<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For fiscal year ended December 31, 1996
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File No. 0-17750
MERCOM,INC.
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(Exact name of registrant as specified in its charter)
Delaware 38-2728175
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Carnegie Center, Princeton, NJ 08540-6215
- ---------------------------------- ----------
(Address of principle executive offices) (Zip Code)
Registrant's telephone number including area code: 609-734-3737
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
--------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K (X).
As of February 28, 1997, 4,787,060 shares of Common Stock were outstanding. The
aggregate market value of the shares held by non-affiliates of the registrant
(based upon the average of the bid and asked prices of these shares quoted by
the National Quotation Bureau, Inc. and the OTC Bulletin Board on February 28,
1997, of $6 7/16 per share) was approximately $11,734,383.
Documents Incorporated by Reference - None
------------------------------------------
The Index to Exhibits is on Page 24.
<PAGE>
PART I
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Item 1. Business.
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Mercom, Inc. ("Mercom" or the "Company") is a cable television operator
with three cable systems in southern Michigan and one cable system in Port St.
Lucie, Florida (the "Systems"). The Michigan systems are operated through
Mercom's wholly-owned subsidiary, Communications and Cablevision, Inc. ("CCV").
The Florida system is operated through a wholly-owned subsidiary, Mercom of
Florida, Inc. ("Mercom of Florida"). As of December 31, 1996, the Systems had
40,012 subscribers.
The three Michigan systems provide cable service to Monroe County, Allegan
County and the Coldwater and Sturgis areas. The Florida system serves St. Lucie
West, a planned community in Southeastern Florida, approximately 90 miles north
of Palm Beach.
The following table indicates the development of the Company by
summarizing, as of December 31 of each of the last five years, the number of
homes passed by cable, the number of homes purchasing basic cable service
("basic subscribers"), the number of basic subscribers as a percentage of homes
passed, the number of homes purchasing basic cable service and tier cable
service ("tier subscribers"), the number of tier subscribers as a percentage of
basic subscribers, the number of premium service units, premium service units as
a percentage of basic subscribers ("pay-to-basic ratio"), and the average
revenue per subscriber for December of each year.
<TABLE>
<CAPTION>
As of December 31
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Homes Passed (1)........... 59,988 61,730 63,721 65,449 65,998
Basic subscribers (2)...... 34,118 34,714 37,324 38,853 40,012
Basic subscribers as a
percentage of homes passed 56.9% 56.2% 58.6% 59.4% 60.6%
Tier subscribers (3)....... 32,814 32,945 34,789 36,120 36,989
Tier subscribers as a
percentage of basic subs.. 96.2% 94.9% 93.2% 93.0% 92.4%
Premium service units (4).. 12,762 12,816 14,312 17,834 15,493
Premium service units as a
percentage of basic subs.. 37.4% 36.9% 38.3% 45.9% 38.7%
Average revenue per sub for
month of December (5)..... $ 30.05 $ 29.70 $ 29.36 $ 30.41 $32.72
</TABLE>
(1) A home is deemed to be "passed" by cable if it can be connected to the
distribution system without any further extension of the distribution
plant.
(2) A home with one or more television sets connected to a cable television
system is counted as one basic subscriber.
(3) A home with one or more television sets receiving both basic and tier
service is counted as one tier subscriber. Tier service is not available
in the St. Lucie System.
(4) A basic subscriber may purchase more than one premium service, each of which
is counted as a separate premium service unit. Hence, the pay-to-basic
ratio can exceed 100%. A premium service unit includes only single channel
services offered for a monthly fee.
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<PAGE>
Item 1. Business, Continued
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(5) Calculated by dividing total cable related revenues for the month of
December by the number of basic subscribers at the end of the month.
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992 and the Telecommunications Act of 1996.
(See "Management's Discussion and Analysis - Regulatory Matters").
The Company's performance is dependent to a large extent on its
ability to obtain and renew its franchise agreements from local government
authorities on acceptable terms. To date, all of the Company's franchises have
been renewed or extended, generally at or prior to their stated expirations and
on acceptable terms. During 1996, the Company completed negotiations with 4
communities resulting in franchise renewals on terms which are acceptable to the
Company. The Company has 78 franchises, 22 of which are in the 3 year Federal
Communications Commission (the "FCC") franchise renewal window at December 31,
1996. No one franchise accounts for more than 12% of the Company's total
revenue.
Competition for the Company's services traditionally has come from a
variety of providers including broadcast television, video cassette recorders
and home satellite dishes. Direct broadcast satellite (DBS) which allows a
consumer to receive cable programming for a fee once they purchase or lease a
receiving dish, has proved to be a viable competitor. These services are
generally available throughout the country, including areas in which the Company
operates. There are currently four national DBS service providers in the United
States. In addition, the Company is aware of eight communities within its
service areas where other cable television providers have commenced cable
programming operations. Although the Company has experienced some erosion of its
subscriber base in these communities, the impact on its operations to date has
not been material. The level of competition from other video providers may also
increase due to the passage of the Telecommunications Act of 1996, which is
intended to foster competition. It is not possible to quantify the potential
impact of future technological, competitive or regulatory developments on the
cable television industry in general or the Company in particular.
Employees
As of December 31, 1996, Mercom had 54 full-time employees, none of whom
were represented by collective bargaining units. Management believes that the
Company's relationship with its employees is satisfactory.
Item 2. Properties.
- ------- -----------
The principal assets of the Company include headends, distribution systems
and subscriber connection equipment. Mercom owns six headends, each including a
tower, antennas, earth stations for the reception of satellite signals, and
electronic equipment necessary for the reception, amplification and modulation
of signals. In addition to these headends, the Company owns ten microwave
receive sites, each including a tower, microwave dish and electronic equipment
necessary for their reception of microwave signals. The distribution system
consists of approximately 1,448 miles of coaxial cable plus related electronic
equipment. Subscriber connection equipment consists of house or apartment drop
equipment and decoding converters. The physical components of the Systems
require regular maintenance and periodic upgrading in order to keep pace with
technological advances and to comply with regulatory standards.
-2-
<PAGE>
Item 2. Properties, Continued
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Mercom owns two small parcels of real property used as headend sites, and
it owns most of the buildings which contain headend equipment for the Systems.
The remainder of Mercom's facilities are leased.
Item 3. Legal Proceedings.
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In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the results of operations or financial condition of
the Company.
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:
<TABLE>
<CAPTION>
Nominee For Against
------- --- -------
<S> <C> <C>
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
</TABLE>
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
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<PAGE>
Executive Officers Of The Registrant
------------------------------------
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an un-numbered Item in Part I of this Report in lieu of being
included in the definitive proxy statement relating to the Registrant's Annual
Meeting of Shareholders to be filed by Registrant with the Securities and
Exchange Commission (the "Commission") pursuant to section 14 (A) of the
Securities Exchange Act of 1934 (the "1934 Act"). Information with respect to
Executive Officers who are also Directors is set forth in Part III Item 10 of
this Form 10-K.
<TABLE>
<CAPTION>
Age as of Office and Date Held Since:
Name March 1, 1997 Other Positions Held
---- ------------- -----------------------------
<S> <C> <C>
John J. Gdovin 39 Executive Vice President - Mercom since August 1996; Senior Vice President RCN
Telecom Services Group since February 1997; Executive Vice President C-TEC
Corporation ("C-TEC") Cable Television Group since August 1996; Vice President
C-TEC Cable Television Group (August 1995 -August 1996); Director of
Operations, C-TEC Cable Television Group (February 1992 - August 1995);
Director of Marketing and Business Administration (May 1991 - February 1992).
John D. Filipowicz 38 Vice President and Assistant General Counsel -Mercom since May 1995; Corporate
Secretary since December 1994; Vice President and Assistant General Counsel -
C-TEC since February 1995; Assistant Corporate Secretary - C-TEC since
December 1994; Corporate Counsel - C-TEC (December 1990- February 1995);
Associate Counsel - C-TEC (August 1988 - November 1990).
</TABLE>
-4-
<PAGE>
PART II
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Item 5. Market for the Registrant's Common Stock and Related Stockholders
- --------------------------------------------------------------------------
There were approximately 1,804 holders of the Company's Common Stock on
February 28, 1997.
<TABLE>
<CAPTION>
1996 1995
Bid Prices Bid Prices
---------- ----------
High Low High Low
$ $ $ $
<S> <C> <C> <C> <C>
Quarter Ended:
March 31 8-1/2 6 4-1/2 3-3/4
June 30 8-1/2 5-1/4 4-1/4 3-1/2
September 30 6-1/2 5-1/2 5-3/32 2-1/4
December 31 6-3/4 6 7-1/4 3-1/4
</TABLE>
The Company's Common Stock is traded on the over-the-counter market. The
bid and ask prices are quoted by the National Quotation Bureau, Inc. and the OTC
Bulletin Board under the symbol "MEEO." The 1996 and 1995 bid prices listed
above represent the high and low bid prices reported by the National Quotation
Bureau, Inc. Prices listed above represent inter-dealer quotations without
adjustment for retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions. Trading in the Company's Common
Stock, has been limited and sporadic and thus does not constitute an established
public trading market. See Note 10 (Stock Exchange Listing) of Notes to
Consolidated Financial Statements.
The Company currently is restricted by its credit agreements from paying
dividends. The Company has not paid dividends in the preceding two years. The
Company does not anticipate paying cash dividends on its shares of Common Stock
in the foreseeable future. See Note 5 (Debt) of Notes to Consolidated Financial
Statements.
-5-
<PAGE>
Item 6. Selected Financial Data.
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(Dollars in Thousands, except per share data)
The following information should be read in conjunction with the
Consolidated Financial Statements and Notes thereto:
<TABLE>
<CAPTION>
For the Years Ended December 31, 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales $15,570 $13,939 $12,927 $12,606 $11,986
Net income (loss) $ 1,472 $ 549 $ (658) $ (236) $(1,144)
Net income (loss) per average common share $ 0.31 $ 0.16 $ (0.27) $ (0.10) $ (0.48)
Total assets $19,851 $20,390 $19,823 $22,244 $23,873
Debt $17,430 $18,930 $25,926 $28,184 $29,847
</TABLE>
In August 1995, a Common Stock rights offering was concluded. The Company's
shareholders purchased 2,393,530 of its shares of Common Stock for $3.60 per
share. The rights offering provided the Company with approximately $8,200 after
payment of fees and expenses. The Company used the proceeds to repay $5,070 of
outstanding indebtedness to its bank, $2,287 of outstanding indebtedness to
C-TEC, its controlling shareholder, under two demand notes and the remaining
balance was used for general corporate purposes, including capital expenditures.
(See "Liquidity and Capital Resources").
-6-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
- ---------------------------------------------------------------------
and Results of Operations
-------------------------
(Dollars in Thousands, except per share data)
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
report is forward looking, such as information relating to future capital
expenditures, 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, Mercom. These risks and uncertainties include, but are not limited
to, uncertainties relating to economic conditions, government and regulatory
policies, the pricing and availability of equipment, materials, inventories and
programming, technological developments and changes in the competitive
environment in which the Company operates.
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and Notes thereto:
<TABLE>
<CAPTION>
Liquidity and Capital Resources 1996 1995 1994
- ------------------------------- ---- ---- ----
<S> <C> <C> <C>
Investing Activities:
Additions to property, plant and equipment $1,585 $1,701 $1,238
Other (3) (12) (12)
------ ------ ------
Net cash used in investing activities $1,582 $1,689 $1,226
====== ====== ======
Net cash provided by
operating activities $4,103 $2,366 $2,591
====== ====== ======
</TABLE>
Net cash provided by operating activities represented 259.4%, 140.1% and
211.3% of investing activities for capital expenditures for 1996, 1995 and 1994,
respectively. The Company's construction budget is estimated to be $5,663 in
1997 as compared to actual expenditures of $1,585, $1,701 and $1,238 in 1996,
1995 and 1994, respectively. The 1997 construction budget includes capital
expenditures necessary to upgrade system capacity and network reliability.
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. Revenue growth was impacted previously due
to the elimination of capital projects resulting from ongoing cash flow concerns
and to the effect rate regulation has had on the Company in particular and the
industry as a whole. Although operating expenses continued to rise, the Company
was unable to raise its rates due to a "Rate Freeze" ordered by the FCC. The
"Rate Freeze" delayed the Company's implementation of any rate increases from
September 1992 until April 1995. At that time, the Company instituted a basic
rate increase according to the rules and regulations established by the FCC. In
December 1995 and 1996, the Company commenced basic rate increase notifications
to all of its Michigan subscribers for rate increases which were implemented in
the first quarters of 1996 and 1997, respectively. The rate increases were
implemented according to the rules and regulations established by the FCC. The
1996 rate increase provided an additional $1,200 in annual revenues, subject to
the final decision by the FCC with respect to these rate increases, of which no
assurances can be given. The statement of operations for 1996 included charges
totaling approximately $170 relating to these exposures. (See "Management's
Discussion and Analysis - Regulatory Matters, Impact to Company"). The 1997 rate
increase is expected to provide an additional $600 in annualized revenues based
on the average number of subscribers forecasted for 1997.
-7-
<PAGE>
Liquidity and Capital Resources, Continued
- -------------------------------
(Dollars in Thousands, except per share data)
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 determining the best
alternative for such funding.
While the Company is in compliance with all covenants of its credit
agreements at December 31, 1996, and through the date of this filing, the credit
agreements contain restrictions on the payment of dividends and additional
amortization of debt to the extent the Company generates excess cash flow. See
Note 5 (Debt) of Notes to Consolidated Financial Statements. The requirement for
such additional amortization at December 31, 1996, of approximately $492 was due
and paid by March 31, 1997. The Company has not paid dividends in recent years
due to the Company's financial condition and does not expect to pay dividends in
the foreseeable future.
In November 1995, C-TEC, 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 disposition of its domestic cable television
unit, including its investment in the Company.
In February 1997, C-TEC announced that its Board of Directors approved a
restructuring plan pursuant to which C-TEC will separate its operations along
business lines into three separate, publicly traded companies. The restructuring
will be effected by the spin-off of two companies, one of which will be C-TEC
Cable Systems of Michigan, Inc. ("CCS Michigan") which will consist of C-TEC's
classic cable television operations in Michigan, including its 61.92% interest
in Mercom. It is anticipated that the spin-offs will occur by the end of 1997.
The spin-offs are, however, subject to the receipt of a private letter ruling
from the Internal Revenue Service regarding the tax-free nature of the spin-off,
the receipt of other regulatory approvals, financial consents, and certain other
conditions. There can be no assurances that any transaction will take place.
-8-
<PAGE>
Results of Operations
- ---------------------
(Dollars in Thousands, except per share data)
1996 Compared with 1995
The Company's net income in 1996 increased $923 or $0.15 per average common
share. The Company recorded net income in 1996 of $1,472 or $0.31 per average
common share compared to a net income of $549 or $0.16 per average common share
in 1995. The increase from 1995 is primarily attributable to an increase in
operating income before depreciation and amortization of $452 and a decline in
interest expense of $673.
The Company had operating income before depreciation and amortization of
$5,643 in 1996 compared to $5,191 in 1995. This represents an increase of $452
(8.7%) from 1995 to 1996. Management believes that operating income before
depreciation and amortization is a useful measure in assessing the degree to
which resources are available to meet debt service requirements and to replace
and modernize plant in order to offer new services to customers and to improve
the quality of service.
Sales increased in 1996 by $1,631 (11.7%) from the previous year. This
increase is primarily due to increased basic service revenue of approximately
$1,500. Approximately $1,000 of the increase is a result of the rate increase
implemented in February 1996. The remaining $500 of the basic service revenue
increase is due to approximately 1,845 additional average basic subscribers per
month in 1996 over the prior year.
Programming, franchise and other variable costs increased by $775 (21.7%)
from 1995. This increase is directly related to costs associated with subscriber
growth, increased programming rates on existing channels and new basic channels
added during the year. Operating, marketing and other fixed system costs
increased by $423 (12.2%) in 1996. The increase is primarily due to salaries and
benefits, costs associated with maintaining a larger subscriber base and a
concentration on customer service initiatives.
Other expenses, including interest, decreased by $497 (30.6%). The decrease
is due primarily to a reduction in interest expense as described below partially
offset by the effect of the reversal in 1995 of a restructuring accrual from
prior years.
Higher average cash balances in 1996 resulted in higher interest income of
$44.
Interest expense decreased by $673 (35.4%) in 1996. The decrease from 1995
in the average outstanding debt of approximately $5,060 was the primary reason
for the decrease in interest expense. In addition, a reduction in the annual
weighted average effective interest rate from 7.8% in 1995 to 6.5% in 1996
contributed to the reduction in interest expense. The Company's future interest
expense is subject to fluctuations in the market rate of interest and,
therefore, there is no assurance that the Company's current level of interest
expense is indicative of future trends.
The Company does not expect inflation to have a significant impact on its
future operations.
-9-
<PAGE>
Results of Operations, Continued
- ---------------------
(Dollars in Thousands, except per share data)
1995 Compared with 1994
The Company's earnings in 1995 increased $1,207 or $0.43 per average common
share. The Company recorded net income in 1995 of $549 or $0.16 per average
common share compared to a net loss of $658 or $0.27 per average common share in
1994. The increase from 1994 is primarily attributable to a decline in
litigation expenses, as discussed below.
The Company had operating income before depreciation and amortization of
$5,191 in 1995 compared to $5,052 in 1994. This represents an increase of $139
(2.8%) from 1994 to 1995.
Sales increased $1,012 (7.8%) in 1995 from the previous year primarily due
to an increase in basic service revenue of $900. This increase in basic service
revenue is primarily a result of approximately 2,300 average additional basic
subscribers per month in 1995 which generated approximately $600 of the
increase. The remaining $300 increase in basic service revenue, is primarily due
to a rate increase implemented in April 1995. In addition, growth in premium
units contributed to the increase in sales from 1994.
Programming, franchise and other variable costs increased by $461 (14.9%)
from 1994. This increase is directly related to costs associated with subscriber
growth, increased programming rates on existing channels and new basic channels
added during 1995. Operating, marketing, fixed and other general and
administrative costs increased $412 (8.6%) in 1995. The increase is primarily
due to salaries and benefits, costs associated with maintaining a larger
subscriber base and a concentration on customer service initiatives.
Other expenses, including interest, decreased by $1,082 (40.0%) in 1995
primarily due to a reversal in 1995 of a restructuring accrual from prior years
and nonrecurring litigation costs related to litigation with a former officer
recorded in 1994.
Interest expense decreased by $167 (8.1%) in 1995. The reduction in
principal resulting from the completion of the Rights Offering is the primary
reason for the decrease in interest expense from the prior period. The Company
used a portion of the net proceeds from the Rights Offering to repay $5,070 of
outstanding indebtedness to its bank in August 1995.
Financial Condition
-------------------
The increase in cash and temporary cash investments at December 31, 1996,
as compared to December 31, 1995, is attributed to cash of $2,521 generated by
operations in excess of capital expenditures offset by mandatory principal
payments of $1,500. Cash and temporary cash investments were $3,054 at December
31, 1996, as compared to $2,033 at December 31, 1995, an increase of $1,021.
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>
Regulatory Matters, Continued
- -------------------
(Dollars in Thousands, except per share data)
Cable Television Consumer Protection and Competition Act of 1992
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 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.
Impact to Company
The rate regulation provisions of the 1992 Act have not had a material
adverse effect on the Company's financial condition and results of operations
through December 31, 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.
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. In the event the FCC upholds their initial decision
regarding these three communities, the Company has filed alternate rate
justifications to support its 1996 rates. The statement of operations for 1996
included charges totaling approximately $170 relating to exposures under the
Order.
-11-
<PAGE>
Regulatory Matters, Continued
- -------------------
(Dollars in Thousands, except per share data)
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, no complaints have 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.
New Accounting Pronouncement
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). 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 for
periods ending after December 15, 1997; earlier application is not permitted.
This Statement requires restatement of all prior-period EPS data presented. The
Company is currently evaluating the impact, if any, adoption of SFAS 128 will
have on its financial statements.
Item 8. Financial Statements and Supplementary Data.
- ------- --------------------------------------------
The consolidated financial statements and supplementary data required under
Item 8 of Part II are set forth in Part IV Item 14 (a)(1) and (a)(2) of this
Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------- -----------------------------------------------------------
and Financial Disclosure
------------------------
During the two years preceding December 31, 1996, there has been neither a
change of accountants of the Registrant nor any disagreements on any matter of
accounting principles, practices or financial statement disclosure.
-12-
<PAGE>
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
<TABLE>
<CAPTION>
Director
--------
Name of Director Age Since
---------------- ---- -----
<S> <C> <C> <C>
Bruce C. Godfrey 41 Executive Vice President and Chief Financial 1994
Officer of the Company since May 1994;
Executive Vice President and Chief Financial
Officer, C-TEC since April 1994; Director,
C-TEC since November 1996; Former Senior Vice
President, Daniels & Associates, an
investment banking firm specializing in the
cable television, mobile communications a
entertainment businesses from January 1984-
April 1994.
Clifford L. Jones 69 Served as President, Capital Region Economic 1991
Development Corporation from September 1992-
February 1994; Past President, Pennsylvania
Chamber of Business & Industry from 1983-
1991; Director, Pennsylvania Power & Light
Company.
Michael J. Mahoney 46 President and Chief Operating Officer of the 1994
Company since March 1994; Executive Vice
President of the Company from 1991-1994;
President and Chief Operating Officer, C-TEC
since February 1994; Executive Vice
President, C-TEC Cable Systems, Inc. ("CCS")
from 1991-1994; Director of C-TEC since May
1995; Former Executive Vice President and
Chief Operating Officer, Harron
Communications Corp.
</TABLE>
-13-
<PAGE>
Item 10. Directors and Executive Officers of the Registrant, Continued
- -------- --------------------------------------------------
<TABLE>
<CAPTION>
Director
--------
Name of Director Age Since
- ---------------- --- ------
<S> <C> <C>
David C. McCourt 40 Chairman and Chief Executive Officer of the 1993
Company since October 1993; Chairman, Chief
Executive Officer and Director, C-TEC;
President and Director, Kiewit Telecom
Holdings, Inc.; President and Director,
Metropolitan Fiber Systems/McCourt, Inc., a
subsidiary of MFS Telecom, Inc. since 1988;
Director, MFS Communications Company, Inc.
since July 1990; Director, WorldCom, Inc.
since December 1996.
Raymond B. Ostroski 42 Executive Vice President and General Counsel 1994
of the Company since February 1995; Executive
Vice President, General Counsel and Corporate
Secretary, C-TEC since February 1995; Vice
President and General Counsel-C-TEC from
December 1990-February 1995; Vice President and
General Counsel-Mercom since December 1991-February
1995.
Harold J. Rose, Jr. 61 Partner, RK Associates, real estate management 1991
consultants since 1990; Former Chairman of the
Board and Chief Executive Officer of Merchants
Bancorp, Inc. and Chairman of the Board of
Merchants Bank, N.A. and Merchants Bank (North);
Chairman, Pennsylvania Millers Mutual, Inc. Co. .
George C. Stephenson 51 Managing Director, PaineWebber, Inc. since 1987. 1991
</TABLE>
The information required under Item 10 of Part III with respect to the
Executive Officers of the Registrant is set forth in Part I of this report.
-14-
<PAGE>
Item 11. Executive Compensation
- -------- ----------------------
Except for the Company's management agreement dated January 1, 1992 ("the
Management Agreement") with CCS, a wholly-owned subsidiary of C-TEC, no
Executive Officer of the Company received any compensation for services rendered
on behalf of the Company during the fiscal year ended December 31, 1996 (See
Item 13).
Directors' Compensation
Each Director of the Company is paid an annual retainer of $6,000, plus
$500 for each Board meeting attended during 1996. Committee Chairmen are paid
$1,000 for each committee meeting attended while other committee members are
paid $500 for each meeting attended. Members of the Executive Committee are not
compensated for participating in the meetings of said committee. Directors who
are also employees of C-TEC have authorized the payment of such fees to their
employer, C-TEC Services, consistent with the terms of their employment with
C-TEC. The following fees were paid in 1996: Clifford L. Jones $9,000; Harold J.
Rose, Jr. $10,500; George C. Stephenson $9,000 and C-TEC Services, $31,500.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
Security Ownership of Management
The following table sets forth the beneficial ownership of Common Stock, as
of March 1, 1997, by each director, the named executive officers and by all
persons, as a group, who are currently directors and executive officers of the
Company. Each director or executive officer has sole investment and voting power
over the shares listed opposite his name except as set forth in the footnotes
hereto:
<TABLE>
<CAPTION>
Number of Shares Percent
Name of Beneficial Owner Beneficially Owned of Class
------------------------ ------------------ --------
<S> <C> <C>
Bruce C. Godfrey -0- -0-
John J. Gdovin -0- -0-
Clifford L. Jones 300 *
David C. McCourt -0-(1) -0-
Michael J. Mahoney -0- -0-
Raymond B. Ostroski 4,000 *
Harold J. Rose, Jr. -0- -0-
George C. Stephenson 5,000 *
All Directors and Current Executive
Officers as a Group (8 persons) 9,300 *
</TABLE>
* Less than one percent.
(1) Mr. McCourt disclaims beneficial ownership of 50,000 shares which are
owned by his wife which constitute approximately 1.69% of the Class.
-15-
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management,
- -------- ---------------------------------------------------------------
Continued
The following table sets forth the beneficial ownership of C-TEC Common
Stock and C-TEC Class B Stock of C-TEC as of March 1, 1997, by each director,
the named executive officers and by all persons, as a group, who are currently
directors and executive officers of the Company. Because the shares of C-TEC
Class B Stock are convertible at the option of the holder into shares of C-TEC
Common Stock on a one-for-one basis at any time and from time to time, the
"Assuming Conversion" columns in the C-TEC Common Stock table reflect the total
shares of C-TEC Common Stock which would be beneficially owned by such group
assuming no other conversions. The "Percent of Class" columns represent
ownership not voting interest. Shares of C-TEC Common Stock have one vote per
share and shares of C-TEC Class B Stock, 15 votes per share. Each director or
executive officer has sole investment and voting power over the shares listed
opposite his name except as set forth in the footnotes hereto:
<TABLE>
<CAPTION>
Assuming Conversion
-------------------
Name of Number of Shares of C-TEC Percent of Percent of
Beneficial Owner Common Stock Beneficially Owned Class Total Class Approx.
- ---------------- ------------------------------- ---------- ----- -------------
<S> <C> <C> <C> <C>
Bruce C. Godfrey 13,826(1) * 13,826 *
John J. Gdovin 6,996(2) * 6,996 *
Clifford L. Jones 100 * 100 *
David C. McCourt 35,251(3)(4) * 41,251 *
Michael J. Mahoney 8,483(5) * 8,483 *
Raymond B. Ostroski 8,249(6) * 8,249 *
Harold J. Rose, Jr. -0-
George C. Stephenson -0-
All Directors and Current Executive
Officers as a Group (8 persons) 72,905 *
<CAPTION>
Name of Number of Shares of C-TEC Percent of Percent of
Beneficial Owner Class B Stock Beneficially Owned Class Total Class Approx.
- ---------------- -------------------------------- ---------- ----- -------------
<S> <C> <C> <C> <C>
Bruce C. Godfrey -0-
John J. Gdovin -0-
Clifford L. Jones -0-
David C. McCourt 6,000 * 6,000 *
Michael J. Mahoney -0-
Raymond B. Ostroski 1,000 * 1,000 *
Harold J. Rose, Jr. -0-
George C. Stephenson -0-
All Directors and Current Executive
Officers as a Group (8 persons) 7,000 * 7,000 *
</TABLE>
* Less than one percent
(1) Includes the 8,069 shares which are comprised of C-TEC Common Stock and
the C-TEC matching restricted stock awards.
(2) Includes the 2,471 shares which are comprised of C-TEC Common Stock and the
C-TEC matching restricted stock awards.
-16-
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management,
- ------- --------------------------------------------------------------
Continued
(3) Includes the 27,314 shares which are comprised of C-TEC Common Stock
and the C-TEC matching restricted stock awards.
(4) Excludes the 225 shares of C-TEC Common Stock which are owned by Mr.
McCourt's wife and of which Mr. McCourt disclaims beneficial
ownership.
(5) Includes the 7,488 shares which are comprised of C-TEC Common Stock
and the C-TEC matching restricted stock awards.
(6) Includes the 4,784 shares which are comprised of C-TEC Common Stock
and the C-TEC matching restricted stock awards.
Security Ownership of Certain Beneficial Owners
So far as is known to the Company, as of March 1, 1997, no persons,
except those listed below, owned beneficially more than five percent (5%) of the
outstanding Common Stock. With respect to the named persons, the following
information is based on Schedules 13D or 13G filed with the Securities and
Exchange Commission ("SEC"), copies of which were supplied to the Company by
said persons. The table below discloses the name and address of such beneficial
owners, the total number of shares beneficially owned by each and their
percentage of ownership in relation to the total shares outstanding and entitled
to vote as of March 1, 1997.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership (1) of Class
- ------------------- -------------------- --------
<S> <C> <C>
C-TEC Corporation (2) 2,964,250 61.92%
105 Carnegie Center
Princeton, New Jersey 08540
Lappin Capital Management, L.P. (3) 586,219 12.25%
767 Third Avenue 16th Floor
New York, New York 10017
</TABLE>
(1) The number of shares stated in this column includes shares owned directly
or indirectly, through any contract, arrangement, understanding, relationship,
or which the indicated beneficial owner otherwise has the power to vote, or
direct the voting of, and/or has investment power.
(2) Based on information set forth in Amendment No. 20 to C-TEC's Schedule 13D
filed February 20, 1997.
(3) Based on information obtained from Schedule 13D for the Common Stock of the
Company filed through March 4, 1997, with the Securities and Exchange Commission
by Lappin Capital Management, L.P. and LBL Group, L.P.
-17-
<PAGE>
Item 13. Certain Relationships and Related Transactions
- ------- ----------------------------------------------
Transactions with Management and Certain Concerns
The Company entered into a Management Agreement dated January 1, 1992 with
CCS pursuant to which CCS operates and manages the Company's cable properties.
The Management Agreement provides that the Company will pay CCS: (a) an annual
fee equal to the greater of: (i) $500,000 or (ii) a percentage of the Company's
annual revenues (ranging from 5% of $10 million of revenues, as defined, to 4%
of revenues in excess of $20 million); and (b) an annual incentive bonus equal
to twenty-five percent (25%) of the Company's earnings before interest, taxes,
depreciation and amortization ("EBITDA") as adjusted, during the applicable
fiscal year less the base year EBITDA of $3.85 million. During 1996, CCS
earned, pursuant to the Management Agreement, management and incentive fees of
approximately $1.4 million. In addition, pursuant to the Management Agreement,
the Company paid C-TEC Services, Inc., a wholly-owned subsidiary of C-TEC
("C-TEC Services"), $63,013 for certain services (including without limitation,
legal, accounting, tax and public relations services) performed for the Company
by C-TEC Services and/or non-affiliated third-parties. The cost of such
services (to the extent rendered by C-TEC and its affiliates) was determined in
accordance with the Management Agreement by calculating all of C-TEC Services'
direct and indirect labor, overhead and employee benefit costs associated with
the provision of such services. On January 1, 1997, the Company entered into a
new Management Agreement with CCS Michigan. See Note 8 (Commitments and
Contingencies) of Notes to Consolidated Financial Statements.
-18-
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------- ---------------------------------------------------------------
<TABLE>
<CAPTION>
Description Page
----------- ----
<S> <C> <C>
(a)(1) Financial Statements:
---------------------
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 F-1
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 F-2
Consolidated Balance Sheets -
December 31, 1996 and 1995 F-3
Consolidated Statements of
Shareholders' Capital Deficiency for the Years Ended
December 31, 1996, 1995 and 1994 F-4
Notes to Consolidated Financial Statements F-5
Report of Independent Accountants F-15
(a)(2) Financial Statement Schedules:
------------------------------
Valuation and Qualifying Accounts and Reserves
for the Years Ended December 31, 1996, 1995 and 1994
(Schedule II) F-16
</TABLE>
All other financial statement schedules not listed have been omitted since the
required information is included in the consolidated financial statements or the
notes thereto, or are not applicable or required.
(a)(3) Exhibits
--------
Exhibits marked with an asterisk are filed herewith and are listed in
the index to exhibits on page 24 of this Form 10-K. The remainder of the
exhibits have been filed with the Commission and are incorporated herein
by reference.
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated as of December 30, 1988, between
UtiliCorp United, Inc. and Michigan Energy Resources Company, and
Amendment No. 1 dated as of March 8, 1989. (Incorporated by reference
to the Form 10 of the Registrant dated May 11, 1989, File No.
0-17750.)
2.2 Agreement and Plan of Merger dated June 1, 1992, between Mercom,
Inc., a Michigan corporation, and Mercom, Inc., a Delaware
corporation. (Incorporated by reference to the Form 8-K of the
Registrant dated June 29, 1992, File No. 0-17750.)
3.1 Certificate of Incorporation (Incorporated by reference to Exhibit
3.1 of Form 10-Q of the Registrant dated June 30, 1992, File No.
0-17750.)
</TABLE>
-19-
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K,
- -------- ---------------------------------------------------------------
Continued
<TABLE>
<CAPTION>
<S> <C>
3.2 By-laws of Registrant, as amended through June 1, 1992. (Incorporated
by reference to Exhibit 3.2 of the Form 10-K of the Registrant dated
December 31, 1994, File No. 0-17750.)
10.1 Credit Agreement dated as of November 26, 1989, by and between Registrant
and Morgan Guaranty Trust Company of New York, (Incorporated by
reference to Exhibit 10.1 of the Form 10-K of the Registrant dated March
30, 1990, File No. 0-17750.)
10.2 Assignment and Agreement dated January 1, 1988, by and between Registrant
and Mercom of Florida, Inc. (Incorporated by reference to Exhibit 10.5 of
the Form 10 of the Registrant dated May 11, 1989, File No. 0-17750.)
10.3 Form of Indemnification Agreement between Registrant and UtiliCorp
United, Inc. (Incorporated by reference to Exhibit 10.6 of the Form 10 of
the Registrant dated May 11, 1989, File No. 0-17750.)
10.4 Asset Purchase Agreement dated August 14, 1989, between Registrant and
C4 Media Cable Investors Limited Partnership and Communications and
Cablevision, Inc. (Incorporated by reference to the Form 10-Q of the
Registrant for the quarter ended September 30, 1989, File No. 0-17750.)
10.5 Management Agreement dated January 1, 1992, by and between Registrant and
C-TEC Cable Systems, Inc. (Incorporated by reference to Exhibit 10.9 of
the Form 10-K of the Registrant for the year ended December 31, 1992,
File No. 0-17750.)
10.6 Settlement Agreement and Mutual Release dated April 19, 1995, by and
between Communications and Cablevision, Inc. and Mercom, Inc. and Kenneth
E. Lahey. (Incorporated by reference to Exhibit 10.12 of the Form 8-K of
the Registrant dated May 4, 1995, File No. 0-17750.)
10.7 Amended and Restated Credit Agreement dated August 16, 1995, to Credit
Agreement dated as of November 26, 1989, by and between Registrant and
Morgan Guaranty Trust Company of New York. (Incorporated by reference to
Exhibit 10.10 of the Form 8-K of the Registrant dated August 22, 1995,
File No. 0-17750.)
*10.8 Amendment No. 1 dated August 14, 1996 to Amended and Restated Credit
Agreement dated August 16, 1995, to Credit Agreement dated as of November
26, 1989, by and between Registrant and Morgan Guaranty Trust Company of
New York.
*10.9 Management Agreement dated January 1, 1997, by and between Registrant
and C-TEC Cable Systems of Michigan, Inc.
*22. Subsidiaries of Registrant.
*24. Directors' Powers of Attorney.
*27. Financial Data Schedule.
</TABLE>
-20-
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K,
- -------- ---------------------------------------------------------------
Continued
Item 14.(b) Reports on Form 8-K:
--------------------
(b) Reports on Form 8-K filed in the fourth quarter of 1996.
No report on Form 8-K has been filed by the Registrant during the
last quarter of the period covered by this report on Form 10-K.
-21-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
MERCOM, INC.
Date: March 31, 1997 By /s/ David C. McCourt
-------------------------
David C. McCourt, Chairman
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David C. McCourt Chairman March 31, 1997
------------------------
David C. McCourt Chief Executive Officer
/s/ Michael J. Mahoney President March 31, 1997
------------------------
Michael J. Mahoney Chief Operating Officer
Executive Vice President and
/s/ Bruce C. Godfrey Chief Financial Officer March 31, 1997
------------------------
Bruce C. Godfrey (Principal Financial Officer)
</TABLE>
-22-
<PAGE>
DIRECTORS:
/s/ David C. McCourt March 31, 1997
- ---------------------------------------
David C. McCourt
/s/ Michael J. Mahoney March 31, 1997
- ---------------------------------------
Michael J. Mahoney
/s/ Bruce C. Godfrey March 31, 1997
- ---------------------------------------
Bruce C. Godfrey
/s/ Clifford L. Jones March 31, 1997
- ---------------------------------------
Clifford L. Jones
/s/ Harold J. Rose, Jr. March 31, 1997
- ---------------------------------------
Harold J. Rose, Jr.
/s/ George C. Stephenson March 31, 1997
- ---------------------------------------
George C. Stephenson
/s/ Raymond B. Ostroski March 31, 1997
- ---------------------------------------
Raymond B. Ostroski
-23-
<PAGE>
Form 10-K
Index to Exhibits
-----------------
Certain exhibits to this report on Form 10-K have been incorporated by
reference. For a list of these and all exhibits, see Item 14 (a)(3) hereof.
The following exhibits are being filed herewith.
Exhibit No.
- -----------
10.8 Amendment No. 1 dated August 14, 1996 to Amended and Restated Credit
Agreement dated August 16, 1995, to Credit Agreement dated as of November
26, 1989, by and between Registrant and Morgan Guaranty Trust Company of
New York.
10.9 Management Agreement dated January 1, 1997, by and between Registrant and
C-TEC Cable Systems of Michigan, Inc.
22. Subsidiaries of Registrant.
24. Directors' Powers of Attorney.
27. Financial Data Schedule.
-24-
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
1996, 1995 AND 1994 (Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
SALES $15,570 $13,939 $12,927
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING EXPENSES:
Programming, franchise and other variable costs 4,340 3,565 3,104
Operating, marketing and other fixed system costs 3,878 3,455 3,226
Other general and administrative expenses 1,709 1,728 1,545
Depreciation and amortization 3,018 3,022 3,010
---------- ---------- ----------
Total operating expenses 12,945 11,770 10,885
---------- ---------- ----------
Operating income 2,625 2,169 2,042
---------- ---------- ----------
OTHER (INCOME) EXPENSES:
Litigation costs (12) (188) 643
Interest income (127) (83) (30)
Interest expense 1,227 1,900 2,067
Loss (income) from asset disposal 37 (7) 24
---------- ---------- ----------
Total other expenses, net 1,125 1,622 2,704
---------- ---------- ----------
Income (loss) before income taxes 1,500 547 (662)
---------- ---------- ----------
INCOME TAX EXPENSE (BENEFITS) 28 (2) (4)
---------- ---------- ----------
Net income (loss) $1,472 $549 ($658)
========== ========== ==========
EARNINGS (LOSS) PER AVERAGE COMMON SHARE:
Net income (loss) $0.31 $0.16 ($0.27)
========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (in thousands) 4,787 3,338 2,393
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-1
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in Thousands) 1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,472 $549 ($658)
Depreciation 2,731 2,713 2,697
Amortization 287 309 313
Loss (income) from asset disposal 37 (7) 24
Net change in certain assets and liabilities:
Accounts receivable, trade and other, net 8 74 (297)
Accounts payable, trade and other 198 582 (93)
Other assets and liabilities (630) (1,854) 605
---------- ---------- ----------
Net cash provided by operating activities 4,103 2,366 2,591
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expansion, improvements and other (1,585) (1,701) (1,238)
Proceeds from asset disposal 3 12 12
---------- ---------- ----------
Net cash used in investing activities (1,582) (1,689) (1,226)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank loans (1,500) (6,996) (2,258)
Net proceeds from the issuance of common stock - 8,256 -
---------- ---------- ----------
Net cash (used in) provided by financing activities (1,500) 1,260 (2,258)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH & TEMPORARY CASH INVESTMENTS 1,021 1,937 (893)
CASH & TEMPORARY CASH INVESTMENTS, JANUARY 1 2,033 96 989
---------- ---------- ----------
CASH & TEMPORARY CASH INVESTMENTS, DECEMBER 31 $3,054 $2,033 $96
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $1,247 $2,044 $2,097
Taxes $29 - $14
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS 1996 1995
---------- ---------
<S> <C> <C>
CASH & TEMPORARY CASH INVESTMENTS $3,054 $2,033
ACCOUNTS RECEIVABLE:
Trade, net of reserve for doubtful
accounts of $36 in 1996 and $25 in 1995 309 328
Other 60 49
PREPAID EXPENSES AND OTHER 101 180
PROPERTY, PLANT AND EQUIPMENT:
Cable television distribution plant 39,309 38,155
Buildings and land 549 531
Furniture, fixtures and vehicles 1,785 1,526
---------- ---------
Total property, plant and equipment 41,643 40,212
Accumulated depreciation 27,395 24,778
---------- ---------
Net property, plant and equipment 14,248 15,434
---------- ---------
INTANGIBLE ASSETS, NET 2,079 2,366
---------- ---------
TOTAL ASSETS $19,851 $20,390
========== =========
LIABILITIES AND SHAREHOLDERS'
CAPITAL DEFICIENCY
LIABILITIES:
Accounts payable, trade $828 $800
Accounts payable, affiliates 784 614
Other liabilities 1,578 1,554
Accrued litigation costs 2,150 2,883
Debt 17,430 18,930
---------- ---------
Total liabilities 22,770 24,781
---------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' CAPITAL DEFICIENCY:
Preferred stock, $100 par value, 150,000 shares authorized, none issued
and outstanding at December 31, 1996 and 1995
Common stock, $1 par value, 5,000,000 shares authorized,
4,787,060, issued and outstanding at December 31, 1996 and 1995 4,787 4,787
Additional paid-in capital 11,374 11,374
Accumulated deficit (19,080) (20,552)
---------- ---------
Total shareholders' capital deficiency (2,919) (4,391)
---------- ---------
TOTAL LIABILITIES & SHAREHOLDERS' CAPITAL DEFICIENCY $19,851 $20,390
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' CAPITAL DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock Total
---------------------------------- Additional Shareholders'
Issued & Paid-in Accumulated Capital
Outstanding Par Value Capital Deficit Deficiency
------------- ----------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 2,393 $ 2,393 $ 5,512 $ (20,443) $ (12,538)
Net loss - - - (658) (658)
----------- ---------- --------- ----------- ------------
BALANCE AT DECEMBER 31, 1994 2,393 2,393 5,512 (21,101) (13,196)
Net income - - - 549 549
Stock rights offering 2,394 2,394 5,862 - 8,256
----------- ---------- --------- ----------- ------------
BALANCE AT DECEMBER 31, 1995 4,787 4,787 11,374 (20,552) (4,391)
Net income - - - 1,472 1,472
----------- ---------- --------- ----------- ------------
BALANCE AT DECEMBER 31, 1996 4,787 $ 4,787 $ 11,374 $ (19,080) $ (2,919)
=========== ========== ========= =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in Thousands, except per share data)
1. ORGANIZATION
Mercom, Inc. (the "Company"), is a cable television operator which provides
basic, premium and pay-per-view cable programming services to subscribers
in three cable systems in southern Michigan and one cable system in Port
St. Lucie, Florida. The Michigan systems are operated through Mercom's
wholly-owned subsidiary, Communications and Cablevision, Inc. ("CCV"). The
Florida system is operated through a wholly-owned subsidiary, Mercom of
Florida, Inc. ("Mercom of Florida").
CCV, through its wholly-owned subsidiaries, operates cable television
systems serving approximately 38,200 subscribers in Monroe County, Allegan
County, Coldwater and Sturgis areas of Michigan. CCV and its subsidiaries
have 77 franchise agreements with expiration dates between 1997 and 2015.
Mercom of Florida operates a television system serving approximately 1,800
subscribers in St. Lucie West, a planned community in Southeastern Florida.
Mercom of Florida has 1 franchise agreement with an expiration date of
2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies of the Company and its subsidiaries are
summarized below:
Principles of Consolidation - The consolidated financial statements include
---------------------------
the accounts of the Company and its wholly-owned subsidiaries, CCV and
Mercom of Florida. All significant intercompany accounts and transactions
have been eliminated in consolidation. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Temporary Cash Investments - For the purposes of the Statement of
-----------------------------------
Cash Flows, the Company considers all investments purchased with an
original maturity of three months or less to be temporary cash investments.
Property, Plant and Equipment and Depreciation - Property, plant and
----------------------------------------------
equipment are recorded at cost. Depreciation is provided over the
estimated useful lives of the assets using the straight-line method. The
estimated useful life of the property, plant and equipment is 12 years
except for vehicles, which have an estimated useful life of 5 years.
Maintenance and repair costs are charged to expense as incurred. Major
replacements and betterments are capitalized. Gain or loss is recognized
on retirements and dispositions.
Intangible Assets - The purchase price in excess of the fair market value
-----------------
of net assets of cable television systems acquired and franchise rights and
costs are being amortized on a straight line basis over the expected period
of benefit ranging from 11 years to 15 years.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands, except per share data)
Accounting for Impairments - In 1995, the Company adopted the provisions of
---------------------------
Statement of Financial Accounting Standards No. 121 - Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of
("SFAS 121").
SFAS 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those
assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of.
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In performing the review for
recoverability, the Company estimates the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum
of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, an impairment loss
is recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles expected to be held and used is based on the fair
value of the asset.
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount
or fair value less cost to sell.
No impairment losses have been recognized by the Company pursuant to SFAS
121.
Subscriber Revenue - Revenues from cable programming services are recorded
------------------
in the month the service is provided.
Advertising Expense - The Company expenses advertising costs as incurred.
-------------------
Advertising expense charged to operations was $113, $123 and $102 in 1996,
1995 and 1994, respectively.
Income Taxes - The Company accounts for income taxes based on the
------------
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). The asset and liability
approach of SFAS 109 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the financial reporting basis and the income tax basis
of assets and liabilities. SFAS 109 permits current recognition of deferred
tax assets including net operating loss carryforwards. The tax benefits
recognized must be reduced by a valuation allowance when it is more likely
than not the asset will not be realized.
Earnings (Loss) Per Share - Earnings (loss) per share amounts are based
-------------------------
on the weighted average number of common shares outstanding.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands, except per share data)
3. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Goodwill $1,589 $1,717
Franchise rights and costs 1,768 1,949
Other 856 1,077
------ ------
Total 4,213 4,743
Less accumulated amortization 2,134 2,377
------ ------
Total $2,079 $2,366
====== ======
</TABLE>
Amortization expense charged to operations in 1996, 1995 and 1994 was
$287, $309 and $313, respectively.
During 1996, the Company removed from its balance sheet intangible assets
which had an original cost of $530 and were fully amortized.
4. INCOME TAXES
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current-
Federal $ 28 $ (2) $ (4)
State - - -
------ ------ ---------
Total provision (benefit) for income taxes $ 28 $ (2) $ (4)
====== ====== =========
</TABLE>
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands, except per share data)
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at December 31, are as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 3,532 $ 3,629
Alternative minimum tax credits 39 11
Reserves 330 969
Other, net 63 117
------- -------
Total deferred assets 3,964 4,726
------- -------
Property, plant and equipment (2,597) (2,837)
Intangible assets (105) (109)
------- -------
Total deferred liabilities (2,702) (2,946)
------- -------
Subtotal 1,262 1,780
Valuation allowance (1,262) (1,780)
------- -------
Total deferred taxes $ - $ -
======= =======
</TABLE>
A valuation allowance has been provided for the portion of the deferred tax
assets which, in the opinion of management, are uncertain as to their
realization. The net change in the valuation allowance was a decrease of
$518 in 1996.
The provision (benefit) for income taxes is different from the amounts
computed by applying the U.S. statutory federal tax rate of 34%. The
differences are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income (loss) before provision
(benefit) for income taxes $ 1,500 $ 547 $ (662)
======= ===== ======
Federal tax provision (benefit) $ 510 $ 186 $ (225)
Reduction due to:
State income taxes, net of
federal benefit - - (5)
Goodwill 36 37 37
Increase (decrease) in valuation
allowance (518) (256) 187
Adjustment to prior years
amortization - 28 -
Other, net - 3 2
------- ----- ------
Provision (benefit) for
income taxes $ 28 $ (2) $ (4)
======= ===== ======
</TABLE>
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands, except per share data)
The Company has the following federal net operating loss carryforwards
available:
<TABLE>
<CAPTION>
Tax Net
Operating Expiration
Year Losses Date
---- --------- ----------
<S> <C> <C>
1990 $2,537 2005
1991 $3,220 2006
1992 $1,628 2007
1995 $2,713 2010
</TABLE>
In the past, the Company was liable for Federal Alternative Minimum Tax
(AMT). At December 31, 1996 the cumulative minimum tax credits are $39.
This amount can be carried forward indefinitely to reduce regular tax
liabilities that exceed the AMT in future years.
5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1996 1995
---- ----
<S> <C> <C>
Term Credit Agreement $17,430 $18,930
======= =======
</TABLE>
The Company entered into a $25,000 Credit Agreement (the "Credit
Agreement") with a bank in November 1989. The Credit Agreement was amended
in April 1990 to provide borrowings up to $27,000. The Credit Agreement
was further amended in December 1992, December 1993, December 1994 and
March 1995 to restructure the mandatory repayments due at December 31,
1992, December 31, 1993, December 31, 1994 and March 31, 1995,
respectively. On August 16, 1995, the Company amended and restated the
Credit Agreement.
The amended and restated Credit Agreement consists of a 7.5-year amortizing
term loan with a final maturity of December 31, 2002 (Term Credit
Agreement). In addition, the Company entered into a 364-day revolving
credit facility of $2,000 with an initial maturity of August 14, 1996
(Revolving Credit Agreement) which has been amended and extended to August
12, 1997.
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 four quarters of 1996.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands, except per share data)
The Company is required to repay the remaining indebtedness under the Term
Credit Agreement in equal quarterly installments aggregating the following
amounts for each year ending December 31, 1997 through 2001:
<TABLE>
<CAPTION>
Aggregate
Year Amounts
---- ---------
<S> <C>
1997 $ 1,750
1998 2,100
1999 2,600
2000 3,750
2001 4,300
</TABLE>
The Term Credit Agreement and the Revolving Credit Agreement (the "credit
agreements") are collateralized by both a pledge of the stock of the
Company's subsidiaries and a first lien on certain assets of the Company
and its subsidiaries including certain inventory, equipment and
receivables.
The credit agreements contain restrictive covenants, including the
maintenance of a specified debt to cash flow ratio, an interest coverage
ratio and restrictions on the payment of dividends. In addition, the
Company 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 December 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 December 31, 1996 and 1995. A fee of 3/8% per annum is
required on the unused portion of the available commitment. The Company
had no borrowings under this agreement as of December 31, 1996 and 1995.
The weighted average effective interest rates for all debt at December 31,
1996, and 1995, were 6.5% and 7.0%, 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 determining the best alternative for such funding.
6. COMMON STOCK
On August 10, 1995, the Company completed the issuance of 2,393,530 shares
of Common Stock through a rights offering, resulting in net proceeds, after
deducting issuance costs, of approximately $8,200. Shareholders of record
at the close of business on July 20, 1995 were entitled to one non-
transferable right for every share of Common Stock held. Right holders
were able to purchase for a price of $3.60 per share, one share of Common
Stock for each right held.
The Company utilized a portion of the proceeds received from the Rights
Offering to repay $5,070 of outstanding indebtedness to its lender and
repay $2,287 of outstanding indebtedness to C-TEC under two demand notes.
The remaining proceeds were used for general corporate purposes, including
capital expenditures.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands, except per share data)
7. EMPLOYEE BENEFIT PLANS
The Company adopted a 401(k) savings plan on January 1, 1995 covering
substantially all employees. Contributions made by the Company to the
401(k) plan are based on a specified percentage of employee contributions.
Contributions charged to expense were $26 and $19 in 1996 and 1995,
respectively.
Beginning in 1996, the Company provides short-term disability salary
continuance benefits to former or inactive employees who are not retirees.
The Company accounts for these benefits under Statement of Financial
Accounting Standards No. 112 - "Employers Accounting for Postemployment
Benefits" ("SFAS 112"). SFAS 112 requires the Company to accrue the cost
of postemployment benefits over employees' service lives. The Company uses
the services of an enrolled actuary to calculate the expense. The net
periodic cost for postemployment benefits was $36 in 1996.
8. COMMITMENTS AND CONTINGENCIES
a. Total rental expense, primarily office space and pole rental, was $248,
$250 and $250 for 1996, 1995 and 1994, respectively. At December 31, 1996,
rental commitments under noncancelable leases, excluding annual pole rental
commitments of approximately $145 that are expected to continue
indefinitely, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $100
1998 89
1999 77
2000 77
2001 22
Thereafter 248
</TABLE>
b. CCV, a subsidiary of the Company, was a party to a lawsuit commenced in
1988 in the Circuit Court for the County of Ottawa, Michigan relating to
the termination of Kenneth E. Lahey as President of CCV. Mr. Lahey
asserted that as a result of such termination he was entitled to an amount
equal to the fair market value of 10 percent of the outstanding shares of
CCV stock. On April 19, 1995, the Company entered into a settlement
agreement with Mr. Lahey whereby the Company agreed to pay Mr. Lahey $4,300
over a four year time frame. The Company paid Mr. Lahey $100, $1,400 and
$700 in April and June 1995 and June 1996, respectively. 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.
c. The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992 and the Telecommunications Act of
1996. The Company has either settled challenges or accrued for anticipated
exposures related to rate regulation; however, there is no assurance that
there will not be further additional challenges to its rates. The statement
of operations for 1996 and 1994 included charges totaling approximately
$170 and $150, respectively, relating to cable rate regulation exposures.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands, except per share data)
d. The Company entered into a new management agreement dated January 1, 1997
with CCS Michigan pursuant to which CCS Michigan operates and manages the
Company's cable properties. The Management Agreement provides that the
Company will pay CCS Michigan: (a) an annual fee equal to the greater of:
(i) $500,000 or (ii) a percentage of the Company's annual revenues (ranging
from 5% of $10 million of revenues, as defined, to 4% of revenues in excess
of $20 million); and (b) an annual incentive bonus equal to twenty-five
percent (25%) of the Company's earnings before interest, taxes,
depreciation and amortization ("EBITDA") as adjusted, during the applicable
fiscal year less the base EBITDA of $5.0 million. See Note 9 (Affiliate
Transactions) of Notes to Consolidated Financial Statements.
e. 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 disposition of its domestic cable television unit, including
its investment in the Company.
In February 1997, C-TEC announced that its Board of Directors approved a
restructuring plan pursuant to which C-TEC will separate its operations
along business lines into three separate, publicly traded companies. The
restructuring will be effected by the spin-off of two companies, one of
which will be CCS Michigan which will consist of C-TEC's classic cable
television operations in Michigan, including its 61.92% interest in Mercom.
It is anticipated that the spin-offs will occur by the end of 1997. The
spin-offs are, however, subject to the receipt of a private letter ruling
from the Internal Revenue Service regarding the tax-free nature of the
spin-off, the receipt of other regulatory approvals, financial consents,
and certain other conditions. There can be no assurances that any
transaction will take place.
9. AFFILIATE TRANSACTIONS
The Company entered into a management agreement in 1992 with CCS, pursuant
to which CCS will manage the Company's cable television systems'
operations. The Company was charged $1,398, $1,204 and $1,104 for this
management service in 1996, 1995 and 1994, respectively, based on the
agreement approved by the Board of Directors. Effective January 1, 1997,
the Company entered into a new management agreement with CCS Michigan which
supersedes the management agreement with CCS. C-TEC and its subsidiaries
also supplied other services not covered by the management agreement for
approximately $92, $121 and $54 in 1996, 1995 and 1994, respectively. In
the first quarter of 1995, C-TEC loaned $887 to the Company to enable it to
make a principal payment on its Credit Agreement of $887 scheduled for
March 31, 1995. C-TEC also loaned the Company $1,400 in June 1995 to meet
its scheduled payment under the Lahey settlement agreement. The Company
paid interest in 1995 of $39 to C-TEC in connection with these two demand
notes. These demand notes were repaid in August 1995. In 1995 and 1994,
the Company incurred interest of $29 and $24 respectively, on outstanding
management fee obligations owed to C-TEC.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands, except per share data)
In addition, the Company sold approximately $81, $2 and $3 of inventory to
a C-TEC subsidiary in 1996, 1995 and 1994, respectively.
The Company had amounts due to C-TEC and C-TEC subsidiaries of $784 and
$614 at December 31, 1996 and 1995, respectively. These amounts include
management fees of $741 and $605 as of December 31, 1996 and 1995,
respectively.
10. STOCK EXCHANGE LISTING
The Company's Common Stock was traded on The Nasdaq Stock Market ("Nasdaq")
from May 1989 through February 1992. The Company's Common Stock was
delisted from Nasdaq in February 1992 because the Company did not meet
Nasdaq's minimum capital and surplus requirements. Currently, the
Company's Common Stock is quoted on the National Quotation Bureau, Inc. and
the OTC Bulletin Board which is owned and operated by The Nasdaq Stock
Market, Inc.
11. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
The Company places its cash and temporary cash investments with high credit
quality financial institutions. The Company does, however, maintain
unsecured cash and temporary cash investment balances in excess of
federally insured limits.
Concentrations of credit risk with respect to receivables are limited due
to a large customer base primarily throughout Michigan.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
a. Cash and temporary cash investments
The carrying amount approximates fair value because of the short maturity
of these instruments.
b. Long-term debt
The fair value of floating rate long-term debt is considered to be equal to
carrying value since the debt reprices at least every six months and the
Company believes that its credit risk has not changed from the time the
floating rate debt was borrowed and therefore, it would obtain similar
rates in the current market.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars in Thousands, except per share data)
The estimated fair value of the Company's financial instruments are as follows
at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Financial assets:
Cash and temporary cash
investments $ 3,054 $ 3,054 $ 2,033 $ 2,033
Financial liabilities:
Floating rate long-term debt:
Term Credit Agreement $17,430 $17,430 $18,930 $18,930
</TABLE>
F-14
<PAGE>
[LETTERHEAD OF COOPERS & LYBRAND APPEARS HERE]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Mercom, Inc.
We have audited the consolidated financial statements and financial statement
schedule of Mercom, Inc. and subsidiaries (the "Company") listed in Item 14(a)
of this Form 10-K. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Mercom, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statements referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 20, 1997
F-15
<PAGE>
MERCOM, INC. AND SUBSIDIARIES Schedule II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C
- -------- -------- --------
ADDITIONS
---------
BALANCE AT CHARGED CHARGED
BEGINNING OF TO COSTS TO OTHER
DESCRIPTION PERIOD AND EXPENSE ACCOUNTS
- ----------- ------ ----------- --------
<S> <C> <C> <C>
ALLOWANCE FOR DEFERRED TAX ASSETS -
DEDUCTED FROM DEFERRED TAX ASSETS
IN THE CONSOLIDATED BALANCE SHEETS.
1996 $1,780 $0 $0
1995 $2,036 $0 $0
1994 $1,849 $187 $0
RESERVE FOR DOUBTFUL ACCOUNTS
1996 $25 $177 $0
1995 $23 $107 $0
1994 $29 $64 $0
<CAPTION>
COLUMN D COLUMN E
-------- --------
BALANCE AT
END OF
DESCRIPTION DEDUCTIONS PERIOD
- ----------- ---------- ------
<S> <C> <C>
ALLOWANCE FOR DEFERRED TAX ASSETS -
DEDUCTED FROM DEFERRED TAX ASSETS
IN THE CONSOLIDATED BALANCE SHEETS.
1996 $518 $1,262
1995 $256 $1,780
1994 $0 $2,036
RESERVE FOR DOUBTFUL ACCOUNTS
1996 $166 $36
1995 $105 $25
1994 $70 $23
</TABLE>
F-16
<PAGE>
Exhibit 10.8
AMENDMENT NO. 1 TO CREDIT AGREEMENT
AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT dated as of August
14, 1996 between MERCOM, INC. (together with its successors, the "Borrower") and
MORGAN GUARANTY TRUST COMPANY OF NEW YORK (the "Bank").
WITNESSETH:
WHEREAS, the parties hereto have heretofore entered into an Amended and
Restated Credit Agreement dated as of August 16, 1995 (the "Agreement"); and
WHEREAS, the Company has requested of the Bank, and the Bank has agreed to
provide, a 364-day extension to the Commitment under the Agreement on the terms
and subject to the conditions set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions; References. Unless otherwise specifically defined
herein, each term used herein which is defined in the Agreement shall have the
meaning assigned to such term in the Agreement. Each reference to "hereof",
"hereunder", "herein" and "hereby" and each other similar reference and each
reference to "this Agreement" and each other similar reference contained in the
Agreement shall from and after the date hereof refer to the Agreement as amended
hereby.
SECTION 2. Amendment to Definition. Section 1.01 of the Agreement is
amended by substituting the following definition for the definition of
"Termination Date":
"Termination Date" means August 12, 1997, or, if such day is not a
Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day.
SECTION 3. Effect of Amendment. Except as expressly set forth herein, the
amendment contained herein shall not constitute a waiver or amendment of any
term or condition of the Agreement or the Note, and all such terms and
conditions shall remain in full force and effect and are hereby ratified and
confirmed in all respects.
<PAGE>
SECTION 4. Counterparts. This Amendment No. 1 may be signed in any number
of counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
SECTION 5. GOVERNING LAW. THIS AMENDMENT NO. 1 SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed by their respective authorized officers as of the day and
year first above written.
MERCOM, INC.
By: /s/ Bruce C. Godfrey
----------------------------
Name: Bruce C. Godfrey
Title: Executive Vice President and
Chief Financial Officer
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By:
----------------------------
Name:
Title:
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their respective authorized officers as of the
day and year first above written.
MERCOM, INC.
By:
-------------------------------
Name:
Title:
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By: /s/ GEORGE J. STAPLETON
-------------------------------
Name: GEORGE J. STAPLETON
Title: VICE PRESIDENT
4
<PAGE>
Exhibit 10.9
MANAGEMENT AGREEMENT
MANAGEMENT AGREEMENT, dated this 1st day of January, 1997 by and between
Mercom, Inc., a Delaware corporation ("Mercom"), and C-TEC Cable Systems of
Michigan, Inc., a Pennsylvania corporation or a subsidiary or affiliate thereof
("C-TEC").
WHEREAS C-TEC owns and operates cable television systems serving over
150,000 subscribers in the state of Michigan. Mercom is also engaged in the
ownership and operation of cable television systems serving approximately 40,000
subscribers, in the states of Michigan and Florida. C-TEC is desirous of
managing the cable television systems and business operations of Mercom.
Mercom is desirous of retaining C-TEC to manage its cable television systems and
business operations.
In consideration of the mutual covenants contained herein, and other good
and valuable consideration, the parties hereto hereby agree as follows:
1. Engagement of C-TEC; Power and Authority. Mercom hereby engages C-
-----------------------------------------
TEC, and C-TEC hereby accepts the engagement, to conduct, operate and manage the
cable television systems and business operations (collectively, the "Business")
of Mercom and each subsidiary which Mercom may from time to time own (the
"Subsidiaries"). Such engagement shall vest in C-TEC the exclusive power and
authority to conduct, operate and manage the Business of Mercom and the
Subsidiaries; except, however, that such power and authority:
a. shall not extend to the approval or authorization on behalf of Mercom
of any corporate action which, pursuant to applicable law, requires the
approval or authorization of the Board of Directors and/or the
shareholders of Mercom;
<PAGE>
b. shall be limited to assisting the Board of Directors in carrying out
its directives with respect to any action, suit, dispute, proceeding or
investigation pending or threatened by or against Mercom or any
Subsidiary as of the date hereof or occurring hereafter as a result of
actions or omissions occurring prior to the date hereof but in either
case only to the extent such action, suit, dispute, proceeding or
investigation could reasonably be expected to have a material adverse
effect on Mercom or any Subsidiary if resolved adversely to Mercom's or
such Subsidiary's interests; and
c. shall be subject to the general policies and supervision of the Board
of Directors of Mercom as may be required for the Board of Directors to
perform its fiduciary obligations.
d. shall be subject to the prior review and approval of the Affiliate
Transactions Review Committee ("ATRC") with respect to the following
matters:
i) Invoices for services rendered by C-TEC personnel not included in
the Management Fee will be transmitted to Mercom on a monthly basis
and approved by ATRC on a quarterly basis. These invoices will be
paid by Mercom within 30 days of receipt of said invoice.
2. Management Standards. C-TEC shall use its best efforts to carry out
---------------------
its duties hereunder and shall cause its employees or the employees of its
affiliated companies to devote such time and activity as C-TEC shall deem
necessary for the effective conduct, operation and management of the Business of
Mercom and its Subsidiaries.
3. Term. The initial term of this Agreement shall be from January 1, 1997
-----
until December 31, 1999. At the expiration of the initial term or any renewal
term, this Agreement
2
<PAGE>
shall be automatically extended for two years unless either party has given the
other party at least six months prior notice of non-renewal.
4. Duties and Authority. In carrying out its duties on behalf of Mercom
---------------------
hereunder, C-TEC and its employees shall, subject to Section 1 hereof, have the
power and authority, without the Mercom Board of Directors' prior approval, to
do those things necessary or, in C-TEC's judgment, appropriate to conduct,
operate and manage the Business including, without limitation, the power and
authority inter alia to:
a. direct, endorse and deposit all checks and other funds, as well as
collect revenues, and take such other actions (including the
establishment of Mercom bank accounts with signatories designated by C-
TEC) regarding the collection and handling of checks and other funds
owed, owned or held by or on behalf of Mercom;
b. produce checks and pay all obligations of Mercom (by check or
otherwise), including without limitation normal operating expenses,
extraordinary expenses, required interest and principal payments on
debt, and obligations owed C-TEC hereunder;
c. negotiate or renegotiate and execute business contracts for the
purchase, lease, license or operation of the Mercom cable television
systems, and for the ordinary conduct of Mercom's business operations;
d. subject to Section 1 hereof, resolve contractual and other disputes
which may arise in the ordinary course of Mercom's business;
e. retain attorneys, engineers, consultants and other professionals (but
not Mercom's independent auditors). Retainment of said attorneys,
engineers, consultants and
3
<PAGE>
other professionals will be only sought when absolutely necessary for
proper conduct of business and the services required cannot be provided
by C-TEC's cable operations staff. The retainment of attorneys,
engineers, consultants and other professionals will be based on cost
and expertise. Qualified staff employees of C-TEC's affiliate companies
may be retained to provide said services and said retainment will be
governed by the provisions set forth in Section 10.
f. establish and maintain books and records to enable financial statements
to be prepared, as and when required, in accordance with generally
accepted accounting principles;
g. prepare, or cause to be prepared, and file reports and other documents
in accordance with applicable federal and state securities laws;
h. prepare, or cause to be prepared, and file all periodical and other
required reports of other governmental and regulatory agencies,
including tax returns, and perform all related administrative
functions;
i. perform all aspects of managing the daily operation of the Mercom cable
television systems, including without limitation, engaging, instructing
and supervising all personnel necessary in the judgment of C-TEC and
establishing and maintaining all records relative to the operation of
the systems;
j. select and price all services provided or to be provided to customers
of Mercom's cable television systems;
k. arrange for installation of equipment and service to any home within
Mercom's service area including any area not currently built;
4
<PAGE>
l. oversee all advertising, marketing and sales and public relations
programs, engage and appoint advertising, marketing and public
relations agencies and consultants;
m. execute all instruments of any kind or character which, in C-TEC's
discretion, shall be deemed necessary or appropriate in connection with
the conduct, operation and management of the Business;
n. hire and dismiss Mercom personnel (other than executive officers
elected by the Board who are not employees of C-TEC or its affiliated
companies) employed in the operation of the Business;
o. determine the compensation (including fringe benefits other than
qualified plans) for Mercom employees, except for those employees or
officers of Mercom who are employees of C-TEC Corporation or any of its
subsidiaries or affiliates;
p. oversee negotiations of all collective bargaining agreements, if any;
q. oversee administrations of all qualified benefit plans, if any;
r. maintain a continuing liaison with federal, state and local government
officials regarding the leases and other rights and licenses for the
cable television systems which require periodic review and
renegotiation; and
s. renew and re-negotiate all franchise agreements relative to Mercom's
cable television systems.
t. renew and re-negotiate all F.C.C. licenses and copyrights.
5. Access. C-TEC shall have full and unrestricted access to all books and
-------
records of Mercom and its Subsidiaries, including without limitation:
a. All contracts, agreements, governmental and regulatory filings;
5
<PAGE>
b. All accounting documentation including financial statements, books and
records, audit reports, Securities and Exchange Commission ("SEC")
filings and other documents;
c. All tax returns, both federal and state, and related schedules;
d. All debt agreements or instruments, including pledge and security
agreements and related documents;
e. All customer lists, billing records and histories, accounts receivable
record and other reports used in connection with the operation of
Mercom's cable television systems;
f. All minute books;
g. All personnel records;
h. All files relative to both pending and threatened litigation or
proceedings, including management's assessment of liability;
i. All franchise documents and other governmental authorizations relative
to Mercom's cable television systems, including master antenna
agreements and agreements with multiple development operators; and
j. A complete list of all real property owned or leased and a detailed
schedule of fixed assets.
6. Confidentiality. Any confidential or proprietary information,
----------------
including technical information, business records and other similar or related
information, concerning Mercom and its Subsidiaries which C-TEC receives from
Mercom in the course of performing its engagement hereunder will be maintained
in confidence by C-TEC to the same extent that would be required
6
<PAGE>
if C-TEC were a director of Mercom. This provision will survive the termination
of this Agreement for any reason whatsoever.
7. Mercom Executive Officers and Employees; C-TEC Employees. C-TEC will
---------------------------------------------------------
from time to time recommend to Mercom's Board of Directors individuals to serve
in one or more capacities as executive officers of Mercom, including without
limitation the President, Executive Vice President, Treasurer and Secretary.
Subject to Section 1 hereof, the compensation of employees of Mercom, whether
hired by C-TEC on behalf of Mercom or otherwise, shall be the sole
responsibility of Mercom. Subject to Section 10 hereof, the compensation of
employees of C-TEC shall be the sole responsibility of C-TEC.
8. Management Fee. As compensation for C-TEC's engagement hereunder,
---------------
Mercom will pay C-TEC a reasonable management fee for each calendar month, or
part thereof, of each term this Agreement is in effect. The annual management
fee payable to C-TEC will be the greater of $500,000 or an amount equal to a
percentage of Mercom's annual revenue (annual revenue shall be defined for the
purpose of this calculation to include all gross charges to customers for basic
cable services, premium cable services, pay per view service, installation, line
extensions, long drops, commissions, advertising revenue and any other revenue
received by Mercom related to the provision of CATV services) based on the
following fee schedule plus any incentive fees payable to C-TEC as set forth in
Section 9 of this Agreement (Incentive Management Fee).
7
<PAGE>
<TABLE>
<CAPTION>
Revenue Management Fee
------- --------------
<S> <C>
From $0 to $10,000,000 5%
From $10,000,001 to $15,000,000 4 3/4%
From $15,000,001 to $17,500,000 4 1/2%
From $17,500,001 to $20,000,000 4 1/4%
From $20,000,001 and above 4%
</TABLE>
The minimum management fee of $41,666.66 will be payable to C-TEC on the
15th day of each month commencing in January, 1997. At the end of each quarter
(March 31, June 30, September 30 and December 31), any balance due to C-TEC
pursuant to the formula set forth above will be calculated and paid to C-TEC by
the 20th day of the following month.
9. Incentive Management Fee. As an incentive to C-TEC to manage Mercom's
------------------------
cable systems in the most efficient manner possible, C-TEC will be entitled to
earn an annual incentive management fee equal to twenty-five percent (25%) of
any improvement in Mercom's EBIDAT in excess of the $5,000,000.00 base EBIDAT
figure to be use in the incentive management fee calculations. The base EBIDAT
figure will not be changed during the term of this agreement except to the
extent that any sale or acquisition of assets requires that an adjustment be
made. If such a sale or acquisition occurs, the base EBIDAT figure will be
decreased or increased, as appropriate, in the amount of the budgeted EBIDAT or
said system which was acquired or disposed of. The incentive management fee set
forth above will be calculated in the above manner for the term of the
agreement.
a. Costs excluded from calculating EBIDAT in making the Incentive
Management Fee calculations shall include:
8
<PAGE>
- Costs related to any corporate reorganization of Mercom deemed
necessary by Mercom's Board of Directors; and
- Costs related to any restructuring of Mercom's debt as deemed
necessary by Mercom's Board of Directors; and
- Costs related to any special audit or investigation requested by
Mercom's Board of Directors, taxing authorities or regulatory
authorities; and
- Costs related to the sale or other disposition of any of its cable
operations; and
- Amount of Incentive Management Fee paid to C-TEC
b. The effect on EBIDAT by the sale or acquisition of any cable system by
Mercom during the term of the Management Agreement is specifically
excluded from the calculation of the Incentive Management Fee. C-TEC
and Mercom agree to adjust the base Management Fee and Incentive
Management Fee as appropriate should the acquisition or sale of cable
systems materially increase or decrease C-TEC management's
responsibilities hereunder.
c. The Incentive Management Fee will be calculated by C-TEC on an annual
basis and submitted to Mercom for payment within 60 days following the
end of each fiscal year. Said fees will be due and payable to C-TEC
within 30 days thereafter.
10. Allocation of Costs; Mercom's Own Costs. It is anticipated that in
----------------------------------------
the course of performing its engagement hereunder, C-TEC will provide services
of its or its affiliated companies' personnel on behalf of Mercom or its
subsidiaries in the areas of law, accounting, finance, treasury, cash
management, internal audit, risk insurance, tax returns and other governmental
or regulatory reporting, labor and personnel administration, public relations,
or
9
<PAGE>
other support services. The provision of these services will be included as
part of the Management Fee and C-TEC will no longer allocate and charge the
loaded labor rate of such personnel to Mercom or its Subsidiaries, as the case
may be. All operating expenses (as contrasted to management expenses) of Mercom
and its Subsidiaries shall remain the sole responsibility of Mercom and its
Subsidiaries, and C-TEC shall have no responsibility therefor. However, to the
extent such expenses are paid by C-TEC or any of its affiliated companies,
Mercom or its Subsidiaries, as the case may be, shall reimburse C-TEC or its
affiliated company, as the case may be, within 30 days of receipt of invoice.
11. Termination Fee. If this Agreement is terminated by Mercom for any
----------------
reason (whether upon notice prior to the end of the initial term or any renewal
term or otherwise) without C-TEC's consent, Mercom shall, in recognition of the
significant ongoing costs incurred by C-TEC and the substantial costs incurred
to date by C-TEC in connection with its performance of previous management
services to Mercom, pay C-TEC a termination fee of an amount equal to the
Management fee earned by C-TEC hereunder for the preceding twelve months
immediately prior to termination. However, if C-TEC undergoes a change of
control which results in the majority of its board of directors or management
being replaced by non-affiliated directors or management, the above Termination
Fee will not be applicable. C-TEC agrees to provide management services for up
to three months following written notice of termination, if requested to do so
by Mercom. After the three month period, no further management services will be
provided by C-TEC. The above Termination Fee will be due and payable to C-TEC
within 30 days of notice of termination by Mercom.
10
<PAGE>
12. Representation and Warranties. C-TEC and Mercom each represent and
------------------------------
warrant to the other as follows:
a. It is a corporation duly organized validly existing and in good
standing under the laws of the State of Pennsylvania, in the case of
C-TEC, and the State of Delaware, in the case of Mercom, and has a
requisite corporate power and authority to execute and deliver this
Agreement and to perform its obligations hereunder;
b. The execution, delivery and performance of this Agreement has been
duly and validly authorized by all necessary corporate action. This
agreement has been duly executed and delivered and constitutes a
valid and binding obligation enforceable against it in accordance
with the Agreement's terms;
c. The execution and delivery of this Agreement and the performance of
its obligations hereunder do not require it to obtain any consent,
approval or action of or make any filing with or give any notice to
any corporation, person or firm or any public, governmental or
judicial authority (except for filings with the National Association
of Securities Dealers, Inc. ("NASD") and the SEC; and
d. The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby in accordance
with the terms and conditions hereof will not (i) violate any
provision of its Certificate of Incorporation or By-Laws, (ii)
violate, conflict with or result in the breach of any of the terms
of, result in a material modification of, otherwise give any other
contracting party the right to terminate, or constitute (whether
after the giving of notice or lapse of time or both) a default under
any contract or other agreement to
11
<PAGE>
which it is a party or by or to which it or any of its assets or
properties may be bound or subject the impact of which, singly or in
the aggregate, would have a material adverse effect on its business,
financial condition or results of operations, (iii) violate any
order, judgment, injunction, award or decree of any court, arbitrator
or governmental or regulatory body against or binding upon any
agreement with or condition imposed by any governmental or regulatory
body binding upon it or its securities, assets or business; or (iv)
violate any statute, law or regulation of an jurisdiction as such
statute, law or regulation relates to it (except for filings with the
NASD and the SEC).
Mercom further represents and warrants that it has timely filed all appropriate
federal and state tax returns and SEC filings as are required by law and that
Mercom is in compliance with all requirements of the Internal Revenue Code, the
Michigan Department of Revenue and Securities and Exchange Act as of
December 31, 1996. Such reports or documents do not contain any materially false
statement or any misstatements of any material fact and do not omit to state any
fact necessary to make the statements set forth therein not misleading in any
material respect.
13. Indemnification. Because C-TEC will be acting on behalf of Mercom in
---------------
connection with the Agreement, Mercom will indemnify and hold harmless C-TEC and
the directors, offices, employees (including C-TEC's employees who are elected
executive officers of Mercom) and controlling persons of C-TEC and each
affiliated company of C-TEC (C-TEC and each such other person or entity being
herein referred to as an "indemnified party") from and against any and all
losses, claims, damages and liabilities, joint or several (including all
expenses, such as fees and disbursements of counsel, reasonably incurred by an
indemnified party) to which each
12
<PAGE>
indemnified party may become subject as a result of, caused by or arising out of
the indemnified party acting on behalf of Mercom in connection with this
Agreement, except to the extent that such loss, claim, damage or liability
results from the gross negligence or illegal act of the indemnified part acting
on behalf of Mercom in connection with this Agreement. The provisions of this
Section shall survive the termination of this Agreement for any reason
whatsoever.
14. Notices. All notices given by any party to any other party under this
-------
agreement shall be in writing, sent by registered or certified mail, postage
prepaid, addressed as follows (or to such other address as a party may specify
in such a notice to all other parties):
C-TEC: CCS of Michigan, Inc.
105 Carnegie Center
Princeton, New Jersey 08540
Attention: John J. Gdovin
Executive Vice President
With a copy to:
Raymond B. Ostroski, Esquire
Executive Vice President and General Counsel
C-TEC
105 Carnegie Center
Princeton, New Jersey 08540
Mercom: Mercom, Inc.
105 Carnegie Center
Princeton, New Jersey 08540
Attention: Michael J. Mahoney
President
With a copy to:
John D. Filipowicz, Esquire
Vice President and Assistant General Counsel
C-TEC
105 Carnegie Center
Princeton, New Jersey 08540
13
<PAGE>
15. Miscellaneous Provisions.
------------------------
a. Without the consent of Mercom, C-TEC may not assign this Agreement or
its rights, duties or obligations hereunder to any person or entity,
other than an affiliate or subsidiary of C-TEC or an entity which is an
experienced operator of cable television systems within a radius of 500
miles from Mercom's cable properties. This Agreement may not otherwise
be assigned by any party hereto without the consent of the other party.
b. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
c. The section headings in this Agreement are for reference purposes only
and shall not affect the interpretation of this Agreement.
d. This Agreement represents the entire agreement among the parties
relating to the subject matter hereof.
e. This Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which shall constitute the same
instrument.
f. This Agreement shall be construed in accordance with and government by
the laws of the State of Delaware.
14
<PAGE>
IN WITNESS WHEREOF, this Agreement has been signed on behalf of the parties
hereto by their respective duly authorized officers as of the date first above
written.
MERCOM, INC.
By: /s/ Michael J. Mahoney
---------------------
Michael J. Mahoney
President
C-TEC CABLE SYSTEMS OF MICHIGAN, INC.
By: /s/ John J. Gdovin
---------------------
John J. Gdovin
Executive Vice President
Approved by the Affiliated
Transactions Review Committee
of Mercom, Inc.
By: /s/ Harold J. Rose 3/10/97
---------------- -------------
Harold J. Rose Date
Chairman
15
<PAGE>
Exhibit 22
SUBSIDIARIES OF REGISTRANT
The following are the subsidiaries of Mercom, Inc.:
Communications and Cablevision, Inc.
Coldwater Cablevision, Inc.
Allegan County Cablevision, Inc.
Mercom of Florida, Inc.
Mercom Services, Inc.
<PAGE>
Exhibit 24.
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, David C. McCourt do make,
constitute and appoint Bruce C. Godfrey, Mercom, Inc.'s Chief Financial Officer,
as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name and
in my behalf the Mercom, Inc. Form 10-K for the fiscal year ended December 31,
1996, and to file said form to the Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and relative instruments in writing which
I deem requisite or proper to effectuate specifically the execution and delivery
of the above-mentioned form with the same validity as I could, if personally
present, and I hereby ratify and affirm that my said attorney as I may deem to
act for me, shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect as of March 29, 1997 and such specific rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 24th day of March,
1997.
/s/ David C. McCourt (SEAL)
------------------------------
David C. McCourt
Witness:
/s/ Taara C. Young
- --------------------------------
<PAGE>
Exhibit 24.
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Michael J. Mahoney do make,
constitute and appoint Bruce C. Godfrey, Mercom, Inc.'s Chief Financial Officer,
as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name and
in my behalf the Mercom, Inc. Form 10-K for the fiscal year ended December 31,
1996, and to file said form to the Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and relative instruments in writing which
I deem requisite or proper to effectuate specifically the execution and delivery
of the above-mentioned form with the same validity as I could, if personally
present, and I hereby ratify and affirm that my said attorney as I may deem to
act for me, shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect as of March 29, 1997 and such specific rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 21st day of March,
1997.
/s/ Michael J. Mahoney (SEAL)
------------------------------
Michael J. Mahoney
Witness:
/s/ Kathleen Sparrows
- ---------------------
<PAGE>
Exhibit 24.
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Raymond B. Ostroski do make,
constitute and appoint Bruce C. Godfrey, Mercom, Inc.'s Chief Financial Officer,
as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name and
in my behalf the Mercom, Inc. Form 10-K for the fiscal year ended December 31,
1996, and to file said form to the Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and relative instruments in writing which
I deem requisite or proper to effectuate specifically the execution and delivery
of the above-mentioned form with the same validity as I could, if personally
present, and I hereby ratify and affirm that my said attorney as I may deem to
act for me, shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect as of March 29, 1997 and such specific rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 26th day of March,
1997.
/s/ Raymond B. Ostroski (SEAL)
------------------------------
Raymond B. Ostroski
Witness:
/s/ Taara C. Young
- ---------------------
<PAGE>
Exhibit 24.
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Clifford L. Jones do make,
constitute and appoint Bruce C. Godfrey, Mercom, Inc.'s Chief Financial Officer,
as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name and
in my behalf the Mercom, Inc. Form 10-K for the fiscal year ended December 31,
1996, and to file said form to the Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and relative instruments in writing which
I deem requisite or proper to effectuate specifically the execution and delivery
of the above-mentioned form with the same validity as I could, if personally
present, and I hereby ratify and affirm that my said attorney as I may deem to
act for me, shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect as of March 29, 1997 and such specific rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 21st day of March,
1997.
/s/ Clifford L. Jones (SEAL)
------------------------------
Clifford L. Jones
Witness:
/s/ Jean L. Jones
- ------------------------------
<PAGE>
Exhibit 24.
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Harold J. Rose, Jr. do make,
constitute and appoint Bruce C. Godfrey, Mercom, Inc.'s Chief Financial Officer,
as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name and
in my behalf the Mercom, Inc. Form 10-K for the fiscal year ended December 31,
1996, and to file said form to the Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and relative instruments in writing which
I deem requisite or proper to effectuate specifically the execution and delivery
of the above-mentioned form with the same validity as I could, if personally
present, and I hereby ratify and affirm that my said attorney as I may deem to
act for me, shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect as of March 29, 1997 and such specific rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 21st day of March,
1997.
/s/ Harold J. Rose, Jr. (seal)
------------------------------
Harold J. Rose, Jr.
Witness:
/s/ Barbara E. Rose
- ---------------------
<PAGE>
Exhibit 24.
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, George C. Stephenson do make,
constitute and appoint Bruce C. Godfrey, Mercom, Inc.'s Chief Financial Officer,
as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name and
in my behalf the Mercom, Inc. Form 10-K for the fiscal year ended December 31,
1996, and to file said form to the Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and relative instruments in writing which
I deem requisite or proper to effectuate specifically the execution and delivery
of the above-mentioned form with the same validity as I could, if personally
present, and I hereby ratify and affirm that my said attorney as I may deem to
act for me, shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect as of March 29, 1997 and such specific rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 24th day of March,
1997.
/s/ George C. Stephenson (SEAL)
------------------------------
George C. Stephenson
Witness:
/s/ Victoria Arrington
- -------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,054
<SECURITIES> 0
<RECEIVABLES> 345
<ALLOWANCES> 36
<INVENTORY> 0
<CURRENT-ASSETS> 3,524
<PP&E> 41,643
<DEPRECIATION> 27,395
<TOTAL-ASSETS> 19,851
<CURRENT-LIABILITIES> 5,690
<BONDS> 15,680
0
0
<COMMON> 4,787
<OTHER-SE> (7,706)
<TOTAL-LIABILITY-AND-EQUITY> 19,851
<SALES> 0
<TOTAL-REVENUES> 15,570
<CGS> 0
<TOTAL-COSTS> 8,717
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 176
<INTEREST-EXPENSE> 1,227
<INCOME-PRETAX> 1,500
<INCOME-TAX> 28
<INCOME-CONTINUING> 1,472
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,472
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
</TABLE>
