<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17750
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MERCOM, INC.
- -------------------------------------------------------------------------------
(Exact name or registrant as specified in its charter)
Delaware 38-2728175
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Carnegie Center
Princeton, New Jersey 08540-6215
--------------------------------
(Address of principle executive offices)
(Zip Code)
(609) 734-3737
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(Registrant's telephone number including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock ($1.00 par value), as of July 31, 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 -
June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations -
Quarters and Six Months Ended June 30, 1996
and 1995 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 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 8-11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS:
Cash & temporary cash investments $ 1,744 $ 2,033
Accounts receivable:
Trade, net of reserve for doubtful accounts of $55 and $25 at
June 30, 1996, and December 31, 1995, respectively 305 328
Other 18 49
Prepaid expenses and other 84 180
Property, plant and equipment 40,673 40,212
Less - accumulated depreciation 26,170 24,778
--------------- ---------------
Net property, plant and equipment 14,503 15,434
Intangible assets - net of accumulated amortization of $2,531 and $2,377
at June 30, 1996, and December 31, 1995, respectively 2,212 2,366
--------------- ---------------
Total Assets $ 18,866 $ 20,390
=============== ===============
LIABILITIES AND SHAREHOLDERS' CAPITAL DEFICIENCY:
Accounts payable, trade $ 438 $ 800
Accounts payable, affiliates 425 614
Other liabilities 1,413 1,554
Accrued litigation costs 2,151 2,883
Debt 18,180 18,930
--------------- ---------------
Total Liabilities 22,607 24,781
--------------- ---------------
SHAREHOLDERS' CAPITAL DEFICIENCY:
Preferred stock, $100 par value, 150,000 shares authorized,
none issued and outstanding at June 30, 1996, and December 31, 1995
Common stock, $1 par value, 5,000,000 shares authorized,
4,787,060, issued and outstanding at June 30, 1996, and December 31, 1995 4,787 4,787
Additional paid-in capital 11,374 11,374
Accumulated deficit (19,902) (20,552)
--------------- ---------------
Total Shareholders' Capital Deficiency (3,741) (4,391)
--------------- ---------------
Total Liabilities and Shareholders' Capital Deficiency $ 18,866 $ 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 June 30, Six Months Ended June 30,
---------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $3,885 $3,541 $7,684 $6,844
---------- ---------- ---------- ----------
Cost and expenses 2,447 2,173 4,907 4,276
Depreciation and amortization 783 766 1,562 1,529
---------- ---------- ---------- ----------
Total operating expenses 3,230 2,939 6,469 5,805
---------- ---------- ---------- ----------
Operating income 655 602 1,215 1,039
---------- ---------- ---------- ----------
Other (Income) Expenses:
Interest income (29) (16) (56) (22)
Other expense 2 -- 1 44
Interest expense 299 557 620 1,051
---------- ---------- ---------- ----------
Total other expenses, net 272 541 565 1,073
---------- ---------- ---------- ----------
Income (loss) before income taxes 383 61 650 (34)
Benefit for income taxes (4) -- -- --
---------- ---------- ---------- ----------
Net income (loss) $387 $61 $650 ($34)
========== ========== ========== ==========
Net income (loss) per average common share $0.08 $0.03 $0.14 ($0.01)
========== ========== ========== ==========
Weighted Average Common Shares Outstanding (in thousands) 4,787 2,393 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>
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Net Cash Provided By Operating Activities $938 $1,022
----------- -----------
Cash Flows From Investing Activities
Expansion, improvements and other (477) (455)
----------- -----------
Cash Flows From Financing Activities
Repayment of bank loans (750) (1,233)
Note payable, related party -- 2,287
----------- -----------
Net cash (used in) provided by financing
activities (750) 1,054
----------- -----------
Net (decrease) increase in cash & temporary
cash investments (289) 1,621
Cash & temporary cash investments, January 1, 2,033 96
----------- -----------
Cash & temporary cash investments, June 30, $1,744 $1,717
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $638 $648
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:
June 30 December 31
1996 1995
---- ----
Term Credit Agreement $18,180 $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 each of the first and
second 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 June 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 as of June 30, 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 June 30, 1996.
The weighted average effective interest rate for all debt at June 30, 1996, was
6.5%. 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 half of 1996 to utilization of net operating loss carryforwards for which
the related deferred tax assets previously were reduced by valuation allowances
and primarily due in the first half of 1995 to 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 $425 and $614 at June 30, 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 June 30, 1996, the Company had net income of $387 as
compared to $61 net income for the comparable period in 1995. The Company's net
income for the six months ended June 30, 1996 increased by $684 to $650 from a
loss of $34 for the comparable period in 1995. The increases represent an
improvement of $0.05 and $0.15 per average common share for the three and six
month periods, respectively.
Sales for the three months ended June 30, 1996 increased by $344 or 9.7% over
the comparable period in 1995 while sales for the six months ended June 30, 1996
increased $840 or 12.3%. The increase is primarily due to basic rate increases
in April 1995 and February 1996 adding $213 and $539, respectively, to the three
and six month periods. Also, an additional 1,734 average basic subscribers per
month during the first six months of 1996 compared to the same period in 1995
amounted to $128 and $232, respectively, of increased basic revenues for the
three and six month periods. In addition, an increase of $10 and $54 in pay-per-
view revenue for the three and six months ended June 30, 1996, respectively, as
compared to the same periods in 1995 contributed to the increase.
Total costs and expenses, exclusive of depreciation and amortization, for the
three and six month periods ended June 30, 1996 increased by $274 or 12.6% and
$631 or 14.8%, respectively, when compared to the same periods in 1995. The
increases for the three and six 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 six month periods ended June
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 six month periods ended June 30, 1996
decreased by $258 or 46.3% and $431 or 41.0%, respectively, as compared to the
same periods in 1995. The aggregate principal repayments of $6,513 made against
outstanding bank debt between the periods of June 30, 1995 and June 30, 1996 are
primarily responsible for the decrease in interest expense. In addition, the
weighted average effective interest rate decreased from 8.3% at June 30, 1995 to
6.5% at June 30, 1996. 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 $43 or 97.7% for the six 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 $1,744, at June 30, 1996, as compared
to $2,033 at December 31, 1995. The decrease in cash of $289 is primarily
attributed to mandatory principal payments totaling $750 and capital
expenditures of $477 partially offset by cash provided from operations of $938
for the six months ended June 30, 1996.
The Company's outstanding debt at June 30, 1996, was $18,180. Additionally, the
Company has an unused 364-day revolving credit facility of $2,000 at June 30,
1996. The Company was in compliance with all covenants of its Credit Agreement
at June 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 scheduled quarterly
principal payments on long-term debt of $375 in each of the remaining two
quarters of 1996. The Company expects to fund each of these payments from cash
provided by operations, which include revenues from the rate increase discussed
below. In the event additional cash is required, the Company is currently
discussing with its bank a renewal of the Revolving Credit Agreement expiring
August 14, 1996. 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.
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 an additional $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
announced that a decision has been made 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 material adverse
effect on the Company's financial condition and results of operations through
June 30, 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 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.
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 second 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: August 14, 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 SIX MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,744
<SECURITIES> 0
<RECEIVABLES> 360
<ALLOWANCES> 55
<INVENTORY> 0
<CURRENT-ASSETS> 2,151
<PP&E> 40,673
<DEPRECIATION> 26,170
<TOTAL-ASSETS> 18,866
<CURRENT-LIABILITIES> 4,654
<BONDS> 16,554
0
0
<COMMON> 4,787
<OTHER-SE> (8,528)
<TOTAL-LIABILITY-AND-EQUITY> 18,866
<SALES> 0
<TOTAL-REVENUES> 7,684
<CGS> 0
<TOTAL-COSTS> 4,305
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 74
<INTEREST-EXPENSE> 620
<INCOME-PRETAX> 650
<INCOME-TAX> 0
<INCOME-CONTINUING> 650
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 650
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
