<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 1996.
Common Stock 4,787,060 shares
This Form 10-Q consists of 14 sequentially numbered pages.
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations -
Quarters and Nine Months Ended September 30, 1996
and 1995 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 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 8-12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS:
Cash & temporary cash investments $2,453 $2,033
Accounts receivable:
Trade, net of reserve for doubtful accounts of $56 and $25 at
September 30, 1996, and December 31, 1995, respectively 321 328
Other 20 49
Prepaid expenses and other 155 180
Property, plant and equipment 40,851 40,212
Less - accumulated depreciation 26,810 24,778
------------- ------------
Net property, plant and equipment 14,041 15,434
Intangible assets - net of accumulated amortization of $2,608 and $2,377
at September 30, 1996, and December 31, 1995, respectively 2,134 2,366
------------- ------------
Total Assets $19,124 $20,390
============= ============
LIABILITIES AND SHAREHOLDERS' CAPITAL DEFICIENCY:
Accounts payable, trade $430 $800
Accounts payable, affiliates 598 614
Other liabilities 1,497 1,554
Accrued litigation costs 2,151 2,883
Debt 17,805 18,930
------------- ------------
Total Liabilities 22,481 24,781
------------- ------------
SHAREHOLDERS' CAPITAL DEFICIENCY:
Preferred stock, $100 par value, 150,000 shares authorized,
none issued and outstanding at September 30, 1996, and December 31, 1995
Common stock, $1 par value, 5,000,000 shares authorized,
4,787,060, issued and outstanding at September 30, 1996, and December 31, 1995 4,787 4,787
Additional paid-in capital 11,374 11,374
Accumulated deficit (19,518) (20,552)
------------- ------------
Total Shareholders' Capital Deficiency (3,357) (4,391)
------------- ------------
Total Liabilities and Shareholders' Capital Deficiency $19,124 $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 Sept 30, Nine Months Ended Sept 30,
--------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $3,958 $3,556 $11,642 $10,399
---------- ---------- ---------- ----------
Cost and expenses 2,513 2,186 7,421 6,462
Depreciation and amortization 753 743 2,315 2,272
---------- ---------- ---------- ----------
Total operating expenses 3,266 2,929 9,736 8,734
---------- ---------- ---------- ----------
Operating income 692 627 1,906 1,665
---------- ---------- ---------- ----------
Other (Income) Expenses:
Interest income (29) (31) (85) (53)
Other expense 10 -- 10 44
Interest expense 305 512 925 1,563
---------- ---------- ---------- ----------
Total other expenses, net 286 481 850 1,554
---------- ---------- ---------- ----------
Income before income taxes 406 146 1,056 111
Provision for income taxes 20 -- 22 --
---------- ---------- ---------- ----------
Net income $386 $146 $1,034 $111
========== ========== ========== ==========
Net income per average common share $0.08 $0.04 $0.22 $0.04
========== ========== ========== ==========
Weighted Average Common Shares Outstanding (in thousands) 4,787 3,746 4,787 2,849
========== ========== ========== ==========
</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>
Nine Months Ended Sept 30,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Net Cash Provided By Operating Activities $2,235 $1,356
--------------- --------------
Cash Flows From Investing Activities
Expansion, improvements and other (690) (664)
--------------- --------------
Cash Flows From Financing Activities
Repayment of bank loans (1,125) (6,650)
Note payable, related party -- 2,287
Repayment of note payable, related party -- (2,287)
Net proceeds from the issuance of common stock -- 8,255
--------------- --------------
Net cash (used in) provided by financing activities (1,125) 1,605
--------------- --------------
Net increase in cash & temporary cash investments 420 2,297
Cash & temporary cash investments, January 1, 2,033 96
--------------- --------------
Cash & temporary cash investments, September 30, $2,453 $2,393
=============== ==============
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $944 $1,706
Taxes $9 --
</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:
September 30 December 31
1996 1995
---- ----
Term Credit Agreement $17,805 $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 with an initial maturity of August 14, 1996 (the "Revolving Credit
Agreement") which has been amended and extended to August 12, 1997.
6
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
Under the terms of the Term Credit Agreement, the Company made scheduled
principal payments of $346 in each of the third and fourth quarters of 1995 and
$375 in each of the first, second and third quarters of 1996. The Company is
required to repay the remaining indebtedness under the Term Credit Agreement in
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 September 30, 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. 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 September 30, 1996.
The weighted average effective interest rate for all debt at September 30, 1996,
was 6.56%. 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 for income taxes is different from the amounts computed by
applying the U.S. statutory federal tax rate of 34% primarily due to utilization
of net operating loss carryforwards for which the related deferred tax assets
previously were reduced by valuation allowances.
(4) AFFILIATE TRANSACTIONS
The Company had amounts due to C-TEC Corporation, majority stockholder of the
Company, and C-TEC subsidiaries ("C-TEC"), of $598 and $614 at September 30,
1996, and December 31, 1995, respectively, primarily related to management
services provided by C-TEC. The Company has entered into a management agreement
with C-TEC, pursuant to which C-TEC manages 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 September 30, 1996, the Company had net income of
$386 as compared to $146 net income for the comparable period in 1995. The
Company's net income for the nine months ended September 30, 1996 increased by
$923 to $1,034 from net income of $111 for the comparable period in 1995. The
increases represent an improvement of $0.04 and $0.18 per average common share
for the three and nine month periods, respectively.
Sales for the three and nine month periods ended September 30, 1996, increased
by $402 or 11.3% and $1,243 or 12.0%, respectively, over the comparable periods
in 1995. The increase is primarily due to basic rate increases in April 1995 and
February 1996 adding $237 and $776, respectively, to the three and nine month
periods. Also, an additional 1,751 average basic subscribers per month during
the first nine months of 1996 compared to the same period in 1995 amounted to
$122 and $355, respectively, of increased basic revenues for the three and nine
month periods. Also contributing to the increase, was an additional $11 and $65
in pay-per-view revenue for the three and nine months ended September 30, 1996,
respectively, as compared to the same periods in 1995.
Total costs and expenses, exclusive of depreciation and amortization, for the
three and nine month periods ended September 30, 1996, increased by $327 or
15.0% and $959 or 14.8%, respectively, when compared to the same periods in
1995. The increases for the three and nine month periods were 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 increases for the
three and nine month periods ended September 30, 1996, over the same periods in
1995.
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 and nine month periods ended September 30, 1996,
decreased by $207 or 40.4% and $638 or 40.8%, respectively, as compared to the
same periods in 1995. The decrease in the average outstanding bank debt balance
during the comparable periods was the primary reason for the decrease in
interest expense. In addition, a reduction in the weighted average effective
interest rate during the comparable periods contributed to the reduction in
interest expense. The Company's future interest expense is subject to
fluctuations in the market rate of interest, and accordingly, there is no
assurance that the Company's current level of interest expense is indicative of
future trends.
Other expenses decreased $34 or 77.3% for the nine month period resulting from
an accrual of $52 in the first quarter of 1995 in anticipation of a settlement
in the second quarter of 1995 related to litigation with a former officer.
Liquidity and Capital Resources
Cash and temporary cash investments were $2,453, at September 30, 1996, as
compared to $2,033 at December 31, 1995. The increase in cash of $420 is
attributed to cash provided from operations of $2,235 partially offset by
mandatory principal payments totaling $1,125 and capital expenditures of $690
for the nine months ended September 30, 1996.
The Company's outstanding debt at September 30, 1996, was $17,805. Additionally,
the Company has an unused 364-day revolving credit facility of $2,000 at
September 30, 1996. The Company was in compliance with all covenants of its
Credit Agreement at September 30, 1996.
The Company made a scheduled $700 payment in June 1996, to a former officer
according to the terms of a litigation settlement. The remaining $2,100 will be
paid in equal installments over a three year period beginning with the payment
due on or before July 1, 1997. In addition, the Company has a scheduled
quarterly principal payment on long-term debt of $375 in the last quarter of
1996 and quarterly principal payments of $438 each, due at the end of each
quarter in 1997. 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 expects to fund these payments from cash
provided by operations. On August 14, 1996, the Company and its bank amended
the Revolving Credit Agreement of $2,000 extending its maturity to August 12,
1997. This facility, which is unused at September 30, 1996, may be drawn upon
as necessary.
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 must 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 $1,300 in annualized revenues based on
the current level of subscribers.
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 intended to
distribute to its shareholders, in a tax-free spin-off, its local telephone
operations, communications engineering operations, and certain other assets and
that, following the spin-off, it intended 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. In August 1996, C-TEC
decided to close all discussions concerning a sale of its domestic cable
television unit, including its investment in the Company. C-TEC will, however,
continue to explore ways to increase its profitability and value which could
include a restructuring transaction of some sort. No assurances can be given
that any transaction 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.
10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in Thousands, Except Per Share Data)
Regulatory Matters, continued
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.
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.
Impact to Company
The rate regulation provisions of the 1992 Act have not had a materially adverse
effect on the Company's financial condition and results of operations through
September 30, 1996. 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, have the effect of reducing operating margins of the
Company.
11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in Thousands, Except Per Share Data)
Impact to Company, continued
In December 1995, the Company commenced rate increase notifications to all of
its Michigan subscribers. The rate increase was implemented in February 1996
based primarily 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. Eleven complaints have been filed
with the FCC relative to the February 1996 rate increase, ten of which were
community complaints. The Company implemented its rate increase in eight of
these communities using the small system rules. The FCC has responded to three
of the community complaints and denied the Company's request for small system
relief under the 1996 Act and the Order. The Company believes it is a small
operator under both the 1996 Act and the Order and has filed Petitions for
Reconsideration with the FCC relative to these rulings. At this time, no
further actions have been taken by the FCC relative to these petitions. In the
event the FCC upholds their initial decision regarding these three communities,
the Company has filed alternate rate justifications to support its existing
rates and believes there will not be a material adverse effect on its results of
operations or financial condition.
12
<PAGE>
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on October 10, 1996. Matters
submitted to and approved by Shareholders included:
1) The election of the following Directors to serve for a term of one year:
Nominee For Against
- ------- --- -------
Bruce C. Godfrey 4,358,161 107,785
Clifford L. Jones 4,358,834 107,112
Michael J. Mahoney 4,358,065 107,881
David C. McCourt 4,453,048 12,898
Raymond B. Ostroski 4,358,808 107,138
Harold J. Rose, Jr. 4,358,346 107,600
George C. Stephenson 4,359,093 106,853
2) The ratification of the selection of Coopers & Lybrand L.L.P. as the
Company's independent auditors for the year ending December 31, 1996.
For Against Abstain No Vote
--- ------- ------- -------
4,457,284 3,242 5,420 0
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 third quarter of 1996.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCOM, INC.
DATE: November 14, 1996 /s/ Bruce C. Godfrey
--------------------
Bruce C. Godfrey
Executive Vice President and
Chief Financial Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,453
<SECURITIES> 0
<RECEIVABLES> 377
<ALLOWANCES> 56
<INVENTORY> 0
<CURRENT-ASSETS> 2,949
<PP&E> 40,851
<DEPRECIATION> 26,810
<TOTAL-ASSETS> 19,124
<CURRENT-LIABILITIES> 4,965
<BONDS> 16,116
0
0
<COMMON> 4,787
<OTHER-SE> (8,144)
<TOTAL-LIABILITY-AND-EQUITY> 19,124
<SALES> 0
<TOTAL-REVENUES> 11,642
<CGS> 0
<TOTAL-COSTS> 6,516
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 113
<INTEREST-EXPENSE> 925
<INCOME-PRETAX> 1,056
<INCOME-TAX> 22
<INCOME-CONTINUING> 1,034
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,034
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
