<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, 1997
--------------------------------------
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
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(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 April 30, 1997.
Common Stock 4,787,060 shares
This Form 10-Q consists of 14 sequentially numbered pages.
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MERCOM, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations -
For the Three Months Ended March 31, 1997
and 1996 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
PART II. OTHER INFORMATION
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
<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,
1997 1996
-------------------- --------------------
ASSETS:
<S> <C> <C>
Cash & temporary cash investments $1,933 $3,054
Accounts receivable:
Trade, net of reserve for doubtful accounts of $92 and $36 at
March 31, 1997, and December 31, 1996, respectively 300 309
Other 53 60
Prepaid expenses and other 185 101
Property, plant and equipment 42,068 41,643
Less - accumulated depreciation 28,034 27,395
-------------------- --------------------
Net property, plant and equipment 14,034 14,248
Intangible assets - net of accumulated amortization of $2,204 and $2,134
at March 31, 1997, and December 31, 1996, respectively 2,008 2,079
-------------------- --------------------
Total Assets $18,513 $19,851
==================== ====================
LIABILITIES AND SHAREHOLDERS' CAPITAL DEFICIENCY:
Accounts payable, trade $507 $828
Accounts payable, affiliates 282 784
Other liabilities 1,595 1,578
Accrued litigation costs 2,150 2,150
Debt 16,501 17,430
-------------------- --------------------
Total Liabilities 21,035 22,770
-------------------- --------------------
SHAREHOLDERS' CAPITAL DEFICIENCY:
Preferred stock, $100 par value, 150,000 shares authorized, none issued and
outstanding at March 31, 1997, and December 31, 1996
Common stock, $1 par value, 5,000,000 shares authorized,
4,787,060, issued and outstanding at March 31, 1997, and December 31, 1996 4,787 4,787
Additional paid-in capital 11,374 11,374
Accumulated deficit (18,683) (19,080)
-------------------- --------------------
Total Shareholders' Capital Deficiency (2,522) (2,919)
-------------------- --------------------
Total Liabilities and Shareholders' Capital Deficiency $18,513 $19,851
==================== ====================
</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,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Sales $4,064 $3,799
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Cost and expenses 2,568 2,460
Depreciation and amortization 722 779
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Total operating expenses 3,290 3,239
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Operating income 774 560
------------- ------------
Other (Income) Expenses:
Interest income (42) (27)
Other income (16) --
Interest expense 283 321
------------- ------------
Total other expenses, net 225 294
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Income before income taxes 549 266
Provision for income taxes 152 5
------------- ------------
Net income $397 $261
============= ============
Net income per average common share $0.08 $0.05
============= ============
Weighted Average Common Shares Outstanding (in thousands) 4,787 4,787
============= ============
</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,
----------------------
1997 1996
---- ----
<S> <C> <C>
Net Cash Provided By Operating Activities $245 $157
---------------- -----------------
Cash Flows From Investing Activities
Expansion, improvements and other (437) (259)
---------------- -----------------
Cash Flows From Financing Activities
Repayment of bank loans (929) (375)
---------------- -----------------
Net cash used in financing activities (929) (375)
---------------- -----------------
Net decrease in cash & temporary cash investments (1,121) (477)
Cash & temporary cash investments, January 1, 3,054 2,033
---------------- -----------------
Cash & temporary cash investments, March 31, $1,933 $1,556
================ =================
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $372 $342
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 Mercom, Inc. (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 1996 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, 1997.
(2) DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
---- ----
<S> <C> <C>
Term Credit Agreement $16,501 $17,430
======= =======
</TABLE>
Under the terms of the Term Credit Agreement, the Company made a scheduled
principal payment of $437 in the first quarter of 1997.
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 is required
to amortize additional debt to the extent the Company generates excess cash
flow. The requirement for such additional amortization at December 31, 1996, of
approximately $492, was due and paid by March 31, 1997. At March 31, 1997, 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, 1997. 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, 1997.
The weighted average effective interest rates for all debt at March 31, 1997,
and December 31, 1996, were 6.75% and 6.5%, respectively. Interest is paid based
on Prime, LIBOR or CD rates, depending on the type of loan and terms of the
agreement.
The Company's estimated capital expenditures for 1997 to upgrade a portion of
its plant will require the Company to restructure its debt. The Company is
currently exploring alternatives which will support its 1997 plan.
6
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
(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 the effects
of net operating loss carryforwards.
(4) AFFILIATE TRANSACTIONS
The Company had amounts due to C-TEC Corporation, majority stockholder of the
Company, and C-TEC subsidiaries ("C-TEC"), of $282 and $784 at March 31, 1997,
and December 31, 1996, respectively, primarily related to management services
provided by C-TEC Cable Systems, Inc. ("CCS"). The Company entered into a
new management agreement with C-TEC Cable Systems of Michigan, Inc. ("CCS
Michigan") in 1997, pursuant to which CCS Michigan manages the Company's cable
television systems' operations. The management agreement was approved by the
Company's Board of Directors.
(5) RESTRUCTURING AND SUBSEQUENT EVENT
On May 12, 1997, C-TEC announced that is had proposed to acquire the 38.08% of
the common stock of the Company not currently owned by it, in exchange for 8.75%
of the common stock of CCS Michigan, a C-TEC subsidiary. In the proposed
transaction, the Company would become a wholly owned subsidiary of CCS Michigan.
The proposed exchange ratio is based on the assumption that CCS Michigan will
have $125 million of net debt outstanding at the time of the transaction. The
combined operations would serve approximately 200,000 cable subscribers,
approximately 40,000 of which are currently served by the Company.
C-TEC recently announced a restructuring plan to separate its operations into
three publicly held companies. Under the plan, one of those companies will be
CCS Michigan, which will own all of C-TEC's Michigan cable television
operations, including its interest in the Company. The restructuring is subject
to certain conditions and there can be no assurance that any restructuring will
take place.
C-TEC's proposal to acquire all of the outstanding common stock of the Company
not currently owned by it, has been conveyed to the Board of Directors of the
Company. It is anticipated that the Company's Board of Directors will form a
special committee composed of directors unaffiliated with C-TEC to review and
evaluate the proposal. The proposal is subject to certain conditions, including
the execution and delivery of mutually satisfactory definitive documentation,
the consummation of C-TEC's restructuring and the receipt of all required
regulatory approvals. C-TEC has stated that is reserves the right to withdraw
its proposal at any time prior to the execution of a definitive agreement.
There can be no assurance as to the terms of any transaction or that any
transaction will take place.
7
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
(6) EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share". This
Statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with public held common stock or potential common
stock. This Statement is effective for financial statements issued after
December 31, 1997, earlier application is not permitted. This Statement requires
restatement of all prior-period EPS data presented. The Company does not believe
that the adoption of SFAS No. 128 will have a material impact on its financial
statements.
8
<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, 1996. 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, the effect of rate increases 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
differently than 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, 1997, the Company had net income of $397 as
compared to $261 net income for the comparable period in 1996. This represents
an increase of $136 or $0.03 per average common share for the three month
period.
Sales for the three months ended March 31, 1997, increased $265 or 7.0% over the
comparable period in 1996. The increase in sales is primarily due to higher
basic service revenues of $234. The two components responsible for the increase
are; (i) the basic rate increase in February 1997 added $158 and, (ii) an
additional 1,035 average basic subscribers per month generated an additional
$76. Also contributing to the increase, was $14 in additional advertising
revenue for the three months ended March 31, 1997, as compared to the same
period in 1996.
Total costs and expenses, exclusive of depreciation and amortization, for the
three month period ended March 31, 1997, increased $108 or 4.4% compared to the
same period in 1996. The increase for the three month period was 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 and costs associated with
maintaining a larger customer base also contributed to the increase over the
first quarter of the prior year.
Depreciation and amortization expense for the three month period ended March 31,
1997, decreased $57 or 7.9% compared to the same period in 1996. The decrease
was primarily due to approximately $3,050 of truck and distribution equipment
becoming fully depreciated in August 1996.
9
<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 month period ended March 31, 1997, decreased $38
or 11.8% when compared to the same period in 1996. The decrease in the average
outstanding bank debt between the comparable periods was the primary reason for
the decrease 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.
Income tax expense increased $147 primarily resulting from higher earnings
before taxes of $283.
Liquidity and Capital Resources
Cash and temporary cash investments were $1,933, at March 31, 1997, as compared
to $3,054 at December 31, 1996. The decrease in cash of $1,121 is primarily
attributed to a payment of $929 on long-term debt. In addition, capital
expenditures exceeded cash generated by operations in the three month period by
$192.
The Company's outstanding debt at March 31, 1997, was $16,501. Additionally, the
Company has an unused 364-day revolving credit facility of $2,000 at March 31,
1997. The Company was in compliance with all covenants of its Credit Agreement
at March 31, 1997.
The Company must be able to continue to manage its costs and increase its
revenues through the offering of new products, the expansion of its territories
and when appropriate, rate increases. In February 1997, 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 $600 in annualized revenues based on the current level of
subscribers.
In 1995, the Company restructured both its equity and debt 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's estimated capital
expenditures for 1997 to upgrade a portion of its plant will require the Company
to restructure its debt. The Company is currently exploring alternatives which
will support its 1997 plan.
10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in Thousands, Except Per Share Data)
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 required the FCC to establish rules to
ensure that rates for basic services were 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 1996, Congress passed and the President signed the
Telecommunications Act of 1996 (the "1996 Act"). The new law is intended to
provide a pro-competitive, de-regulatory national policy framework designed to
accelerate rapidly private sector deployment of advanced telecommunications and
information technologies and services to all Americans by opening all
telecommunications markets to competition. The FCC has adopted regulations to
implement the requirements of the 1996 Act and the intent of Congress. 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>
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 materially adverse
effect on the Company's financial condition and results of operations through
March 31, 1997. 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.
In December 1995, the Company provided all of its Michigan subscribers with a
rate increase notification under the rules and regulations established by the
FCC. 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. The Company believes it has adequately reserved for
this exposure in 1996 if the FCC denies the Petitions for Reconsideration
and has filed alternate rate justifications to support its 1996 rates.
In December 1996, the Company commenced rate increase notifications to
substantially all of its Michigan subscribers. The rate increase implemented in
February 1997 was justified using the FCC's existing going forward rules. This
approach protects the Company's 1997 rates in the event the FCC denies the
Company's "small systems" Petition for Reconsideration. As of the date of this
filing, one complaint has been filed with the FCC relative to the 1997 rate
increase. The Company believes the FCC's ultimate decision on the Petition for
Reconsideration will not have a material adverse effect on its results of
operations or financial condition.
12
<PAGE>
Part II. Other Information
Item 5. Other Information
On May 12, 1997, C-TEC announced that it had proposed to acquire the 38.08% of
the common stock of the Company not currently owned by it, in exchange for 8.75%
of the common stock of CCS Michigan, a C-TEC subsidiary. In the proposed
transaction, the Company would become a wholly owned subsidiary of CCS Michigan.
The proposed exchange ratio is based on the assumption that CCS Michigan will
have $125 million of net debt outstanding at the time of the transaction. The
combined operations would serve approximately 200,000 cable subscribers,
approximately 40,000 of which are currently served by the Company.
C-TEC recently announced a restructuring plan to separate its operations into
three publicly held companies. Under the plan, one of those companies will be
CCS Michigan, which will own all of C-TEC's Michigan cable television
operations, including its interest in the Company. The restructuring is subject
to certain conditions and there can be no assurance that any restructuring will
take place.
C-TEC's proposal to acquire all of the outstanding common stock of the Company
not currently owned by it, has been conveyed to the Board of Directors of the
Company. It is anticipated that the Company's Board of Directors will form a
special committee composed of directors unaffiliated with C-TEC to review and
evaluate the proposal. The proposal is subject to certain conditions, including
the execution and delivery of mutually satisfactory definitive documentation,
the consummation of C-TEC's restructuring and the receipt of all required
regulatory approvals. C-TEC has stated that it reserves the right to withdraw
its proposal at any time prior to the execution of a definitive agreement.
There can be no assurance as to the terms of any transaction or that any
transaction will take place.
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 1997.
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: May 15, 1997 /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 THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,933
<SECURITIES> 0
<RECEIVABLES> 392
<ALLOWANCES> 92
<INVENTORY> 0
<CURRENT-ASSETS> 2,471
<PP&E> 42,068
<DEPRECIATION> 28,034
<TOTAL-ASSETS> 18,513
<CURRENT-LIABILITIES> 4,973
<BONDS> 14,662
0
0
<COMMON> 4,787
<OTHER-SE> (7,309)
<TOTAL-LIABILITY-AND-EQUITY> 18,513
<SALES> 0
<TOTAL-REVENUES> 4,064
<CGS> 0
<TOTAL-COSTS> 2,187
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 40
<INTEREST-EXPENSE> 283
<INCOME-PRETAX> 549
<INCOME-TAX> 152
<INCOME-CONTINUING> 397
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 397
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
