<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------------
Commission file number 0-17750
-------------------------
MERCOM, INC.
- --------------------------------------------------------------------------------
(Exact name or registrant as specified in its charter)
Delaware 38-2728175
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Carnegie Center
Princeton, New Jersey 08540-6215
----------------------------------------
(Address of principle executive offices)
(Zip Code)
(609) 734-3737
- --------------------------------------------------------------------------------
(Registrant's telephone number including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock ($1.00 par value), as of July 31, 1998.
Common Stock 4,787,060 shares
This Form 10-Q consists of 15 sequentially numbered pages.
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations -
Quarters and Six Months Ended June 30, 1998
and 1997 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- ---------------
<S> <C> <C>
ASSETS:
Cash & temporary cash investments $5,766 $4,829
Accounts receivable:
Trade, net of reserve for doubtful accounts of $81 and $49 at
June 30, 1998, and December 31, 1997, respectively 351 365
Other 68 93
Prepaid expenses and other 108 134
Deferred income taxes 253 341
Property, plant and equipment 43,366 42,212
Less - accumulated depreciation 29,930 28,998
------------- ---------------
Net property, plant and equipment 13,436 13,214
Intangible assets - net of accumulated amortization of $2,457 and $2,319
at June 30, 1998, and December 31, 1997, respectively 1,605 1,743
------------- ---------------
Total Assets $21,587 $20,719
============= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable, trade $1,250 $980
Accounts payable, affiliate and related parties 491 539
Other liabilities 1,551 1,694
Accrued litigation costs 1,450 1,450
Deferred income taxes 942 626
Note payable, affiliate 14,151 14,151
------------- ---------------
Total Liabilities 19,835 19,440
------------- ---------------
SHAREHOLDERS' EQUITY:
Preferred stock, $100 par value, 150,000 shares authorized, none issued and
outstanding at June 30, 1998, and December 31, 1997
Common stock, $1 par value, 5,000,000 shares authorized,
4,787,060, issued and outstanding at June 30, 1998, and December 31, 1997 4,787 4,787
Additional paid-in capital 11,374 11,374
Accumulated deficit (14,409) (14,882)
------------- ---------------
Total Shareholders' Equity 1,752 1,279
------------- ---------------
Total Liabilities and Shareholders' Equity $21,587 $20,719
============= ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
------------------------- --------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $ 4,387 $ 4,232 $ 8,507 $ 8,296
------- ------- ------- -------
Costs and expenses 2,725 2,599 5,368 5,167
Non-recurring charges 300 -- 300 --
Depreciation and amortization 731 735 1,458 1,457
------- ------- ------- -------
Total operating expenses 3,756 3,334 7,126 6,624
------- ------- ------- -------
Operating income 631 898 1,381 1,672
------- ------- ------- -------
Other (Income) Expenses:
Interest income (74) (37) (150) (79)
Other expense 62 54 155 38
Interest expense 239 284 476 567
------- ------- ------- -------
Total other expenses, net 227 301 481 526
------- ------- ------- -------
Income before income taxes 404 597 900 1,146
Provision (benefit) for income taxes 249 (133) 427 19
------- ------- ------- -------
Net income $ 155 $ 730 $ 473 $ 1,127
======= ======= ======= =======
Basic and diluted earnings per average common share $ 0.03 $ 0.15 $ 0.10 $ 0.24
======= ======= ======= =======
Weighted Average Common Shares Outstanding (in thousands) 4,787 4,787 4,787 4,787
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1998 1997
------ ------
<S> <C> <C>
Net Cash Provided By Operating Activities $2,636 $1,781
------------- -------------
Cash Flows From Investing Activities
Expansion, improvements and other (1,699) (854)
------------- -------------
Cash Flows From Financing Activities
Repayment of bank loans -- (1,367)
------------- -------------
Net increase (decrease) in cash & temporary cash investments 937 (440)
Cash & temporary cash investments, January 1, 4,829 3,054
------------- -------------
Cash & temporary cash investments, June 30, $5,766 $2,614
============= =============
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $476 $658
Taxes $26 $23
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
(1) RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by Mercom, Inc. (the "Company"), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. However, in the opinion of
management, such statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
information. The condensed consolidated financial statements should be read in
conjunction with the annual statements and notes thereto included in the
Company's 1997 Annual Report to the Securities and Exchange Commission on Form
10-K, including any amendments thereto. The results of operations for the
interim periods are not necessarily indicative of the results that might be
expected for future interim periods or for the full year ended December 31,
1998.
(2) RESTRUCTURING
Prior to September 30, 1997, the Company was operated as part of C-TEC
Corporation ("C-TEC"). On September 30, 1997, C-TEC distributed 100% of the
outstanding shares of common stock of its wholly owned subsidiaries, RCN
Corporation ("RCN") and Cable Michigan, Inc. ("Cable Michigan") to holders of
record of C-TEC's Common Stock and C-TEC's Class B Common Stock as of the close
of business on September 19, 1997 in accordance with the terms of a Distribution
Agreement dated September 5, 1997 among C-TEC, RCN and Cable Michigan. Cable
Michigan, Inc. consists of C-TEC's Michigan cable operations, including its 62%
ownership in the Company.
(3) DEBT
Debt consists of the following:
June 30 December 31
1998 1997
-------- -------------
Note Payable, Affiliate $ 14,151 $ 14,151
======== ========
6
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
In November 1989, the Company entered into a term credit agreement with a bank.
The term credit agreement was amended several times in order to, among other
things, increase borrowings thereunder and to restructure the amortization
schedule of the principal repayments.
On September 29, 1997, Cable Michigan purchased and assumed all of the bank's
interest in the term credit agreement and the note issued thereunder. As of such
date, $14,151 of principal was outstanding. Immediately after the purchase, the
term credit agreement was amended in order to, among other things, provide for
less restrictive financial covenants, eliminate mandatory amortization of
principal and provide for a bullet maturity of principal on December 31, 2002,
and remove the change of control event of default. The Company's borrowings
under the term credit agreement contain pricing and security provisions
substantially the same as those in place prior to the purchase of the loan. The
borrowings are collateralized by a pledge of the stock of the Company's
subsidiaries and a first lien on certain of the assets of the Company and its
subsidiaries, including inventory, equipment and receivables.
Cable Michigan has the ability, under Cable Michigan's Credit Agreement, to lend
additional funds, approximately $6,000, up to an aggregate of $20,000, to the
Company to meet additional capital and liquidity needs. At June 30, 1998, the
Company was in compliance with all covenants associated with the Note Payable.
The effective interest rate for debt at June 30, 1998 and December 31, 1997,
was 6.7%. Interest on the Note Payable is paid based on LIBOR plus 1%.
(4) INCOME TAXES
The provision for income taxes is different from the amounts computed by
applying the U.S. statutory federal tax rate of 34% primarily due to the effect
of non-deductible goodwill amortization and non-deductible expenses associated
with the potential acquisition of the minority shares of the Company.
(5) AFFILIATE AND RELATED PARTY TRANSACTIONS
The Company had amounts due to Cable Michigan of $484 and $521 at June 30, 1998,
and December 31, 1997, respectively, primarily related to management services
and interest on the Note Payable. The Company entered into a management
agreement with Cable Michigan, in January 1997, pursuant to which Cable Michigan
manages the Company's cable television systems' operations. The management
agreement was approved by the Company's Board of Directors.
The Company had amounts due to RCN of $5 and $16 at June 30, 1998, and December
31, 1997, respectively, primarily for billing and customer service related
expenses.
7
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
(6) EARNINGS PER SHARE
Basic earnings (loss) per share amounts are computed based on net income (loss)
divided by the weighted average number of shares of common stock outstanding
during the period.
Diluted earnings (loss) per share amounts are computed based on net income
(loss) divided by the weighted average number of shares of common stock
outstanding during the period after giving effect to convertible securities
considered to be dilutive common stock equivalents. The Company does not
currently have any convertible securities.
(7) PENDING CABLE MICHIGAN AGREEMENT AND PLAN OF MERGER
On June 3, 1998, Cable Michigan entered into an Agreement and Plan of Merger
(the "Agreement") among Cable Michigan, Avalon Cable of Michigan Holdings, Inc.
("Avalon Holdings") and Avalon Cable of Michigan, Inc. ("Avalon Sub"), pursuant
to which Avalon Sub will merge into Cable Michigan and Cable Michigan will
become a wholly owned subsidiary of Avalon Holdings (the "Merger").
In accordance with the terms of the Agreement, each share of common stock, par
value $1.00 per share ("Common Stock"), of Cable Michigan outstanding prior to
the effective time of the Merger (other than treasury stock, shares owned by
Avalon Holdings or its subsidiaries, or shares as to which dissenters' rights
have been exercised) shall be converted into the right to receive $40.50 in cash
(the "Merger Consideration"), subject to certain possible closing adjustments.
The Merger is subject to customary conditions, including the approval of the
Cable Michigan shareholders and the receipt of required regulatory approvals.
There can be no assurances that any transaction will be consummated.
Pursuant to a Voting Agreement, dated as of June 3, 1998 (the "Voting
Agreement"), Level 3 Telecom Holdings, Inc. ("LTTH"), which owns approximately
48% of the shares of Common Stock of Cable Michigan, has agreed, among other
things, to vote all its shares of Common Stock in favor of the Agreement at any
meeting of the stockholders of Cable Michigan.
On June 4, 1998, Cable Michigan made a proposal to the Board of Directors of the
Company, to acquire the outstanding shares of the Company that Cable Michigan
does not already own at a price of $11.00 per share. The Company has established
a special committee composed of independent directors to evaluate the proposal.
On August 12, 1998, Avalon Cable authorized Cable Michigan to increase to $12.00
per share, the price of the Cable Michigan proposal for the acquisition of the
outstanding shares of the Company that Cable Michigan does not already own.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1997 included in the Company's Form 10-K, including any amendments
thereto. 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, acquisitions and
divestitures, government and regulatory policies, the pricing and availability
of equipment, materials, inventories and programming, technological
developments, franchise related matters, market conditions that may adversely
affect the availability of debt and equity financing and changes in the
competitive environment in which the Company operates.
Results of Operations
For the three months ended June 30, 1998, the Company had net income of $155 as
compared to $730 net income for the comparable period in 1997. The Company's net
income for the six months ended June 30, 1998 decreased by $654 to $473 from net
income of $1,127 for the comparable period in 1997. The decreases represent a
reduction of $.12 and $.14 per average common share for the three and six month
periods, respectively.
Sales for the three and six month periods ended June 30, 1998, increased by $155
or 3.7% and $211 or 2.5%, respectively, over the comparable periods in 1997.
Excluding the sales from Mercom of Florida, which was sold in July 1997, of $143
and $282 for the three and six month periods, respectively, sales increased by
$298 or 7.3% and $493 or 6.2%, for the three and six month periods ended June
30, 1998, respectively. The increases are primarily due to increased basic
service revenue of approximately $269 and $410 for the three and six month
periods, respectively. The following two factors were responsible for the
increase in basic service revenue. A basic service rate increase in May 1998
contributed approximately $152 and $189, respectively, for the three and six
month periods ended June 30, 1998 and an additional 1,400 average basic
subscribers per month during the first six months of 1998 compared to the same
period in 1997 generated approximately $117 and $221, for the three and six
month periods, respectively. Also contributing to the increase in sales in 1998
is approximately $18 and $72 in advertising, pay-per-view and premium revenues
for the three and six month periods, respectively.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
Results of Operations, continued
Total costs and expenses for the three and six month periods ended June 30,
1998, increased by $126 or 4.8% and $201 or 3.9%, respectively, when compared to
the same periods in 1997. Excluding costs from Mercom of Florida in 1997,
expenses increased by $216 or 8.6% and $378 or 7.6%, for the three and six month
periods ended June 30, 1998, respectively. The increase for the three and six
month periods was primarily the result of higher programming costs of
approximately $116 and $299, respectively, exclusive of Mercom of Florida. These
costs are directly related to additional customers, new channels and higher
programming rates from suppliers. In addition, increases in salaries and
benefits of $39 and $58, respectively, exclusive of Mercom of Florida,
contributed to the increases over the same periods in 1997.
Non-recurring charges of $300 were recorded in the second quarter of 1998. These
charges pertain to outside consultants authorized by a special committee
composed of independent directors of the Company to prepare a fairness opinion
on the proposal to acquire the outstanding shares of Mercom that Cable Michigan
does not already own (Note 7).
Other expenses in 1998 are primarily losses of $61 and $154 for the three and
six month periods, respectively, from the retirement of plant as a result of
system upgrades.
Interest expense for the three and six month periods ended June 30, 1998,
decreased by $45 or 15.8% and $91 or 16.0%, respectively, as compared to the
same periods in 1997. The decrease in the average outstanding debt between the
comparable periods was the primary reason for the decrease in interest expense.
The Company's future interest expense is subject to fluctuations in the market
rate of interest, and accordingly, there is no assurance that the Company's
current level of interest expense is indicative of future trends.
Income tax provision for the three and six month periods ended June 30, 1998,
increased by $382 and $408, respectively, as compared to the same periods in
1997. The increase is due to the utilization of net operating losses for the
period ended June 30, 1997, for which a valuation allowance had been established
and which was correspondingly reversed. For the period ended June 30, 1998, no
such valuation allowance existed.
Liquidity and Capital Resources
Cash and temporary cash investments were $5,766, at June 30, 1998, as compared
to $4,829 at December 31, 1997. The increase in cash of $937 is attributed to
cash provided from operations of $2,636 offset by capital expenditures for the
six month period of $1,699.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
Liquidity and Capital Resources, continued
The Company expects to 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. The 1998 rate increase, implemented in May
1998, is expected to provide an estimated additional $775 in annualized revenues
based on the average number of subscribers forecasted for 1998. All rate
increases are subject to a final decision by the Federal Communications
Commission (the "FCC") with respect to these rate increases, of which no
assurances can be given.
In September 1997, Cable Michigan assumed all of the bank's interest in the
Company's Credit Agreement (Note 3). Immediately after the assumption of the
Credit Agreement by Cable Michigan, the Note Payable was amended and restated.
The Note Payable contains the same pricing and collateral provisions as were
previously in place with the Credit Agreement. The amendments to the Note
Payable provide for less restrictive financial covenants and the elimination of
mandatory principal repayments prior to December 31, 2002. The Note Payable to
Cable Michigan matures with a balloon payment on December 31, 2002. The
Company's Note Payable to Cable Michigan at June 30, 1998, was $14,151. The
Company was in compliance with all of the terms of its Note Payable at June 30,
1998.
The Note Payable provides for increased borrowing capacity as the Company
continues to invest in the upgrade of its facilities. The 1998 construction
budget includes capital expenditures necessary to upgrade system capacity and
network reliability. Cable Michigan has the ability, under Cable Michigan's
Credit Agreement, to lend additional funds, approximately $6,000, up to an
aggregate of $20,000, to the Company. The Company believes its cash on hand,
cash generated from operations and credit availability will be sufficient to
meet its liquidity requirements, prior to maturity of the Note Payable, but
there are no assurances in this regard.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
Liquidity and Capital Resources, continued
On June 3, 1998, Cable Michigan entered into an Agreement and Plan of Merger
(the "Agreement") among Cable Michigan, Avalon Cable of Michigan Holdings, Inc.
("Avalon Holdings") and Avalon Cable of Michigan, Inc. ("Avalon Sub"), pursuant
to which Avalon Sub will merge into Cable Michigan and Cable Michigan will
become a wholly owned subsidiary of Avalon Holdings (the "Merger").
In accordance with the terms of the Agreement, each share of common stock, par
value $1.00 per share ("Common Stock"), of Cable Michigan outstanding prior to
the effective time of the Merger (other than treasury stock, shares owned by
Avalon Holdings or its subsidiaries, or shares as to which dissenters' rights
have been exercised) shall be converted into the right to receive $40.50 in cash
(the "Merger Consideration"), subject to certain possible closing adjustments.
The Merger is subject to customary conditions, including the approval of the
Cable Michigan shareholders and the receipt of required regulatory approvals.
There can be no assurances that any transaction will be consummated.
Pursuant to a Voting Agreement, dated as of June 3, 1998 (the "Voting
Agreement"), Level 3 Telecom Holdings, Inc. ("LTTH"), which owns approximately
48% of the shares of Common Stock of Cable Michigan, has agreed, among other
things, to vote all its shares of Common Stock in favor of the Agreement at any
meeting of the stockholders of Cable Michigan.
On June 4, 1998, Cable Michigan made a proposal to the Board of Directors of the
Company, to acquire the outstanding shares of the Company that Cable Michigan
does not already own at a price of $11.00 per share. The Company has established
a special committee composed of independent directors to evaluate the proposal.
On August 12, 1998, Avalon Cable authorized Cable Michigan to increase to $12.00
per share, the price of the Cable Michigan proposal for the acquisition of the
outstanding shares of the Company that Cable Michigan does not already own.
Regulatory Matters
The Company, like other operators of cable television systems, is subject to
regulation at the federal, state and local levels. No assurances can be given at
this time that the following matters will not have a material adverse effect on
the Company's business and results of operations in the future. Also, no
assurance can be given as to what other future actions Congress, the FCC or
other regulatory authorities may take or the effects thereof on the cable
industry in general or the Company in particular.
Cable Television Consumer Protection and Competition Act
- --------------------------------------------------------
On October 5, 1992, Congress passed the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Act") which regulated certain subscriber
rates and a number of other matters in the cable industry, such as mandatory
carriage of local broadcast stations and retransmission consent, and which will
increase the administrative costs of complying with such regulations. The most
significant provision of the 1992 Act required the FCC to establish rules to
ensure that rates for basic services are reasonable for subscribers in areas
without effective competition as defined in the 1992 Act.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
Regulatory Matters, continued
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 rapid 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 cable programming service tier rates
are deregulated as effective competition enters the franchise area, or by March
31, 1999, whichever occurs first.
Impact to Company
The rate regulation provisions of the 1992 Act have not had a material adverse
effect on the Company's financial condition and results of operations through
June 30, 1998. 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.
Over the last several years the Company has received complaints related to its
rate filings. Although the Company believes its rates are justified according to
the rules and regulations established by the FCC, the Company believes it has
adequately reserved for any exposure related to these rate proceedings.
In the second quarter of 1998, the FCC adopted and released two orders stating
that the rates charged by the Company for its two cable programming service
tiers, effective through January 31, 1998 are reasonable. Accordingly, reserves
established for rate complaints relating to these two cable programming service
tiers have been reversed in the second quarter 1998 in the amount of
approximately $40.
Competition
Competition for the Company's services traditionally has come from a variety of
providers including broadcast television, video cassette recorders, overbuilders
and home satellite dishes. The Company has eight franchises within its service
areas where other cable television providers have commenced cable programming
operations. In addition, the Board of Public Utilities of a ninth franchised
area has begun construction and as of July 1998, has activated a portion of its
network. To date, the nine competitive communities have the ability to serve 11%
of the homes passed by the Company's network, with the potential of increasing
to 17% upon completion of the ninth community's network.
13
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
(27) Financial Data Schedule
(b). Reports on Form 8-K
On June 16, 1998, Mercom, Inc. (the "Company") filed an 8-K. On June 3, 1998,
Cable Michigan, Inc. ("Cable Michigan") entered into an Agreement and Plan of
Merger dated as of that date (the "Agreement") among Cable Michigan, Avalon
Cable of Michigan Holdings, Inc. ("Avalon Holdings") and Avalon Cable of
Michigan, Inc. ("Avalon Sub"). Pursuant to the Agreement, and subject to the
terms and conditions set forth therein, Avalon Sub will merge into Cable
Michigan and Cable Michigan will become a wholly owned subsidiary of Avalon
Holdings (the "Merger"). The Company understands that ABRY Partners, Inc., a
Boston-based private equity fund that invests primarily in media and
communications businesses, is the principal investor in Avalon Holdings.
As permitted by the Agreement, on June 4, 1998, Cable Michigan made a proposal
to the Board of Directors of the Company, in which Cable Michigan holds a 62%
interest, to acquire the outstanding shares of the Company that Cable Michigan
does not already own at a price of $11.00 per share. The Company has established
a special committee composed of independent directors to evaluate the proposal.
There can be no assurances that any transaction will be agreed upon or that any
transaction will take place.
Subsequent to the filing of the Form 8-K, on August 12, 1998, Avalon Cable
authorized Cable Michigan to increase to $12.00 per share, the price of the
Cable Michigan proposal for the acquisition of the outstanding shares of the
Company that Cable Michigan does not already own.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCOM, INC.
DATE: August 14, 1998 /s/ Timothy J. Stoklosa
-----------------------
Timothy J. Stoklosa
Executive Vice President,
Chief Financial Officer and
Treasurer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,766
<SECURITIES> 0
<RECEIVABLES> 432
<ALLOWANCES> 81
<INVENTORY> 0
<CURRENT-ASSETS> 6,293
<PP&E> 43,366
<DEPRECIATION> 29,930
<TOTAL-ASSETS> 21,587
<CURRENT-LIABILITIES> 4,042
<BONDS> 14,151
0
0
<COMMON> 4,787
<OTHER-SE> (3,035)
<TOTAL-LIABILITY-AND-EQUITY> 21,587
<SALES> 0
<TOTAL-REVENUES> 8,507
<CGS> 0
<TOTAL-COSTS> 4,658
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<INCOME-PRETAX> 900
<INCOME-TAX> 427
<INCOME-CONTINUING> 473
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 473
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
