<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For fiscal year ended December 31, 1995
-----------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File No. 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, Princeton, NJ 08540-6215
- ---------------------------------- ----------
(Address of principle executive offices) (Zip Code)
Registrant's telephone number including area code: 609-734-3737
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
---------------------------------------
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K (X).
As of February 28, 1996, 4,787,060 shares of Common Stock were outstanding. The
aggregate market value of the shares held by non-affiliates of the registrant
(based upon the average of the bid and asked prices of these shares by the
National Quotation Bureau, Inc. and the OTC Bullentin Board on February 28,
1996, of $6 3/4 per share) was approximately $12,303,968.
Documents Incorporated by Reference - None
-----------------------------------
The Index to Exhibits is on Page 23.
<PAGE>
PART I
------
Item 1. Business.
- ------- ---------
Mercom, Inc. ("Mercom" or the "Company") is a cable television operator
with three cable systems in southern Michigan and one cable system in Port St.
Lucie, Florida (the "Systems"). The Michigan systems are operated through
Mercom's wholly-owned subsidiary, Communications and Cablevision, Inc. ("CCV").
The Florida system is operated through a wholly-owned subsidiary, Mercom of
Florida, Inc. ("Mercom of Florida"). As of December 31, 1995, the Systems had
38,853 subscribers.
The three Michigan systems provide cable service to Monroe County, Allegan
County and the Coldwater and Sturgis areas. The Florida system serves St. Lucie
West, a planned community in Southeastern Florida, approximately 90 miles north
of Palm Beach.
The following table indicates the development of the Company by
summarizing, as of December 31 of each of the last five years, the number of
homes passed by cable, the number of homes purchasing basic cable service
("basic subscribers"), the number of basic subscribers as a percentage of homes
passed, the number of homes purchasing basic cable service and tier cable
service ("tier subscribers"), the number of tier subscribers as a percentage of
basic subscribers, the number of premium service units, premium service units as
a percentage of basic subscribers ("pay-to-basic ratio"), and the average
revenue per subscriber for December of each year.
<TABLE>
<CAPTION>
As of December 31
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Homes Passed (1)........... 58,726 59,988 61,730 63,721 65,449
Basic subscribers (2)...... 33,692 34,118 34,714 37,324 38,853
Basic subscribers as a
percentage of homes passed 57.3% 56.9% 56.2% 58.6% 59.4%
Tier subscribers (3)....... 33,122 32,814 32,945 34,789 36,120
Tier subscribers as a
percentage of basic subs.. 98.3% 96.2% 94.9% 93.2% 93.0%
Premium service units (4).. 15,324 12,762 12,816 14,312 17,834
Premium service units as a
percentage of basic subs.. 45.5% 37.4% 36.9% 38.3% 45.9%
Average revenue per sub for
month of December (5)..... $27.60 $30.05 $29.70 $29.36 $30.41
</TABLE>
(1) A home is deemed to be "passed" by cable if it can be connected to the
distribution system without any further extension of the distribution
plant.
(2) A home with one or more television sets connected to a cable television
system is counted as one basic subscriber.
(3) A home with one or more television sets receiving both basic and tier
service is counted as one tier subscriber. Tier service is not available in
the St. Lucie System.
(4) A basic subscriber may purchase more than one premium service, each of which
is counted as a separate premium service unit. Hence, the pay-to-basic
ratio can exceed 100%. A premium service unit includes only single channel
services offered for a monthly fee.
-1-
<PAGE>
Item 1. Business, Continued
- ------- ---------
(5) Calculated by dividing total cable related revenues for the month of
December by the number of basic subscribers at the end of the month.
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended, including the provisions
regarding rate regulation. The Company has either settled challenges or accrued
for anticipated exposures related to rate regulation; however, there is no
assurance that there will not be challenges to its rates.
The Company's performance is dependent to a large extent on its ability to
obtain and renew its franchise agreements from local government authorities on
acceptable terms. To date, all of the Company's franchises have been renewed or
extended, generally at or prior to their stated expirations and on acceptable
terms. During 1995, the Company completed negotiations with 7 communities
resulting in franchise renewals on terms which are acceptable to the Company.
The Company has 78 franchises, 20 of which are in the 3 year Federal
Communications Commission (the "FCC") franchise renewal window at December 31,
1995. No one franchise accounts for more than 11% of the Company's total
revenue.
Competition for the Company's services traditionally has come from a
variety of providers including broadcast television, video cassette recorders
and home satellite dishes. Direct broadcast satellite (DBS) which allows a
consumer to receive cable programming for a fee once they purchase or lease a
receiving dish, has proved to be a viable competitor. These services are
generally available throughout the country, including areas in which the Company
operates. There are currently five national DBS service providers in the United
States. In addition, the Company is aware of six communities within its service
areas where other cable television providers have commenced cable programming
operations. Although the Company has experienced some erosion of its subscriber
base in these communities, the impact on its operations to date has not been
material. The level of competition from other video providers may also increase
due to the passage of the Telecommunications Act of 1996. The Company is
currently evaluating the impact the new act will have on regulation, competition
and its operating results. It is impossible to quantify at this time the impact
of these technological and regulatory developments on the cable television
industry in general or on the Company in particular.
Employees
As of December 31, 1995, Mercom had 52 full-time employees, none of whom
were represented by collective bargaining units. Management believes that the
Company's relationship with its employees is satisfactory.
-2-
<PAGE>
Item 2. Properties.
- ------- -----------
The principal assets of the Company include headends, distribution systems
and subscriber connection equipment. Mercom owns six headends, each including a
tower, antennas, earth stations for the reception of satellite signals, and
electronic equipment necessary for the reception, amplification and modulation
of signals. In addition to these headends, the Company owns ten microwave
receive sites, each including a tower, microwave dish and electronic equipment
necessary for their reception of microwave signals. The distribution system
consists of approximately 1,396 miles of coaxial cable plus related electronic
equipment. Subscriber connection equipment consists of house or apartment drop
equipment and decoding converters. The physical components of the Systems
require regular maintenance and periodic upgrading in order to keep pace with
technological advances and to comply with regulatory standards.
Mercom owns two small parcels of real property used as head-end sites, and
it owns most of the buildings which contain head-end equipment for the Systems.
The remainder of Mercom's facilities are leased.
Item 3. 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 among CCV, Mercom,
Inc. and Kenneth E. Lahey. The settlement pertained to outstanding litigation
commenced in 1988 with Mr. Lahey who was formally President of CCV. 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. See Note 8 (Commitments and Contingencies) of Notes to Consolidated
Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
No matters were submitted to a vote of security holders of the Registrant
during the fourth quarter of the Registrant's 1995 fiscal year.
-3-
<PAGE>
Executive Officers Of The Registrant
------------------------------------
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an un-numbered Item in Part I of this Report in lieu of being
included in the definitive proxy statement relating to the Registrant's Annual
Meeting of Shareholders to be filed by Registrant with the Securities and
Exchange Commission (the "Commission") pursuant to section 14(A) of the
Securities Exchange Act of 1934 (the "1934 Act"). Information with respect to
Executive Officers who are also Directors is set forth in Part III Item 10 of
this Form 10-K.
<TABLE>
<CAPTION>
Age as of Office and Date Held Since:
Name March 1, 1996 Other Positions Held
- ---- ------------- ----------------------------
<S> <C> <C>
Mark Haverkate 41 Executive Vice President (since
July 1995); Executive Vice
President - C-TEC Corporation
("C-TEC") Cable Television Group
(since July 1995); Executive Vice
President of Development (since
February 1995); Vice President of
Development (December 1993 -February
1995); Executive Vice President of
Development - C-TEC (since February
1995); Director of Megacable S.A. de
C.V. (since January 1995); Vice
President of Development - C-TEC
(December 1993 - February 1995);
Vice President - C-TEC Cable
Television Group (October 1989 -
December 1993); Director of
Acquisitions and Development (July
1988 - October 1989); Corporate
Marketing Manager - Cable Television
Group (May 1981 - July 1988).
John D. Filipowicz 37 Corporate Secretary (since December
1994); Vice President and Assistant
General Counsel - C-TEC (since
February 1995); Assistant Corporate
Secretary - C-TEC (since December
1994); Corporate Counsel - C-TEC
(December 1990 - February 1995);
Associate Counsel - C-TEC (August
1988 - November 1990).
</TABLE>
-4-
<PAGE>
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related
- ------- ----------------------------------------------------
Stockholders
------------
There were approximately 1,934 holders of the Company's Common Stock on
February 28, 1996.
<TABLE>
<CAPTION>
1995 1994
Bid Prices Bid Prices
---------- ----------
High Low High Low
$ $ $ $
<S> <C> <C> <C> <C>
Quarter Ended:
March 31 4-1/2 3-3/4 4 3-3/4
June 30 4-1/4 3-1/2 4 3-1/4
September 30 5-3/32 2-1/4 3-1/2 3
December 31 7-1/4 3-1/4 3-3/4 3
</TABLE>
The Company's Common Stock is traded on the over-the-counter market. The
bid and ask prices are quoted by the National Quotation Bureau, Inc. and the OTC
Bulletin Board under the symbol "MEEO." The 1995 and 1994 bid prices listed
above represent the high and low bid prices reported by the National Quotation
Bureau, Inc. Prices listed above represent inter-dealer quotations without
adjustment for retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions. Trading in the Company's Common
Stock, has been limited and sporadic and thus does not constitute an established
public trading market. See Note 10 (Stock Exchange Listing) of Notes to
Consolidated Financial Statements.
The Company currently is restricted by its credit agreements from paying
dividends. The Company has not paid dividends in the last three years. The
Company does not anticipate paying cash dividends on its shares of Common Stock
in the foreseeable future. See Note 5 (Debt) of Notes to Consolidated Financial
Statements.
-5-
<PAGE>
Item 6. Selected Financial Data.
- ------- ------------------------
(Dollars in Thousands, except per share data)
The following information should be read in conjunction with the
Consolidated Financial Statements and Notes thereto:
<TABLE>
<CAPTION>
For the Years Ended
December 31, 1995 1994 1993 1992 1991
--------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Sales $13,939 $12,927 $12,606 $11,986 $11,041
Net income (loss) $ 549 $ (658) $ (236) $(1,144) $(7,784)
Net income (loss) per
average common share $ 0.16 $ (0.27) $ (0.10) $ (0.48) $ (3.25)
Total assets $20,390 $19,823 $22,244 $23,873 $26,657
Debt $18,930 $25,926 $28,184 $29,847 $30,200
</TABLE>
In August 1995, a Common Stock rights offering was concluded. The Company's
shareholders purchased 2,393,530 of its shares of Common Stock for $3.60 per
share. The rights offering provided the Company with approximately $8,200 after
payment of fees and expenses. The Company used the proceeds to repay $5,070 of
outstanding indebtedness to its bank, $2,287 of outstanding indebtedness to C-
TEC Corporation ("C-TEC"), its controlling shareholder, under two demand notes
with the remaining balance to be used for general corporate purposes (See
"Liquidity and Capital Resources").
-6-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
- ------- -----------------------------------------------------------
and Results of Operations
-------------------------
(Dollars in Thousands, except per share data)
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
report is forward looking, such as information relating to future capital
expenditures and the effects of future regulation and competition. Such forward
looking information involves important risks and uncertainties that could
significantly affect expected results in the future from those expressed in any
forward-looking statements made by, or on behalf of, the Company. These risks
and uncertainties include, but are not limited to, uncertainties relating to
economic conditions, government and regulatory policies, the pricing and
availability of equipment, materials, inventories and programming, technological
developments and changes in the competitive environment in which the Company
operates.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto:
<TABLE>
<CAPTION>
Liquidity and Capital Resources
- -------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Investing Activities:
Additions to property,
plant and equipment $1,701 $1,238 $ 863
Other (12) (12) (3)
------ ------ -----
Net cash used in investing $1,689 $1,226 $ 860
====== ====== =====
Net cash provided by
operating activities $2,366 $2,591 $3,136
====== ====== ======
</TABLE>
Net cash provided by operating activities represented 140.1%, 211.3% and
364.7% of investing activities for capital expenditures for 1995, 1994 and 1993,
respectively. The Company's construction budget is estimated to be $2,451 in
1996 as compared to actual expenditures of $1,701, $1,238 and $863 in 1995, 1994
and 1993, respectively. The 1996 construction budget includes capital
expenditures originally budgeted in previous years but not expended due to
uncertainties regarding the adequacy of cash flows.
The Company significantly improved its liquidity position in 1995 as a
result of several key events. In April 1995, the Company filed a registration
statement with the Securities and Exchange Commission to register up to
2,393,530 shares of its Common Stock offered for sale to shareholders in a
rights offering (the "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.
-7-
<PAGE>
Liquidity and Capital Resources, (Continued)
- -------------------------------
(Dollars in Thousands, except per share data)
C-TEC, which owned approximately 43.63 percent of the outstanding Common
Stock, prior to the Rights Offering, exercised all of the rights it received in
respect of the shares it held and oversubscribed 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, purchased 1,920,056
shares of Common Stock for approximately $6,912, and now owns approximately
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 $8,200 after payment of fees and expenses, to (i) repay
$5,070 of outstanding indebtedness to its bank under a credit agreement, and
(ii) to repay $2,287 of outstanding indebtedness to C-TEC under two demand
notes. The remaining proceeds will be used for general corporate purposes,
including capital expenditures.
Coincident with the successful completion of the Rights Offering, on August
16, 1995, the Company and its bank, entered into an agreement pursuant to which
they agreed, subject to certain conditions, to amend and restate the original
Credit Agreement dated November 26, 1989, as previously amended (the "Credit
Agreement"), between the Company and its bank, and in addition, entered into a
364-day revolving credit facility. The amended and restated Credit Agreement
extended the maturity from December 1998 to December 2002.
Beyond the restructuring of its debt and equity, a significant uncertainty
was eliminated in 1995 as well. In 1988, Kenneth E. Lahey, a former officer of
the Company, sued the Company and CCV alleging that he was entitled to the fair
market value of 10% of CCV. After several years of litigation, the matter was
substantiated by the Circuit Court for the City of Ottawa. A panel of three
appraisers (the "Panel"), on December 16, 1994, rendered a decision in favor of
Mr. Lahey in the amount of $2,949. The Company requested the Circuit Court for
the City of Ottawa to remand this proceeding back to the Panel for further
consideration of certain factors which were not included in their decision on
December 16, 1994. A hearing was held on January 16, 1995, before the Circuit
Court for the City of Ottawa. The Court issued an Opinion on February 14, 1995,
denying the Company's motions and sustaining the decision of the Panel in the
amount of $2,949 and awarded pre-judgment interest in addition to said amount.
The Company filed a Motion for Reconsideration with the Court. On April 19,
1995, the Company entered into a Settlement Agreement and Mutual Release as
discussed more fully in Note 8 (Commitments and Contingencies). Under this
agreement the Company will pay Mr. Lahey $4,300 over a four year time frame. The
Company paid Mr. Lahey $100 and $1,400 in April and June of 1995, respectively.
The remaining $2,800 will be paid in equal installments over a four year period
on or before July 1 of each of the subsequent years. The Company fully accrued
for this liability in prior years.
The events listed above have significantly improved the Company's liquidity
and resulted in the elimination of the independent accountants' expression for
the first time since December 31, 1991, of a concern regarding the Company's
ability to continue to operate as a going concern. The Company must now 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.
-8-
<PAGE>
Liquidity and Capital Resources, Continued
- -------------------------------
(Dollars in Thousands, except per share data)
Although operating expenses continued to rise, the Company was unable to raise
its rates previously due to rate freezes and other factors (See "Regulatory
Matters - Impact to Company"). 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. In December 1995, the Company commenced basic rate increase
notifications to all of its Michigan subscribers for a rate increase to be
implemented in the first quarter of 1996. The rate increase will be implemented
according to the rules and regulations established by the FCC and is expected to
provide an additional $1,300 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 its amended and restated Credit Agreement, to
repay amounts 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 foreseeable future.
While the Company is in compliance with all covenants of its credit
agreements at December 31, 1995, and through the date of this filing, the credit
agreements contain restrictions on the payment of dividends. The Company has not
paid dividends in recent years due to the Company's financial condition and does
not expect to pay dividends in the foreseeable future.
In November 1995, C-TEC Corporation ("C-TEC"), which owns approximately
61.92 percent of the Company's outstanding Common Stock, announced that it had
engaged Merrill Lynch & Company to assist with evaluating strategic options with
a view toward enhancing shareholder value. In March 1996, C-TEC announced that
it intends to distribute to its shareholders, in a tax-free spin-off, its local
telephone operations, communications engineering operations, and certain other
assets. Following the spin-off, C-TEC intends to combine its domestic cable
television operations, including the Company, with a third party pursuant to a
tax-free stock for stock transaction. No assurances can be given that these
transactions will be consummated.
Results of Operations
---------------------
1995 Compared with 1994
The Company's earnings in 1995 increased $1,207 or $0.43 per average common
share. The Company recorded net income in 1995 of $549 or $0.16 per average
common share compared to a net loss of $658 or $0.27 per average common share in
1994. The increase from 1994 is attributed to an increase in sales and a decline
in certain expense categories as discussed in detail below.
The Company had operating income before depreciation and amortization of
$5,191 in 1995 compared to $5,052 in 1994. This represents an increase of $139
(2.8%) from 1994 to 1995. Management believes that operating income before
depreciation and amortization is a useful measure in assessing the degree to
which resources are available to meet scheduled payments of debt, including
interest; to replace and modernize plant; to offer new services to customers;
and to improve the quality of service.
-9-
<PAGE>
Results of Operations, Continued
- ---------------------
(Dollars in Thousands, except per share data)
Sales increased by $1,012 (7.8%) in 1995 from the previous year. This
increase is primarily due to increased basic service revenue as a result of the
rate increase implemented in April 1995 and approximately 2,300 average
additional basic subscribers per month in 1995 compared to 1994. In addition,
growth in premium units contributed to the increase in sales from 1994.
Programming, franchise and other variable costs increased by $461 (14.9%)
from 1994. This increase is directly related to costs associated with subscriber
growth, increased programming rates on existing channels and new basic channels
added during the year. Operating, marketing, fixed and other general and
administrative costs increased by $412 (8.6%) in 1995. The increase is primarily
due to salaries and benefits, costs associated with maintaining a larger
subscriber base and a concentration on customer service initiatives.
Other expenses, including interest, decreased by $1,082 (40.0%). The
decrease is due primarily to a restructuring reversal in 1995 from prior years
and nonrecurring litigation costs related to the Lahey lawsuit recorded in
1994.
Interest expense decreased by $167 (8.1%) in 1995. The reduction in
principal resulting from the completion of the Rights Offering is the primary
reason for the decrease in interest expense from the prior period. 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.
The Company does not expect inflation to have a significant impact on its
future operations.
1994 Compared with 1993
The Company's net loss in 1994 increased $422 or $0.17 per average common
share. The Company recorded a net loss in 1994 of $658 or $0.27 per average
common share compared to a net loss of $236 or $0.10 per average common share in
1993. The increase in the 1994 net loss is primarily attributable to a
litigation accrual of $667 for a liability related to the Lahey lawsuit.
The Company had operating income before depreciation and amortization of
$5,052 in 1994 compared to $5,116 in 1993. This represents a reduction of $64
(1.3%) from 1993 to 1994.
Sales increased $321 (2.5%) in 1994 from the previous year. This is
primarily due to approximately 1,535 additional basic subscribers per month in
1994 compared to the same period in 1993, and increased premium revenue due to
subscriber growth resulting from package restructuring in March of 1994. The
positive sales variance was partially offset by a decrease in basic revenue of
$0.55 (2.1%) per subscriber per month resulting from certain agreements with
municipalities pursuant to the rate regulation provisions of The Cable
Television Consumer Protection and Competition Act of 1992.
Programming, franchise and other variable costs increased by $193 (6.6%)
from 1993. This increase is directly related to revenue growth, greater
subscriber levels, additional basic channels and programming rate increases.
Operating, marketing, fixed and other general and administrative costs increased
$192 (4.2%) in 1994. The increase is primarily due to salaries and benefits,
installation costs from the increase in subscribers and legal expenses
associated with FCC related matters.
-10-
<PAGE>
Results of Operations, (Continued)
- ---------------------
(Dollars in Thousands, except per share data)
Depreciation and amortization decreased $209 (6.5%) in 1994. The decrease
was primarily due to the timing of certain plant assets becoming fully
depreciated during 1993 and 1994.
Other expenses, including interest increased $588 (27.8%) in 1994 primarily
due to the litigation accrual discussed above.
Interest expense decreased by $65 (3.0%) in 1994. The reduction in
principal is the primary reason for the decrease in interest expense from the
prior period. The positive effect on interest expense resulting from the
expiration of an interest rate swap agreement was substantially offset by the
increase in the prime rate during the year.
Financial Condition
-------------------
The increase in cash and temporary cash investments at December 31, 1995 as
compared to December 31, 1994, is attributed to the Rights Offering and cash
from operations in excess of capital expenditures. Cash and temporary cash
investments were $2,033 at December 31, 1995, as compared to $96 at December 31,
1994, an increase of $1,937. Excess cash generated by operations over capital
expenditures accounted for $677 of the increase. The increase in accounts
payable of $582 resulting primarily from capital additions in the fourth quarter
contributed to this excess. The remaining increase in cash of $1,260 was
primarily generated by the Rights Offering which concluded in August 1995.
Regulatory Matters
------------------
The Company, like other operators of cable television systems, is subject
to regulation at the federal, state and local levels. No assurances can be given
at this time that the following 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.
Cable Television Consumer Protection and Competition Act
On October 5, 1992, Congress passed The Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 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 will increase the administrative costs of complying with such regulations.
The most significant provision of the 1992 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 1992 Act. Few
municipalities served by the Company are subject to effective competition.
-11-
<PAGE>
Regulatory Matters, Continued
- ------------------
(Dollars in Thousands, except per share data)
Impact to Company
The rate regulation provisions of the 1992 Act have not had a material
adverse effect on the Company's financial condition and results of operations
through December 31, 1995. The Company anticipates that certain provisions of
the 1992 Act that do not relate to rate regulation, such as the provisions
relating to retransmission consent and customer service standards, will reduce
the future operating margins of the Company.
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 1992
Act. The Company continues to believe it is in full compliance with the 1992
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 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.
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
has filed a complaint with the FCC relative to the April rate increase on the
basic cable service tier. In addition, one subscriber has filed a complaint with
the FCC relative to the April rate increase on the cable programming service
tier.
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. 400,000 or
fewer subscribers) may file a very streamlined cost-of-service analysis to
justify their rates. The Company believes that it is a small operator and that
all of its systems are small systems under these rules.
In December 1995, the Company commenced rate increase notifications to all
of its Michigan subscribers. To date, ten complaints have been filed with the
FCC relative to a February 1996 rate increase.
-12-
<PAGE>
Regulatory Matters, Continued
- ------------------
(Dollars in Thousands, except per share data)
Telecommunications Act of 1996
In early February, Congress passed and the President signed the
Telecommunications Act of 1996 (the "1996 Act"). The new law is intended to
stimulate growth and competition in virtually every component of the
communications industry. The 1996 Act established a framework for deregulation
and calls for state regulators and the FCC to work out the specific
implementation process. In addition, the Company's traditional lines of business
will be provided relief from the earnings restrictions and price controls
imposed by the 1992 Act. With the passage of the 1996 Act, all Cable Systems'
rates are deregulated as effective competition enters the franchise area, or by
March 31, 1999, whichever occurs first.
New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 - Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 allows companies to retain the current
approach set forth in APB Opinion No. 25 - Accounting for Stock Issued to
Employees for recognizing stock-based expense in the basic financial statements;
however, companies are encouraged to adopt a new accounting method based on the
estimated fair value of employee stock options. Companies that do not follow the
new fair value method will be required to provide expanded footnote disclosure.
The Company does not currently provide stock-based compensation; therefore,
this statement is not expected to have any impact on future results of
operations or financial condition.
Item 8. Financial Statements and Supplementary Data.
- ------- --------------------------------------------
The consolidated financial statements and supplementary data required
under Item 8 of Part II are set forth in Part IV Item 14 (a)(1) and (a)(2) of
this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------- -----------------------------------------------------------
and Financial Disclosure
------------------------
During the two years preceding December 31, 1995, there has been neither
a change of accountants of the Registrant nor any disagreements on any matter of
accounting principles, practices or financial statement disclosure.
-13-
<PAGE>
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
Information as of February 29, 1996, including beneficial ownership of
Mercom Common Stock for the current Directors is set forth below:
<TABLE>
<CAPTION>
Director
--------
Name of Director Age Since
---------------- --- -----
<S> <C> <C>
Bruce C. Godfrey 40 Executive Vice President and Chief 1994
Financial Officer of the Company
since May 1994; Executive Vice President
and Chief Financial Officer, C-TEC
Corporation ("C-TEC") since April 1994;
Director of Megacable S.A. de C.V., a
Mexican cable television operator, since
January 1995; Former Senior Vice President,
Daniels & Associates, an investment banking
firm specializing in the cable television,
mobile communications and entertainment
businesses. Mr. Godfrey does not own any
Common Stock of the Company.
Clifford L. Jones 68 Served as President, Capital Region Economic 1991
Development Corporation until February 1994;
Past President, Pennsylvania Chamber of Business
& Industry; Director, Pennsylvania Power & Light
Company. Mr. Jones has sole voting and
investment power with respect to 300 shares of
Common Stock of the Company.
Michael J. Mahoney 45 President and Chief Operating Officer of the 1994
Company since March 1994; Executive Vice
President of the Company from 1991-1994;
President and Chief Operating Officer, C-TEC
since February 1994; Executive Vice President,
C-TEC Cable Systems, Inc. ("CCS") from 1991-1994;
Director of Megacable S.A. de C.V., a Mexican cable
television operator, since January 1995; Former
Executive Vice President and Chief Operating Officer,
Harron Communications Corp. Mr. Mahoney does not own
any Common Stock of the Company.
</TABLE>
-14-
<PAGE>
Item 10. Directors and Executive Officers of the Registrant, Continued
- -------- --------------------------------------------------
<TABLE>
<CAPTION>
Director
--------
Name of Director Age Since
---------------- --- -----
<S> <C> <C>
David C. McCourt 39 Chairman and Chief Executive Officer of the 1993
Company since October 1993; Chairman, Chief
Executive Officer and Director, C-TEC; Director
of Megacable S.A. de C.V., a Mexican cable
television operator, since January 1995;
President, Chief Executive Officer and Director,
RCN Corporation; President and Director,
Metropolitan Fiber Systems/McCourt, Inc.;
Director, MFS Communications Company, Inc. and
MFS Telecom, Inc. Mr. McCourt shares voting and
investment power with respect to 50,000 shares of
Common Stock of the Company.
Raymond B. Ostroski 41 Executive Vice President and General Counsel 1994
of the Company since February 1995; Executive
Vice President, General Counsel and Corporate
Secretary, C-TEC since February 1995. Mr.
Ostroski has sole voting and investment power
with respect to 4,000 shares of Common Stock
of the Company.
Harold J. Rose, Jr. 60 Partner, RK Associates, real estate management 1991
consultants; Former Chairman of the Board and
Chief Executive Officer of Merchants Bancorp,
Inc. and Chairman of the Board of Merchants
Bank, N.A. and Merchants Bank (North). Mr.
Rose does not own any Common Stock of the
Company.
George C. Stephenson 50 Managing Director, PaineWebber, Inc. Mr. 1991
Stephenson has sole voting and investment
power over 5,000 shares of Common Stock of
the Company.
</TABLE>
The information required under Item 10 of Part III with respect to the
Executive Officers of the Registrant is set forth in Part I of this report.
Item 11. Executive Compensation
- -------- ----------------------
Except with respect to the Company's management agreement dated January 1,
1992 ("the Management Agreement") with C-TEC Cable System, Inc., a wholly-owned
subsidiary of C-TEC, no Executive Officer of the Company received any
compensation for services rendered on behalf of the Company during the fiscal
year ended December 31, 1995 (See Item 13).
-15-
<PAGE>
Item 11. Executive Compensation, Continued
- -------- -----------------------
Directors' Compensation
Each Director of the Company is paid an annual retainer of $6,000, plus
$500 for each Board meeting attended during 1995. Committee Chairmen are paid
$1,000 for each committee meeting attended while other committee members are
paid $500 for each meeting attended. Members of the Executive Committee are not
compensated for participating in the meetings of said committee. Directors who
are also employees of C-TEC have authorized the payment of such fees to their
employer, C-TEC Services, consistent with the terms of their employment with C-
TEC. The following fees were paid in 1995: Clifford L. Jones $10,500; Harold J.
Rose, Jr. $12,500; George C. Stephenson $10,500 and C-TEC Services, $37,500.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
Security Ownership of Management
As of March 1, 1996, C-TEC Properties, Inc., a wholly-owned subsidiary of
C-TEC ("C-TEC Properties"), owned 2,964,250 shares of Common Stock of the
Company representing approximately 61.92% of the outstanding Common Stock.
David C. McCourt, Michael J. Mahoney, Bruce C. Godfrey, Raymond B. Ostroski and
Mark Haverkate are the principal Executive Officers of C-TEC Properties. In
addition to the outstanding Common Stock owned by C-TEC Properties, the
Directors and Executive Officers as a group beneficially owned approximately
60,000 shares of Common Stock of the Company, representing less than two
percent of the outstanding Common Stock.
Security Ownership of Certain Beneficial Owners
So far as is known to the Company, as of March 1, 1996, no persons, except
those listed below, owned beneficially more than five percent (5%) of the
outstanding Common Stock. With respect to the named persons, the following
information is based on Schedules 13D or 13G filed with the Securities and
Exchange Commission ("SEC"), copies of which were supplied to the Company by
said persons. The table below discloses the name and address of such beneficial
owners, the total number of shares beneficially owned by each and their
percentage of ownership in relation to the total shares outstanding and entitled
to vote as of March 1, 1996.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership (1) of Class
- ------------------- ------------------------ --------
<S> <C> <C>
C-TEC Corporation (2) 2,964,250 61.92%
105 Carnegie Center
Princeton, New Jersey 08540
</TABLE>
(1) The number of shares stated in this column includes shares owned directly
or indirectly, through any contract, arrangement, understanding, relationship,
or which the indicated beneficial owner otherwise has the power to vote, or
direct the voting of, and/or has investment power.
(2) As set forth in Amendment No. 19 to C-TEC's Schedule 13D dated August 21,
1995, such shares are owned by C-TEC Properties, Inc.
-16-
<PAGE>
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Transactions with Management and Certain Concerns
The Company entered into a Management Agreement with CCS pursuant to which
CCS operates and manages the Company's cable properties. The Management
Agreement provides that the Company will pay CCS: (a) an annual fee equal to the
greater of: (i) $500,000 or (ii) a percentage of the Company's annual revenues
(ranging from 5% of $10 million of revenues, as defined, to 4% of revenues in
excess of $20 million); and (b) an annual incentive bonus equal to twenty-five
percent (25%) of the Company's earnings before interest, depreciation,
amortization and taxes ("EBITDA") as adjusted, during the applicable fiscal year
less the base year EBITDA of $3.85 million. During 1995, CCS earned, pursuant to
the Management Agreement, management and incentive fees of approximately $1.2
million. In addition, pursuant to the Management Agreement, the Company paid
C-TEC Services, Inc., a wholly-owned subsidiary of C-TEC ("C-TEC Services"),
$95,593 for certain services (including without limitation, legal, accounting,
tax and public relations services) performed for the Company by C-TEC Services
and/or non-affiliated third-parties. The cost of such services (to the extent
rendered by C-TEC and its affiliates) was determined in accordance with the
Management Agreement by calculating all of C-TEC Services' direct and indirect
labor, overhead and employee benefit costs associated with the provision of such
services.
The Company is a party to a Credit Agreement with Morgan Guaranty Trust
Company of New York ("Morgan Guaranty") dated as of November 26, 1989, as
amended (as amended, the "Credit Agreement"). The Credit Agreement was further
amended on August 16, 1995, and consists of a 7.5-year amortizing term loan with
a final maturity of December 31, 2002. In addition, the Company entered into a
364-day credit facility of $2,000,000 maturing on August 14, 1996. Prior to
this, on March 31, 1995, C-TEC Corporation, which owns 61.92% of the Company's
outstanding Common Stock, loaned $887,000 to the Company to enable it to make
its principal payment of $887,000 scheduled for March 31, 1995, under the Credit
Agreement. C-TEC also loaned the Company $1,400,000 to pay obligations related
to the Lahey lawsuit. The Company paid interest in 1995 of approximately $39,000
to C-TEC in connection with these two demand notes. The demand notes were repaid
in August, 1995 as part of the refinancing.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------- ---------------------------------------------------------------
<TABLE>
<CAPTION>
Description Page
----------- ----
<S> <C>
(a)(1) Financial Statements:
---------------------
Consolidated Statements of Operations for the
Years Ended December 31, 1995, 1994 and 1993 F-1
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1995, 1994 and 1993 F-2
Consolidated Balance Sheets -
December 31, 1995 and 1994 F-3
Consolidated Statements of
Shareholders' Capital Deficiency for the Years
Ended December 31, 1995, 1994 and 1993 F-4
Notes to Consolidated Financial Statements F-5
Report of Independent Accountants F-14
</TABLE>
-17-
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K,
- -------- ---------------------------------------------------------------
Continued
(a)(2) Financial Statement Schedules:
------------------------------
Valuation and Qualifying Accounts and Reserves
for the Years Ended December 31, 1995, 1994
and 1993 (Schedule II) F-15
All other financial statement schedules not listed have been omitted since the
required information is included in the consolidated financial statements or the
notes thereto, or are not applicable or required.
(a)(3) Exhibits
--------
Exhibits marked with an asterisk are filed herewith and are listed in
the index to exhibits on page 23 of this Form 10-K. The remainder of
the exhibits have been filed with the Commission and are incorporated
herein by reference.
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C> <C>
2.1 Agreement and Plan of Merger dated as of December 30, 1988, between
UtiliCorp United, Inc. and Michigan Energy Resources Company, and
Amendment No. 1 dated as of March 8, 1989. (Incorporated by reference
to the Form 10 of the Registrant dated May 11, 1989, File No.
0-17750.)
2.2 Agreement and Plan of Merger dated June 1, 1992, between Mercom,
Inc., a Michigan corporation, and Mercom, Inc., a Delaware
corporation. (Incorporated by reference to the Form 8-K of the
Registrant dated June 29, 1992, File No. 0-17750.)
3.1 Certificate of Incorporation (Incorporated by reference to Exhibit
3.1 of the Form 10-Q of the Registrant dated June 30, 1992, File No.
0-17750.)
3.2 By-laws of Registrant, as amended through June 1, 1992. (Incorporated
by reference to Exhibit 3.2 of the Form 10-K of the Registrant dated
December 31, 1994, File No. 0-17750.)
10.1 Credit Agreement dated as of November 26, 1989, by and between
Registrant and Morgan Guaranty Trust Company of New York.
(Incorporated by reference to Exhibit 10.1 of the Form 10-K of the
Registrant dated March 30, 1990, File No. 0-17750.)
10.2 Amendment dated as of April 5, 1990, to Credit Agreement dated as of
November 26, 1989, by and between Registrant and Morgan Guaranty
Trust Company of New York. (Incorporated by reference to Exhibit 10.2
of the Form 10-K of the Registrant dated March 30, 1991, File No. 0-
17750.)
10.3 Amendment dated as of April 5, 1990, to Credit Agreement dated as of
November 26, 1989, by and between Registrant and Morgan Guaranty
Trust Company of New York. (Incorporated by reference to Exhibit 10.3
of the Form 10-K of the Registrant dated March 30, 1991, File No. 0-
17750.)
</TABLE>
-18-
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K,
- -------- ---------------------------------------------------------------
Continued
<TABLE>
<S> <C>
10.4 Amendment dated as of December 22, 1992, to Credit Agreement dated as
of November 26, 1989, by and between Registrant and Morgan Guaranty
Trust Company of New York. (Incorporated by reference to Exhibit 10.4
of the Form 10-K of the Registrant for the year ended December 31,
1992, File No. 0-17750.)
10.5 Employment Agreement and Shareholder Agreement both dated December
17, 1984, with Kenneth E. Lahey. (Incorporated by reference to
Exhibit 10.2 of Form 10 of the Registrant dated May 11, 1989, File
No. 0-17750.)
10.6 Assignment and Agreement dated January 1, 1988, by and between
Registrant and Mercom of Florida, Inc. (Incorporated by reference to
Exhibit 10.5 of the Form 10 of the Registrant dated May 11, 1989,
File No. 0-17750.)
10.7 Form of Indemnification Agreement between Registrant and UtiliCorp
United, Inc. (Incorporated by reference to Exhibit 10.6 of the Form
10 of the Registrant dated May 11, 1989, File No. 0-17750.)
10.8 Asset Purchase Agreement dated August 14, 1989, between Registrant
and C4 Media Cable Investors Limited Partnership and Communications
and Cablevision, Inc. (Incorporated by reference to the Form 10-Q of
the Registrant for the quarter ended September 30, 1989, File No.
0-17750.)
10.9 Management Agreement dated January 1, 1992, by and between Registrant
and C-TEC Cable Systems, Inc. (Incorporated by reference to Exhibit
10.9 of the Form 10-K of the Registrant for the year ended December
31, 1992, File No. 0-17750.)
10.10 Amendment dated as of December 15, 1993, to Credit Agreement dated as
of November 26, 1989, by and between Registrant and Morgan Guaranty
Trust Company of New York. (Incorporated by reference to Exhibit
10.10 of the Form 10-K of the Registrant for the year ended December
31, 1993, File No. 0-17750.)
10.11 Amendment dated as of December 23, 1994, to Credit Agreement dated as
of November 26, 1989, by and between Registrant and Morgan Guaranty
Trust Company of New York. (Incorporated by reference to Exhibit
10.11 of the Form 10-K of the Registrant for the year ended December
31, 1994, File No. 0-17750.)
10.12 Settlement Agreement and Mutual Release dated April 19, 1995, by and
between Communications and Cablevision, Inc. and Mercom, Inc. and
Kenneth E. Lahey. (Incorporated by reference to Exhibit 10.12 of the
Form 8-K of the Registrant dated May 4, 1995, File No. 0-17750.)
*10.13 Amendment dated as of March 31, 1995, to Credit Agreement dated as of
November 26, 1989, by and between Registrant and Morgan Guaranty
Trust Company of New York.
</TABLE>
-19-
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K,
- -------- ---------------------------------------------------------------
Continued
<TABLE>
<S> <C>
10.14 Amended and Restated Credit Agreement dated August 16, 1995, to
Credit Agreement dated as of November 26, 1989, by and between
Registrant and Morgan Guaranty Trust Company of New York.
(Incorporated by reference to Exhibit 10.10 of the Form 8-K of the
Registrant dated August 22, 1995, File No. 0-17750.)
*22. Subsidiaries of Registrant.
*24. Directors' Powers of Attorney.
*27. Financial Data Schedule.
</TABLE>
Item 14.(b)Reports on Form 8-K:
--------------------
(b) Reports on Form 8-K filed in the fourth quarter of 1995.
No report on Form 8-K has been filed by the Registrant during the
last quarter of the period covered by this report on Form 10-K.
-20-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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: April 1, 1996 By /s/ David C. McCourt
--------------------------------
David C. McCourt, Chairman
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ David C. McCourt Chairman April 1, 1996
---------------------- Chief Executive Officer
David C. McCourt
/s/ Michael J. Mahoney President April 1, 1996
---------------------- Chief Operating Officer
Michael J. Mahoney
/s/ Bruce C. Godfrey Executive Vice President April 1, 1996
---------------------- and Chief Financial
Bruce C. Godfrey Officer (Principal
Financial Officer)
-21-
<PAGE>
DIRECTORS:
/s/ David C. McCourt
- -------------------------- April 1, 1996
David C. McCourt
/s/ Michael J. Mahoney
- -------------------------- April 1, 1996
Michael J. Mahoney
/s/ Bruce C. Godfrey
- -------------------------- April 1, 1996
Bruce C. Godfrey
/s/ Clifford L. Jones
- -------------------------- April 1, 1996
Clifford L. Jones
/s/ Harold J. Rose, Jr.
- -------------------------- April 1, 1996
Harold J. Rose, Jr.
/s/ George C. Stephenson
- -------------------------- April 1, 1996
George C. Stephenson
/s/ Raymond B. Ostroski
- -------------------------- April 1, 1996
Raymond B. Ostroski
-22-
<PAGE>
Form 10-K
Index to Exhibits
-----------------
Certain exhibits to this report on Form 10-K have been incorporated by
reference. For a list of these and all exhibits, see Item 14 (a)(3) hereof.
The following exhibits are being filed herewith.
Exhibit No.
- -----------
10.13 Amendment dated as of March 31, 1995, to Credit Agreement dated as of
November 26, 1989, by and between Registrant and Morgan Guaranty Trust
Company of New York.
22. Subsidiaries of Registrant.
24. Directors' Powers of Attorney.
27. Financial Data Schedule.
-23-
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
SALES $13,939 $12,927 $12,606
-------- -------- --------
OPERATING EXPENSES:
Programming, franchise and other variable costs 3,565 3,104 2,911
Operating, marketing and other fixed system costs 3,455 3,226 3,120
Other general and administrative expenses 1,728 1,545 1,459
Depreciation and amortization 3,022 3,010 3,219
-------- -------- --------
Total operating expenses 11,770 10,885 10,709
-------- -------- --------
Operating income 2,169 2,042 1,897
-------- -------- --------
OTHER (INCOME) EXPENSES:
Litigation costs (188) 643 -
Interest income (83) (30) (26)
Interest expense 1,900 2,067 2,132
(Income) loss from asset disposal (7) 24 10
-------- -------- --------
Total other expenses, net 1,622 2,704 2,116
-------- -------- --------
Income (loss) before income taxes 547 (662) (219)
-------- -------- --------
INCOME TAX EXPENSE (BENEFITS) (2) (4) 17
-------- -------- --------
Net income (loss) $ 549 $ (658) $ (236)
======== ======== ========
EARNINGS (LOSS) PER AVERAGE COMMON SHARE:
Net income (loss) $ 0.16 $ (0.27) $ (0.10)
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(in thousands) 3,338 2,393 2,393
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-1
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 549 $ (658) $ (236)
Depreciation 2,713 2,697 2,885
Amortization 309 313 334
(Income) loss from asset disposal (7) 24 10
Net change in certain assets and liabilities:
Accounts receivable, trade and other,
net 74 (297) (117)
Accounts payable, trade and other 582 (93) 343
Other assets and liabilities (1,854) 605 (83)
-------- -------- --------
Net cash provided by operating
activities 2,366 2,591 3,136
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expansion, improvements and other (1,701) (1,238) (863)
Proceeds from asset disposal 12 12 3
-------- -------- --------
Net cash used in investing activities (1,689) (1,226) (860)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank loans (6,996) (2,258) (1,663)
Net proceeds from the issuance of common
stock 8,256 - -
-------- -------- --------
Net cash provided by (used in)
financing activities 1,260 (2,258) (1,663)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH &
TEMPORARY CASH INVESTMENTS 1,937 (893) 613
CASH & TEMPORARY CASH INVESTMENTS, JANUARY 1 96 989 376
-------- -------- --------
CASH & TEMPORARY CASH INVESTMENTS, DECEMBER 31 $ 2,033 $ 96 $ 989
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 2,044 $ 2,097 $ 2,156
Taxes - $ 14 $ 13
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
(Dollars in Thousands)
- ----------------------
<TABLE>
<CAPTION>
ASSETS 1995 1994
------- --------
<S> <C> <C>
CASH & TEMPORARY CASH INVESTMENTS $ 2,033 $ 96
ACCOUNTS RECEIVABLE:
Trade, net of reserve for doubtful
accounts of $25 in 1995 and $23 in 1994 328 264
Other 49 187
PREPAID EXPENSES AND OTHER 180 150
PROPERTY, PLANT AND EQUIPMENT:
Cable television distribution plant 38,155 36,555
Buildings and land 531 525
Furniture, fixtures and vehicles 1,526 1,503
------- --------
Total property, plant and equipment 40,212 38,583
Accumulated depreciation 24,778 22,132
------- --------
Net property, plant and equipment 15,434 16,451
------- --------
INTANGIBLE ASSETS, NET 2,366 2,675
------- --------
TOTAL ASSETS $20,390 $ 19,823
======= ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS'
CAPITAL DEFICIENCY
<S> <C> <C>
LIABILITIES:
Accounts payable, trade $ 800 $ 298
Accounts payable, affiliates and related parties 614 534
Other liabilities 1,554 1,861
Accrued litigation costs 2,883 4,400
Debt 18,930 25,926
------- --------
Total liabilities 24,781 33,019
------- --------
<CAPTION>
COMMITMENTS AND CONTINGENCIES
<S> <C> <C>
SHAREHOLDERS' CAPITAL DEFICIENCY:
Preferred stock, $100 par value, 150,000 shares authorized,
none issued and outstanding at December 31, 1995 and 1994
Common stock, $1 par value, 5,000,000 shares authorized,
4,787,060, issued and outstanding at December 31, 1995 and
2,393,530, issued and outstanding at December 31, 1994 4,787 2,393
Additional paid-in capital 11,374 5,512
Accumulated deficit (20,552) (21,101)
------- --------
Total shareholders' capital deficiency (4,391) (13,196)
------- --------
TOTAL LIABILITIES & SHAREHOLDERS' CAPITAL DEFICIENCY $20,390 $ 19,823
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' CAPITAL DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock Total
----------------------- Additional Shareholders'
Issued & Paid-in Accumulated Capital
Outstanding Par Value Capital Deficit Deficiency
------------ --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 2,393 $2,393 $ 5,512 $ (20,207) $ (12,302)
Net loss - - - (236) (236)
------------ --------- --------- ----------- -------------
BALANCE AT DECEMBER 31, 1993 2,393 2,393 5,512 (20,443) (12,538)
------------ --------- --------- ----------- -------------
Net loss - - - (658) (658)
------------ --------- --------- ----------- -------------
BALANCE AT DECEMBER 31, 1994 2,393 2,393 5,512 (21,101) (13,196)
------------ --------- --------- ----------- -------------
Net income - - - 549 549
Stock rights offering 2,394 2,394 5,862 - 8,256
------------ --------- --------- ----------- -------------
BALANCE AT DECEMBER 31, 1995 4,787 $4,787 $11,374 $ (20,552) $ (4,391)
------------ --------- --------- ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------
(Dollars in Thousands)
1. ORGANIZATION
Mercom, Inc. (the "Company"), is a cable television operator which provides
basic, premium and pay-per-view cable programming services to subscribers
in three cable systems in southern Michigan and one cable system in Port
St. Lucie, Florida. The Michigan systems are operated through Mercom's
wholly-owned subsidiary, Communications and Cablevision, Inc. ("CCV"). The
Florida system is operated through a wholly-owned subsidiary, Mercom of
Florida, Inc. ("Mercom of Florida").
CCV, through its wholly-owned subsidiaries, operates cable television
systems serving approximately 37,400 subscribers in Monroe County, Allegan
County, Coldwater and Sturgis areas of Michigan. CCV and its subsidiaries
have 77 franchise agreements with expiration dates between 1996 and 2015.
Mercom of Florida operates a television system serving approximately 1,500
subscribers in St. Lucie West, a planned community in Southeastern Florida.
Mercom of Florida has 1 franchise agreement with an expiration date of
2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies of the Company and its subsidiaries are
summarized below:
Principles of Consolidation - The consolidated financial statements include
---------------------------
the accounts of the Company and its wholly-owned subsidiaries, CCV and
Mercom of Florida. All significant intercompany accounts and transactions
have been eliminated in consolidation. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Temporary Cash Investments - For the purposes of the Statement
-----------------------------------
of Cash Flows, the Company considers all investments originally purchased
with a maturity of three months or less to be temporary cash investments.
Property, Plant and Equipment and Depreciation - Property, plant and
----------------------------------------------
equipment are recorded at cost. Depreciation is provided over the estimated
useful lives of the assets using the straight-line method. The estimated
useful life of the property, plant and equipment is 12 years except for
vehicles, which have an estimated useful life of 5 years. Maintenance and
repair costs are charged to expense as incurred. Major replacements and
betterments are capitalized. Gain or loss is recognized on retirements and
dispositions.
Intangible Assets - The purchase price in excess of the fair market value
-----------------
of net assets of cable television systems acquired and franchise rights and
costs are being amortized on a straight line basis over the expected period
of benefit ranging from 11 years to 15 years.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands)
Accounting for Impairments - In 1995, the Company adopted the provisions of
--------------------------
Statement of Financial Accounting Standards No. 121 - Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of
("SFAS 121").
SFAS 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those
assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of.
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In performing the review for
recoverability, the Company estimates the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum
of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, an impairment loss
is recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles expected to be held and used is based on the fair
value of the asset.
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount
or fair value less cost to sell.
No impairment loss was recognized by the Company in 1995 as a result of
adoption of SFAS 121.
Interest Rate Swap Agreements - The Company had an interest rate swap
-----------------------------
agreement which expired in September 1994. The difference to be paid or
received on such agreement was accrued as interest rates changed and was
recognized over the respective payment periods during the life of the
agreement.
Subscriber Revenue - Revenues from basic and premium programming services
------------------
are recorded in the month the service is provided.
Advertising Expense - The Company expenses advertising costs as incurred.
-------------------
Advertising expense charged to operations was $123, $102 and $85 in 1995,
1994 and 1993, respectively.
Income Taxes - The Company accounts for income taxes based on the
------------
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). The asset and liability
approach of SFAS 109 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the financial reporting basis and the income tax basis
of assets and liabilities. SFAS 109 permits current recognition of deferred
tax assets including net operating loss carryforwards. The tax benefits
recognized must be reduced by a valuation allowance when it is more likely
than not the asset will not be realized.
Earnings (Loss) Per Share - Earnings (loss) per share amounts are based
-------------------------
on the weighted average number of common shares outstanding.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands)
3. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Goodwill $1,717 $1,717
Franchise rights and costs 1,949 1,949
Other 1,077 1,077
------ ------
Total 4,743 4,743
Less accumulated amortization 2,377 2,068
------ ------
Total $2,366 $2,675
====== ======
</TABLE>
Amortization expense charged to operations in 1995, 1994 and 1993 was $309, $313
and $334, respectively.
4. INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
Prior years financial statements have not been restated to apply the
provision of SFAS 109. There was no cumulative effect on prior years
earnings as a result of the adoption of SFAS 109.
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current-
Federal $ (2) $ (4) $ 17
State - - -
---- ---- ----
Total provision (benefit) for income taxes $ (2) $ (4) $ 17
==== ==== ====
</TABLE>
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands)
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at December 31, are as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net operating loss carryforwards $3,629 $3,329
Alternative minimum tax credits 11 13
Reserves 969 1,515
Other, net 117 311
------ ------
Total deferred assets 4,726 5,168
------ ------
Property, plant and equipment (2,837) (2,971)
Intangible assets (109) (161)
------ ------
Total deferred liabilities (2,946) (3,132)
------ ------
Subtotal 1,780 2,036
Valuation allowance (1,780) (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 $256 in 1995.
The provision (benefit) for income taxes is different from the amounts
computed by applying the U. S. statutory federal tax rate of 34%. The
differences are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income (loss) before provision
(benefit) for income taxes $ 547 $(662) $(219)
===== ===== =====
Federal tax provision (benefit) $ 186 $(225) $ (74)
Reduction due to:
State income taxes, net of
federal benefit - (5) -
Goodwill 37 37 36
Increase (decrease) in valuation
allowance (256) 187 58
Adjustment to prior years
amortization 28 - -
Other, net 3 2 (3)
----- ----- -----
Provision (benefit)
for income taxes $ (2) $ (4) $ 17
===== ===== =====
</TABLE>
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands)
The Company has the following federal net operating loss carryforwards
available:
<TABLE>
<CAPTION>
Tax Net
Operating Expiration
Year Losses Date
---- --------- ----------
<S> <C> <C>
1989 $1,097 2004
1990 $3,575 2005
1991 $3,220 2006
1992 $1,628 2007
1995 $ 864 2010
</TABLE>
In the past, the Company was liable for Federal Alternative Minimum Tax
(AMT). At December 31, 1995, the cumulative minimum tax credits are $11.
This amount can be carried forward indefinitely to reduce regular tax
liabilities that exceed the AMT in future years.
5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
December, 31
--------------
1995 1994
---- ----
<S> <C> <C>
Term Credit Agreement $18,930 $20,926
Demand note - 5,000
------- -------
Total $18,930 $25,926
===== ======= =======
</TABLE>
The Company entered into a $25,000 Credit Agreement (the "Credit
Agreement") with a bank in November 1989. The Credit Agreement was amended
in April 1990 to provide borrowings up to $27,000. The Credit Agreement was
further amended in December 1992, December 1993, December 1994 and March
1995 to restructure the mandatory repayments due at December 31, 1992,
December 31, 1993, December 31, 1994 and March 31, 1995, respectively. On
August 16, 1995, the Company amended and restated the Credit Agreement.
The amended and restated Credit Agreement consists of a 7.5-year amortizing
term loan with a final maturity of December 31, 2002 (Term Credit
Agreement). In addition, the Company entered into a 364-day revolving
credit facility of $2,000 maturing on August 14, 1996 (Revolving Credit
Agreement).
In connection with the amended and restated Term Credit Agreement, on
August 16, 1995, outstanding indebtedness of $5,000 evidenced by a Demand
Note was refinanced by canceling such note and increasing the amount
outstanding under the Term Credit Agreement by $5,000 from $19,693 to
$24,693.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands)
On August 18, 1995, the Company repaid $5,070 of the debt under the Term
Credit Agreement with proceeds from the Rights Offering. Under the terms of
the agreement, the Company also made scheduled principal payments of $346
in each of the third and fourth quarters of 1995.
The Company is required to repay the remaining indebtedness under the Term
Credit Agreement in equal quarterly installments aggregating the following
amounts for each year ending December 31, 1996 through 2000:
<TABLE>
<CAPTION>
Aggregate
Year Amounts
---- --------
<S> <C>
1996 $1,500
1997 1,750
1998 2,100
1999 2,600
2000 3,750
</TABLE>
The Term Credit Agreement and the Revolving Credit Agreement (the "credit
agreements") are collateralized by both a pledge of the stock of the
Company's subsidiaries and a first lien on certain assets of the Company
and its subsidiaries including certain inventory, equipment and
receivables.
The credit agreements contain restrictive covenants, including the
maintenance of a specified debt to cash flow ratio, an interest coverage
ratio and restrictions on the payment of dividends. In addition, the
Company may be required to amortize additional debt to the extent the
Company generates excess cash flow. At December 31, 1995, the Company was
in compliance with all covenants associated with its credit agreements. As
noted, the Revolving Credit Agreement provides for revolving credit
borrowings up to $2,000 as of December 31, 1995. A fee of 3/8% per annum is
required on the unused portion of the available commitment. The Company had
no borrowings under this agreement as of December 31, 1995.
The weighted average effective interest rates for all debt at December 31,
1995, and 1994, were 7.0% and 7.34%, respectively. Interest is paid based
on Prime, LIBOR or CD rates, depending on the type of loan and terms of the
agreement.
6. COMMON STOCK
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 approximately $8,200. 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. Right holders were
able to purchase for a price of $3.60 per share, one share of Common Stock
for each right held.
The Company utilized a portion of the proceeds received from the Rights
Offering to repay $5,070 of outstanding indebtedness to its lender and
repay $2,287 of outstanding indebtedness to C-TEC under two demand notes.
The remaining proceeds will be used for general corporate purposes,
including capital expenditures.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands)
7. EMPLOYEE SAVINGS PLAN
The Company adopted a 401(k) savings plan on January 1, 1995 covering
substantially all employees. Contributions made by the Company to the
401(k) plan are based on a specified percentage of employee contributions.
Contributions charged to expense were $19 in 1995.
8. COMMITMENTS AND CONTINGENCIES
a. Total rental expense, primarily office space and pole rental, was $250,
$250 and $235 for 1995, 1994 and 1993, respectively. At December 31, 1995,
rental commitments under noncancelable leases, excluding annual pole rental
commitments of approximately $148 that are expected to continue
indefinitely, are as follows:
<TABLE>
<S> <C>
1996 $86
1997 72
1998 69
1999 65
2000 65
Thereafter 257
</TABLE>
b. Communications and Cablevision, Inc., ("CCV"), a subsidiary of the Company,
was a party to a lawsuit commenced in 1988 in the Circuit Court for the
County of Ottawa, Michigan relating to the termination of Kenneth E. Lahey
as President of CCV. Mr. Lahey asserted that as a result of such
termination he was entitled to an amount equal to the fair market value of
10 percent of the outstanding shares of CCV stock (the "Lahey Interest").
The trial court determined that Mr. Lahey was entitled to an amount equal
to the fair market value of the Lahey Interest and ordered, among other
things, that an appraisal proceeding be held to determine such fair market
value. The Company appealed such order, but the Michigan Court of Appeals
upheld the trial court's decision on December 27, 1993. On December 16,
1994, a panel of three appraisers (the "Panel") rendered a decision in
favor of Mr. Lahey in the amount of $2,949. The Company requested the
Circuit Court for the City of Ottawa to remand this proceeding back to the
Panel for further consideration of certain factors which were not included
in their decision on December 16, 1994. A hearing was held on January 16,
1995 before the Circuit Court for the City of Ottawa. The Court issued an
Opinion on February 14, 1995, denying the Company's motions and sustaining
the decision of the Panel in the amount of $2,949 and awarded pre-judgment
interest in the amount of approximately $1,200. The Company filed a Motion
for Reconsideration with the Court. On March 27, 1995, the Court issued an
Order denying the Company's Motion of Reconsideration. On April 19, 1995,
the Company entered into a settlement agreement with Mr. Lahey whereby the
Company agreed to pay Mr. Lahey $4,300 over a four year time frame. The
Company paid Mr. Lahey $100 and $1,400 in April 1995 and June 1995,
respectively. The remaining $2,800 will be paid in equal installments over
a four year period on or before July 1 of each of the subsequent years.
c. The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended. The Company has either
settled challenges or accrued for anticipated exposures related to rate
regulation; however, there is no assurance that there will not be
challenges to its rates. The 1994 statement of operations includes charges
aggregating approximately $150 relating to cable rate regulation
liabilities.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands)
d. In November 1995, C-TEC Corporation ("C-TEC"), which owns approximately 61.92
percent of the Company's outstanding Common Stock, announced that it had
engaged Merrill Lynch & Company to assist with evaluating strategic options
with a view toward enhancing shareholder value. In March 1996, C-TEC
announced that it intends to distribute to its shareholders, in a tax-free
spin-off, its local telephone operations, communications engineering
operations, and certain other assets. Following the spin-off, C-TEC intends
to combine its domestic cable television operations, including the Company,
with a third party pursuant to a tax-free stock for stock transaction. No
assurances can be given that these transactions will be consummated.
9. AFFILIATE AND RELATED PARTY TRANSACTIONS
The Company entered into a management agreement in 1992 with C-TEC,
pursuant to which C-TEC will manage the Company's cable television systems'
operations. The Company was charged $1,204, $1,104, and $1,108 for this
management service in 1995, 1994 and 1993, respectively, based on the
agreement approved by the Board of Directors. C-TEC and its subsidiaries
also supplied other services not covered by the management agreement for
approximately $121, $54, and $61 in 1995, 1994 and 1993, respectively. C-
TEC loaned $887 to the Company to enable it to make a principal payment on
its Credit Agreement of $887 scheduled for March 31, 1995. C-TEC also
loaned the Company $1,400 to meet its scheduled payment under the Lahey
settlement agreement. The Company paid interest in 1995 of $39 to C-TEC in
connection with these two demand notes. These demand notes were repaid in
August, 1995. In 1995, 1994 and 1993, the Company incurred interest of $29,
$24 and $9 respectively, on outstanding management fee obligations owed to
C-TEC.
In addition, the Company sold approximately $2, $3 and $16 of inventory to
a C-TEC subsidiary in 1995, 1994 and 1993, respectively.
The Company had amounts due to C-TEC and C-TEC subsidiaries of $614 and
$534 at December 31, 1995 and 1994, respectively. These amounts include
management fees of $605 and $509 as of December 31, 1995 and 1994,
respectively.
10. STOCK EXCHANGE LISTING
The Company's Common Stock was traded on the Nasdaq Stock Market ("Nasdaq")
from May 1989 through February 1992. The Company's Common Stock was
delisted from Nasdaq in February 1992 because the Company did not meet
Nasdaq's minimum capital and surplus requirements. Currently, the Company's
Common Stock is quoted on the National Quotation Bureau, Inc. and the
OTC Bulletin Board which is owned and operated by the Nasdaq Stock Market,
Inc.
11. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
The Company places its cash and temporary cash investments with high credit
quality financial institutions. The Company does, however, maintain
unsecured cash and temporary cash investment balances in excess of
federally insured limits.
Concentrations of credit risk with respect to receivables are limited due
to a large customer base primarily throughout Michigan.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands)
12. SUBSEQUENT EVENT
Effective January 1, 1996, the Company began to provide post employment
benefits primarily in the form of salary continuance to substantially all
of its employees. The Company does not expect the costs of these benefits
to be material.
F-13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Mercom, Inc.
We have audited the consolidated financial statements and financial statement
schedule of Mercom, Inc. and subsidiaries listed in Item 14(a) of this
Form 10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Mercom,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statements
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects, the information
required to be included therein.
As discussed in Note 4 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 26, 1996
F-14
<PAGE>
MERCOM, INC. AND SUBSIDIARIES Schedule II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in Thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- -------- --------
ADDITIONS
---------
BALANCE AT CHARGED CHARGED BALANCE
BEGINNING OF TO COSTS TO OTHER AT END OF
DESCRIPTION PERIOD AND EXPENSE ACCOUNTS DEDUCTIONS PERIOD
- ----------- ------ ----------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DEFERRED TAX ASSETS -
DEDUCTED FROM DEFERRED TAX ASSETS
IN THE CONSOLIDATED BALANCE SHEETS.
1995 $2,036 $0 $0 $256 $1,780
1994 $1,849 $187 $0 $0 $2,036
1993* $1,791 $58 $0 $0 $1,849
RESERVE FOR DOUBTFUL ACCOUNTS
1995 $23 $107 $0 $105 $25
1994 $29 $64 $0 $70 $23
1993 $46 $34 $0 $51 $29
</TABLE>
* Valuation allowance as of initial adoption of Statement of Financial
Accounting Standards No. 109 on January 1, 1993.
F-15
<PAGE>
EXHIBIT 10.13
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT dated as of March 31, 1995 between MERCOM, INC. (the
"Borrower"), a Delaware corporation, and MORGAN GUARANTY TRUST COMPANY OF NEW
YORK (the "Bank"), a New York State banking corporation.
WHEREAS, the Borrower and the Bank entered into a Credit Agreement dated as
of November 26, 1989 (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 to further amend the Credit Agreement as
amended as provided below and the Bank is willing to so amend the Credit
Agreement, as amended:
NOW, THEREFORE, the parties hereto agree as follows:
1. Section 6.7 entitled "Debt" shall be amended in its entirety to read
as follows:
"The Borrower will not permit any Subsidiary to create or allow to
exist any Debt other than Debt to the Borrower and other than capital
lease obligations which shall not exceed $100,000 in the aggregate.
The Borrower will not incur any additional Debt in excess of $100,000
in the aggregate other than hereunder, with the exception of the
Promissory Note in favor of C-TEC Services, Inc. dated March 31, 1995
in the amount of $887,000, plus interest at the lower of any interest
rates in effect at such time for borrowings under the Credit
Agreement, as amended."
2. Terms not defined herein are used as defined in the Credit Agreement.
3. The provisions of Section 1 of this Amendment Agreement are hereby
incorporated into and made a part of the Credit Agreement as if fully
set forth therein.
4. This Amendment Agreement shall be effective as of the date hereof upon
receipt by the Bank of (i) a copy of this Amendment Agreement executed
on behalf of the Borrower and the Bank, (ii) a certificate of a duly
authorized officer of the Borrower dated as of the date of the
delivery of this Amendment Agreement to the Bank to the effect that
(a) no Default or Event of Default (as such terms are defined in the
Credit Agreement) has occurred and is continuing and (b) 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, (iii) certified copies of all corporate action taken by
the Borrower to authorize the execution, delivery
<PAGE>
and performance of this Amendment Agreement and (iv) a certificate of
a duly authorized officer of the Borrower as to the incumbency, and
setting forth a specimen signature, of the person who has signed this
Amendment Agreement on behalf of the Borrower.
5. This Amendment 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 Amendment Agreement
to be duly executed as of the day first above written.
MERCOM, INC.
By: /s/ Bruce C. Godfrey
--------------------------------
Title Bruce C. Godfrey
EVP/CFO
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: /s/ Vance B. Barbour
--------------------------------
Title Vance B. Barbour
Associate
<PAGE>
Exhibit 22.
SUBSIDIARIES OF REGISTRANT
The following are the subsidiaries of Mercom, Inc.:
Communications and Cablevision, Inc.
Coldwater Cablevision, Inc.
Allegan County Cablevision, Inc.
Mercom of Florida, Inc.
Mercom Services, Inc.
<PAGE>
Exhibit 24.
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, George C. Stephenson do make,
constitute and appoint Bruce C. Godfrey, Mercom, Inc.'s Chief Financial Officer,
as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name and
in my behalf the Mercom, Inc. Form 10-K for the fiscal year ended December 31,
1995, and to file said form to the Securities and Exchange Commission, 450 5th
Street, N.W., Washington, D.C. 20549, and relative instruments in writing which
I deem requisite or proper to effectuate specifically the execution and delivery
of the above-mentioned form with the same validity as I could, if personally
present, and I hereby ratify and affirm that my said attorney as I may deem to
act for me, shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect as of March 21, 1996 and such specific rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 24th day of March,
1996.
/s/ George C. Stephenson (SEAL)
--------------------------
George C. Stephenson
Witness:
/s/ John D. Filipowicz
- ----------------------
John D. Filipowicz
<PAGE>
Exhibit 24.
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Harold J. Rose, Jr. do make,
constitute and appoint Bruce C. Godfrey, Mercom, Inc.'s Chief Financial Officer,
as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name and
in my behalf the Mercom, Inc. Form 10-K for the fiscal year ended December 31,
1995, and to file said form to the Securities and Exchange Commission, 450 5th
Street, N.W., Washington, D.C. 20549, and relative instruments in writing which
I deem requisite or proper to effectuate specifically the execution and delivery
of the above-mentioned form with the same validity as I could, if personally
present, and I hereby ratify and affirm that my said attorney as I may deem to
act for me, shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect as of March 21, 1996 and such specific rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 23rd day of March,
1996.
/s/ Harold J. Rose Jr. (SEAL)
--------------------------
Harold J. Rose Jr.
Witness:
/s/ Barbara E. Rose
- ----------------------
Barbara E. Rose
<PAGE>
Exhibit 24.
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Michael J. Mahoney do make,
constitute and appoint Bruce C. Godfrey, Mercom, Inc.'s Chief Financial Officer,
as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name and
in my behalf the Mercom, Inc. Form 10-K for the fiscal year ended December 31,
1995, and to file said form to the Securities and Exchange Commission, 450 5th
Street, N.W., Washington, D.C. 20549, and relative instruments in writing which
I deem requisite or proper to effectuate specifically the execution and delivery
of the above-mentioned form with the same validity as I could, if personally
present, and I hereby ratify and affirm that my said attorney as I may deem to
act for me, shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect as of March 21, 1996 and such specific rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 21st day of March,
1996.
/s/ Michael J. Mahoney (SEAL)
--------------------------
Michael J. Mahoney
Witness:
/s/ John D. Filipowicz
- ----------------------
John D. Filipowicz
<PAGE>
Exhibit 24.
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Raymond B. Ostroski do make,
constitute and appoint Bruce C. Godfrey, Mercom, Inc.'s Chief Financial Officer,
as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name and
in my behalf the Mercom, Inc. Form 10-K for the fiscal year ended December 31,
1995, and to file said form to the Securities and Exchange Commission, 450 5th
Street, N.W., Washington, D.C. 20549, and relative instruments in writing which
I deem requisite or proper to effectuate specifically the execution and delivery
of the above-mentioned form with the same validity as I could, if personally
present, and I hereby ratify and affirm that my said attorney as I may deem to
act for me, shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect as of March 21, 1996 and such specific rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 24th day of March,
1996.
/s/ Raymond B. Ostroski (SEAL)
--------------------------
Raymond B. Ostroski
Witness:
/s/ John D. Filipowicz
- ----------------------
John D. Filipowicz
<PAGE>
Exhibit 24.
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, David C. McCourt do make,
constitute and appoint Bruce C. Godfrey, Mercom, Inc.'s Chief Financial Officer,
as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name and
in my behalf the Mercom, Inc. Form 10-K for the fiscal year ended December 31,
1995, and to file said form to the Securities and Exchange Commission, 450 5th
Street, N.W., Washington, D.C. 20549, and relative instruments in writing which
I deem requisite or proper to effectuate specifically the execution and delivery
of the above-mentioned form with the same validity as I could, if personally
present, and I hereby ratify and affirm that my said attorney as I may deem to
act for me, shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect as of March 21, 1996 and such specific rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 23rd day of March,
1996.
/s/ David C. McCourt (SEAL)
--------------------------
David C. McCourt
Witness:
/s/ John D. Filipowicz
- ----------------------
John D. Filipowicz
<PAGE>
Exhibit 24.
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Clifford L. Jones do make,
constitute and appoint Bruce C. Godfrey, Mercom, Inc.'s Chief Financial Officer,
as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name and
in my behalf the Mercom, Inc. Form 10-K for the fiscal year ended December 31,
1995, and to file said form to the Securities and Exchange Commission, 450 5th
Street, N.W., Washington, D.C. 20549, and relative instruments in writing which
I deem requisite or proper to effectuate specifically the execution and delivery
of the above-mentioned form with the same validity as I could, if personally
present, and I hereby ratify and affirm that my said attorney as I may deem to
act for me, shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect as of March 21, 1996 and such specific rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 21st day of March,
1996.
/s/ Clifford L. Jones (SEAL)
--------------------------
Clifford L. Jones
Witness:
/s/ Jean L. Jones
- ----------------------
Jean L. Jones
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Financial
Statements as of and for the twelve months ended December 31, 1995 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,033
<SECURITIES> 0
<RECEIVABLES> 353
<ALLOWANCES> 25
<INVENTORY> 0
<CURRENT-ASSETS> 2,590
<PP&E> 40,212
<DEPRECIATION> 24,778
<TOTAL-ASSETS> 20,390
<CURRENT-LIABILITIES> 5,251
<BONDS> 17,430
0
0
<COMMON> 4,787
<OTHER-SE> (9,178)
<TOTAL-LIABILITY-AND-EQUITY> 20,390
<SALES> 0
<TOTAL-REVENUES> 13,939
<CGS> 0
<TOTAL-COSTS> 7,866
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 107
<INTEREST-EXPENSE> 1,900
<INCOME-PRETAX> 547
<INCOME-TAX> (2)
<INCOME-CONTINUING> 549
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 549
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
