue growth was impacted previously due to the
elimination of capital projects resulting from 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 was 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.
As noted earlier, the Company has restructured both the equity and debt of the
Company on terms which are significantly less restrictive to its liquidity and
operations than its prior structure. The Company must be able to generate cash
to service its debt, under the amended Credit Agreement, and 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. The Company believes that its capital structure and results of
operations will be adequate to meet these requirements for the forseeable
future.
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 Federal Communications Commission (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
12
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in Thousands, Except Per Share Data)
Regulatory Matters, continued
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 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 Company is currently reviewing the Order and its
impact on the Company going forward.
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in Thousands, Except Per Share Data)
Regulatory Matters, continued
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.
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 continues to believe 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.
14
<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 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.
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.
15
<PAGE>
Part II Other Information
Item 1. Legal Proceedings
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.
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
(27) Financial Data Schedule
(b). Reports on Form 8-K
The Company filed a Form 8-K on August 22, 1995 to announce (1) the completion
of a Rights Offering on August 10, 1995, (2) change of control of the Company,
whereby C-TEC beneficially owns, as of the date of this 8-K, an aggregate of
2,964,250 shares of Common Stock, representing 61.92% of the outstanding Common
Stock of the Company, and (3) to announce the signing of an agreement on
August 16, 1995, between the Company and Morgan Guaranty Trust Company of
New York which amended and restated the Credit Agreement effective as of
August 18, 1995.
16
<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.
DATE: November 14, 1995 /s/ Bruce Godfrey
--------------------------
Bruce Godfrey
Executive Vice President and
Chief Financial Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Financial
Statements as of and for the nine months ended September 30, 1995 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 2,393
<SECURITIES> 0
<RECEIVABLES> 328
<ALLOWANCES> 32
<INVENTORY> 0
<CURRENT-ASSETS> 2,962
<PP&E> 39,187
<DEPRECIATION> 24,105
<TOTAL-ASSETS> 20,487
<CURRENT-LIABILITIES> 5,347
<BONDS> 17,805
<COMMON> 4,787
0
0
<OTHER-SE> (9,616)
<TOTAL-LIABILITY-AND-EQUITY> 20,487
<SALES> 0
<TOTAL-REVENUES> 10,399
<CGS> 0
<TOTAL-COSTS> 5,788
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 76
<INTEREST-EXPENSE> 1,563
<INCOME-PRETAX> 111
<INCOME-TAX> 0
<INCOME-CONTINUING> 111
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 111
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
