<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------------------------------------
Commission file number 0-17750
----------------------------------------------------------
MERCOM, INC.
- --------------------------------------------------------------------------------
(Exact name or registrant as specified in its charter)
Delaware 38-2728175
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Carnegie Center
Princeton, New Jersey 08540-6215
--------------------------------
(Address of principle executive offices)
(Zip Code)
(609) 734-3737
- --------------------------------------------------------------------------------
(Registrant's telephone number including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
-------- -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock ($1.00 par value), as of April 30, 1996.
Common Stock 4,787,060 shares
This Form 10-Q consists of 13 sequentially numbered pages.
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations -
For the Three Months Ended March 31, 1996
and 1995 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ----------
<S> <C> <C>
ASSETS:
Cash & temporary cash investments $ 1,556 $ 2,033
Accounts receivable:
Trade, net of reserve for doubtful accounts of $29 and $25 at
March 31, 1996, and December 31, 1995, respectively 488 328
Other 77 49
Prepaid expenses and other 259 180
Property, plant and equipment 40,460 40,212
Less - accumulated depreciation 25,468 24,778
--------- ---------
Net property, plant and equipment 14,992 15,434
Intangible assets - net of accumulated amortization of $2,454 and $2,377
at March 31, 1996, and December 31, 1995, respectively 2,288 2,366
--------- ---------
Total Assets $19,660 $20,390
========= =========
LIABILITIES AND SHAREHOLDERS' CAPITAL DEFICIENCY:
Accounts payable, trade $ 430 $ 800
Accounts payable, affiliates 275 614
Other liabilities 1,673 1,554
Accrued litigation costs 2,857 2,883
Debt 18,555 18,930
--------- ---------
Total Liabilities 23,790 24,781
--------- ---------
SHAREHOLDERS' CAPITAL DEFICIENCY:
Preferred stock, $100 par value, 150,000 shares authorized,
none issued and outstanding at March 31, 1996, and December 31, 1995
Common stock, $1 par value, 5,000,000 shares authorized,
4,787,060, issued and outstanding at March 31, 1996, and December 31, 1995 4,787 4,787
Additional paid-in capital 11,374 11,374
Accumulated deficit (20,291) (20,552)
--------- ---------
Total Shareholders' Capital Deficiency (4,130) (4,391)
--------- ---------
Total Liabilities and Shareholders' Capital Deficiency $19,660 $20,390
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Quarter Ended March 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Sales $3,799 $3,303
-------- --------
Cost and expenses 2,460 2,103
Depreciation and amortization 779 763
-------- --------
Total operating expenses 3,239 2,866
-------- --------
Operating income 560 437
-------- --------
Other (Income) Expenses:
Interest income (27) (6)
Other expense -- 44
Interest expense 321 494
-------- --------
Total other expenses, net 294 532
-------- --------
Income (loss) before income taxes 266 (95)
Provision for income taxes 5 --
-------- --------
Net income (loss) $261 ($95)
======== ========
Net income (loss) per average common share $0.05 ($0.04)
======== ========
Weighted Average Common Shares Outstanding (in thousands) 4,787 2,393
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Quarter Ended March 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Net Cash Provided By Operating Activities $157 $989
-------- --------
Cash Flows From Investing Activities -
Expansion, improvements and other (259) (249)
-------- --------
Cash Flows From Financing Activities -
Repayment of bank loans (375) (887)
Note payable, related party -- 887
-------- --------
Net cash used in financing activities (375) --
-------- --------
Net increase (decrease) in cash & temporary cash investments (477) 740
Cash & temporary cash investments, January 1, 2,033 96
-------- --------
Cash & temporary cash investments, March 31, $1,556 $836
======== ========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $342 $483
Taxes -- --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
(1) RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of management,
such statements include all adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation of the financial information. The
condensed consolidated financial statements should be read in conjunction with
the annual statements and notes thereto included in the Company's 1995 Annual
Report to the Securities and Exchange Commission on Form 10-K. The results of
operations for the interim periods are not necessarily indicative of the results
that might be expected for future interim periods or for the full year ended
December 31, 1996.
(2) DEBT
Debt consists of the following:
March 31 December 31
1996 1995
---- ----
Term Credit Agreement $18,555 $18,930
======= =======
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, as stated below.
The amended and restated Credit Agreement consists of a 7.5-year amortizing term
loan with a final maturity of December 31, 2002 (the "Term Credit Agreement").
In addition, the Company entered into a 364-day revolving credit facility of
$2,000 maturing on August 14, 1996 (the "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.
6
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
On August 18, 1995, the Company repaid $5,070 of the debt under the Term Credit
Agreement with proceeds from a rights offering of Common Stock. 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 and $375 in the first quarter of
1996. The Company is required to repay the remaining indebtedness under the
Term Credit Agreement in equal quarterly installments.
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, as defined in the Term Credit Agreement. At March 31, 1996, 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 March 31, 1996. 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 March 31, 1996.
The weighted average effective interest rates for all debt at March 31, 1996,
was 6.25%. Interest is paid based on Prime, LIBOR or CD rates, depending
on the type of loan and terms of the agreement.
(3) INCOME TAXES
The provision (benefit) for income taxes is different from the amounts computed
by applying the U.S. statutory federal tax rate of 34% primarily due in the
first quarter of 1996 to utilization of net operating loss carryforwards which
previously had valuation allowances and in the first quarter of 1995 losses
producing no federal tax benefits due to uncertainty of realization.
(4) AFFILIATE TRANSACTIONS
The Company had amounts due to C-TEC Corporation, majority stockholder of the
Company, and C-TEC subsidiaries ("C-TEC"), of $275 and $614 at March 31, 1996,
and December 31, 1995, respectively, primarily related to management services
provided by C-TEC. The Company entered into a management agreement with C-TEC
in 1992, pursuant to which C-TEC will manage the Company's cable television
systems' operations. The management agreement was approved by the Company's
Board of Directors.
7
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in Thousands, Except Per Share Data)
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1995. 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.
Results of Operations
For the three months ended March 31, 1996, the Company had net income of $261 as
compared to a $95 net loss for the comparable period in 1995. This represents
an increase of $356 or $0.09 per average common share for the three month
period.
Sales for the three months ended March 31, 1996, increased $496 or 15.0% over
the comparable period in 1995. The increase in sales is primarily attributed to
higher basic service revenues of $429. The two components responsible for the
increase are; (i) basic rate increases implemented in April 1995 and February
1996 generating an additional $325 and, (ii) 1,592 average additional basic
subscribers per month generating an additional $104. In addition, sales from
pay-per-view events increased $45 over the comparable period in 1995.
Total costs and expenses, exclusive of depreciation and amortization, for the
three month period ended March 31, 1996, increased $357 or 17.0% when compared
to the same period in 1995. The increase is primarily the result of higher
programming costs that are directly related to additional customers, new
channels and higher programming rates from suppliers. In addition, increases in
salaries and benefits, advertising and promotional expenses, costs associated
with maintaining a larger customer base and a concentration on customer service
also contributed to the increase over the first quarter of the prior year.
8
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in Thousands, Except Per Share Data)
Results of Operations, continued
Interest expense for the three months ended March 31, 1996, decreased $173 or
35.0% when compared to the same period in 1995. The aggregate principal
repayments of $6,484 made against outstanding bank debt between the periods of
March 31, 1995, and March 31, 1996, are primarily responsible for the decrease
in interest expense. In addition, the weighted average effective interest rate
decreased from 8.3% at March 31, 1995, to 6.25% at March 31, 1996. 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.
Other expenses decreased $44 or 100.0% for the three month period resulting from
an accrual of $52 in the first quarter of 1995 related to the litigation with a
former officer which was settled in the second quarter of 1995.
Liquidity and Capital Resources
Cash and temporary cash investments were $1,556, at March 31, 1996, as compared
to $2,033 at December 31, 1995. The decrease in cash of $477 is primarily
attributed to a mandatory principal payment of $375 made in the first quarter of
1996. In addition, capital expenditures exceeded cash provided from operations
by $102 for the quarter ended March 31, 1996.
The Company's outstanding debt at March 31, 1996, was $18,555. Additionally,
the Company has an unused 364-day revolving credit facility of $2,000 at March
31, 1996. The Company was in compliance with all covenants of its Credit
Agreement at March 31, 1996.
The Company has scheduled quarterly principal payments of $375 in each of the
remaining three quarters of 1996. In addition, the Company has a scheduled $700
payment due on or before July 1, 1996, according to the terms of the litigation
settlement with a former officer. The Company expects to fund these payments
from cash provided by operations, which include revenues from the rate increase
discussed below, and if necessary borrowing on its revolving credit facility.
Additionally, the Company is required to amortize additional debt to the extent
the Company generates excess cash flow, as defined in the Term Credit Agreement.
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. In addition to the basic subscriber increases discussed
previously, in February 1996, a basic rate increase was implemented according to
the rules and regulations established by the Federal Communications Commission
(the "FCC") and is expected to provide an additional $1,300 in annualized
revenues based on the current level of subscribers.
9
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in Thousands, Except Per Share Data)
Liquidity and Capital Resources, continued
The Company has restructured both the equity and debt of the Company in 1995 on
terms that 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.
In November 1995, C-TEC, which owns approximately 61.92% 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 its investment in 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.
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.
10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in Thousands, Except Per Share Data)
Regulatory Matters, continued
Impact to Company
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
March 31, 1996. 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.
In December 1995, the Company commenced rate increase notifications to all of
its Michigan subscribers. The rate increase was implemented in February 1996
based on a small system rate relief order (the "Order") released by the FCC on
June 5, 1995. The Order defines "small systems" as those systems with 15,000 or
fewer subscribers owned by small cable companies, those cable companies with
400,000 or fewer subscribers. The Company believes that it is a small operator
and that all of its systems are small systems under these rules. Eleven
complaints have been filed with the FCC relative to the February 1996 rate
increase.
Telecommunications Act of 1996
- ------------------------------
In early February, Congress passed and the President signed the
Telecommunications Act of 1996 (the "1996 Act"). The new law intends to
stimulate growth and competition in virtually every component of the
communications industry. The 1996 Act establishes 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.
11
<PAGE>
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
(27) Financial Data Schedule
(b). Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of 1996.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCOM, INC.
DATE: May 15, 1996
/s/ Bruce C. Godfrey
------------------------
Bruce C. Godfrey
Executive Vice President and
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANICAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,556
<SECURITIES> 0
<RECEIVABLES> 517
<ALLOWANCES> 29
<INVENTORY> 0
<CURRENT-ASSETS> 2,380
<PP&E> 40,460
<DEPRECIATION> 25,468
<TOTAL-ASSETS> 19,660
<CURRENT-LIABILITIES> 4,698
<BONDS> 16,992
0
0
<COMMON> 4,787
<OTHER-SE> (8,917)
<TOTAL-LIABILITY-AND-EQUITY> 19,660
<SALES> 0
<TOTAL-REVENUES> 3,799
<CGS> 0
<TOTAL-COSTS> 2,122
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 37
<INTEREST-EXPENSE> 321
<INCOME-PRETAX> 266
<INCOME-TAX> 5
<INCOME-CONTINUING> 261
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 261
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
