<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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.)
201 East 69th Street, Suite PH-G
New York, New York 10021
--------------------------------
(Address of principal executive offices)
(Zip Code)
(212) 421-0600
--------------------------------------------------
(Registrant's telephone number including area code)
- ---------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock ($1.00 par value), as of October 31, 1998.
Common Stock 4,787,060 shares
This Form 10-Q consists of 17 sequentially numbered pages.
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations -
Quarters and Nine Months Ended September 30, 1998
and 1997 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
ASSETS:
<S> <C> <C>
Cash & temporary cash investments $6,115 $4,829
Accounts receivable:
Trade, net of reserve for doubtful accounts of $84 and $49 at
September 30, 1998, and December 31, 1997, respectively 323 365
Other 55 93
Prepaid expenses and other 138 134
Deferred income taxes 264 341
Property, plant and equipment 44,110 42,212
Less - accumulated depreciation 30,458 28,998
-------- --------
Net property, plant and equipment 13,652 13,214
Intangible assets - net of accumulated amortization of $2,525 and $2,319
at September 30, 1998, and December 31, 1997, respectively 1,537 1,743
-------- --------
Total Assets $22,084 $20,719
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable, trade $1,525 $980
Accounts payable, affiliate and related parties 850 539
Other liabilities 1,614 1,694
Accrued litigation costs 750 1,450
Deferred income taxes 1,140 626
Note payable, affiliate 14,151 14,151
-------- --------
Total Liabilities 20,030 19,440
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, $100 par value, 150,000 shares authorized,
none issued and outstanding at September 30, 1998, and
December 31, 1997
Common stock, $1 par value, 5,000,000 shares authorized,
4,787,060, issued and outstanding at September 30, 1998,
and December 31, 1997 4,787 4,787
Additional paid-in capital 11,374 11,374
Accumulated deficit (14,107) (14,882)
-------- --------
Total Shareholders' Equity 2,054 1,279
-------- --------
Total Liabilities and Shareholders' Equity $22,084 $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 Sept 30, Nine Months Ended Sept 30,
---------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $4,387 $4,103 $12,894 $12,399
-------- ------ ------- -------
Costs and expenses 2,886 2,595 8,254 7,762
Non-recurring charges 49 - 349 -
Depreciation and amortization 748 709 2,206 2,166
-------- ------ ------- -------
Total operating expenses 3,683 3,304 10,809 9,928
-------- ------ ------- -------
Operating income 704 799 2,085 2,471
-------- ------ ------- -------
Other (Income) Expenses:
Interest income (82) (52) (232) (131)
Other expense 39 16 194 54
Interest expense 242 245 718 812
Gain on sale of Mercom of Florida, Inc. - (2,571) - (2,571)
-------- ------ ------- -------
Total other expenses (income), net 199 (2,362) 680 (1,836)
-------- ------ ------- -------
Income before income taxes 505 3,161 1,405 4,307
Provision for income taxes 203 461 630 480
-------- ------ ------- -------
Net income $302 $2,700 $775 $3,827
======== ====== ======= =======
Basic and diluted earnings per average common share $0.06 $0.56 $0.16 $0.80
======== ====== ======= =======
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>
Nine Months Ended Sept 30,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Net Cash Provided By Operating Activities $3,921 $2,652
------- -------
Cash Flows From Investing Activities
Expansion, improvements and other (2,635) (1,910)
Proceeds from sale of Mercom of Florida, Inc. -- 3,496
------- -------
Net cash (used in) provided by investing activities (2,635) 1,586
Cash Flows From Financing Activities
Repayment of bank loans -- (17,430)
Note payable, affiliate -- 14,151
------- -------
Net cash used in financing activities -- (3,279)
------- -------
Net increase in cash & temporary cash investments 1,286 959
Cash & temporary cash investments, January 1, 4,829 3,054
------- -------
Cash & temporary cash investments, September 30, $6,115 $4,013
======= =======
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $476 $916
Taxes $38 $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:
September 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.
On November 6, 1998, Avalon Cable of Michigan Holdings, Inc. ("Avalon
Holdings"), a subsidiary of Avalon Cable Holdings, LLC, acquired Cable Michigan
pursuant to a merger agreement dated June 3, 1998 through the merger of its
subsidiary, Avalon Cable of Michigan, Inc. ("Avalon Sub"), into Cable Michigan.
Cable Michigan was the surviving corporation of such merger and changed its name
to "Avalon Cable of Michigan, Inc."
Avalon Sub has the ability, subject to certain limitations and restrictions,
under Avalon Sub's Credit Agreement, to lend additional funds to the Company to
meet additional capital and liquidity needs. At September 30, 1998, the Company
was in compliance with all covenants associated with the Note Payable.
The effective interest rate for debt at September 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 $843 and $521 at September 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.
-7-
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company had amounts due to RCN of $6 and $16 at September 30, 1998, and
December 31, 1997, respectively, primarily for billing and customer service
related expenses.
(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) CABLE MICHIGAN AGREEMENT AND PLAN OF MERGER
On November 6, 1998, pursuant to an Agreement and Plan of Merger, dated June 3,
1998 (the "Cable Michigan Merger Agreement") among Cable Michigan, Avalon
Holdings and Avalon Sub, Avalon Sub merged into Cable Michigan and Cable
Michigan became 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, 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) was
converted into the right to receive $40.50 in cash (the "Merger Consideration").
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 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>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
On September 10, 1998, the Company, Cable Michigan and Mercom Acquisition, Inc.,
a Delaware corporation and a wholly owned subsidiary of Cable Michigan ("Merger
Subsidiary") entered into an Agreement and Plan of Merger (the "Mercom Merger
Agreement"). Pursuant to the Mercom Merger Agreement and subject to the terms
and conditions set forth therein, Merger Subsidiary will be merged with and into
the Company with the Company being the surviving corporation (the "Surviving
Corporation") and a wholly owned subsidiary of Cable Michigan. At the effective
time of the Mercom Merger, each outstanding share of common stock of the Company
held by the Company ("Common Stock") as treasury stock or owned by Cable
Michigan or any of Cable Michigan's subsidiaries immediately prior to the
effective time will be canceled, and no payment will be made with respect
thereto. Each share of common stock of the Merger Subsidiary outstanding
immediately prior to the effective time will be converted into and become one
share of common stock of the Surviving Corporation. At the effective time,
except as set forth above and except for shares with respect to which appraisal
rights have been properly exercised, each issued and outstanding share of Common
Stock will be converted into the right to receive $12.00 in cash. The
consummation of the Mercom Merger is subject to certain conditions, including
the approval of the Mercom Merger and the Mercom Merger Agreement by the
stockholders of the Company. In the Merger Agreement, Cable Michigan agreed to
vote in favor of the Mercom Merger and the Mercom Merger Agreement. Cable
Michigan owns approximately 62% of the outstanding Common Stock. Accordingly,
the adoption of the Mercom Merger Agreement and the Mercom Merger by the
Company's stockholders is expected to occur irrespective of the manner in which
the Company's other stockholders vote their shares of Common Stock.
-9-
<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 September 30, 1998, the Company had net income of
$302 as compared to $2,700 net income for the comparable period in 1997. The
Company's net income for the nine months ended September 30, 1998 decreased by
$3,052 to $775 from net income of $3,827 for the comparable period in 1997. The
decreases represent a reduction of $.50 and $.64 per average common share for
the three and nine month periods, respectively. Included in net income for the
three and nine months ended September 30, 1997, is a gain of approximately
$2,600 recorded from the sale of the Company's investment in Mercom of Florida
in July 1997.
Sales for the three and nine month periods ended September 30, 1998, increased
by $284 or 6.9% and $495 or 4.0%, respectively, over the comparable periods in
1997. Excluding the sales from Mercom of Florida of $282, sales increased by
$777 or 6.4%, for the nine month period ended September 30, 1998. The increases
are primarily due to increased basic service revenue of approximately $244 and
$654 for the three and nine 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 $139 and $327,
respectively, for the three and nine month periods ended September 30, 1998 and
an additional 1,400 average basic subscribers per month during the first nine
months of 1998 compared to the same period in 1997 generated approximately $105
and $327, for the three and nine month periods, respectively. Also contributing
to the increase in sales in 1998 is approximately $32 and $103 in advertising,
pay-per-view and premium revenues for the three and nine month periods,
respectively.
-10-
<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 nine month periods ended September
30, 1998, increased by $291 or 11.2% and $492 or 6.3%, respectively, when
compared to the same periods in 1997. Excluding costs from Mercom of Florida in
1997, expenses increased by $667 or 8.8% for the nine month period ended
September 30, 1998. The increase for the three and nine month periods was
primarily the result of higher programming costs of approximately $174 and $473,
respectively, exclusive of Mercom of Florida. These costs are directly related
to additional customers, new channels and higher programming rates from
suppliers. The remaining increase of $117 and $194 is primarily due to higher
insurance, shareholders and management fee expense, for the three and nine month
periods, respectively, exclusive of Mercom of Florida.
Non-recurring charges of $49 and $349 were recorded for the three and nine month
periods ended September 30, 1998, respectively. These charges pertain to Cable
Michigan's proposal to acquire the outstanding shares of the Company that Cable
Michigan does not already own (Note 7), including financial advisor and legal
expenses and other special committee expenses.
Other expenses in 1998 are primarily losses of $39 and $197 for the three and
nine month periods, respectively, from the retirement of plant as a result of
system upgrades.
Interest expense for the nine month period ended September 30, 1998, decreased
by $94 or 11.6%, as compared to the same period in 1997. The decrease in the
average outstanding debt between the comparable period 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.
Gain on sale of Mercom of Florida, Inc., for the three and nine month periods
ended September 30, 1997 of approximately $2,600 resulted from the Company's
sale of its investment in Mercom of Florida.
Income tax provision for the three month period ended September 30, 1998,
decreased by $258 as compared to the same period in 1997. For the nine month
period ended September 30, 1998, income tax provision increased by $150 as
compared to the same period in 1997. The decrease for the three month period is
primarily due to income taxes recorded in 1997 pertaining to the sale of the
Company's investment in Mercom of Florida, Inc. The increase for the nine month
period is due to the utilization of net operating losses for the period ended
September 30, 1997, for which a valuation allowance had been established and
which was correspondingly reversed. For the period ended September 30, 1998, no
such valuation allowance existed.
-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
Cash and temporary cash investments were $6,115, at September 30, 1998, as
compared to $4,829 at December 31, 1997. The increase in cash of $1,286 is
attributed to cash provided from operations of $3,921 offset by capital
expenditures for the nine month period of $2,635.
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 September 30, 1998, was $14,151. The
Company was in compliance with all of the terms of its Note Payable at September
30, 1998.
On November 6, 1998, pursuant to an Agreement and Plan of Merger, dated June 3,
1998 (the "Cable Michigan Merger Agreement") among Cable Michigan, Avalon Cable
of Michigan Holdings, Inc. ("Avalon Holdings") and Avalon Cable of Michigan,
Inc. ("Avalon Sub"), Avalon Sub merged into Cable Michigan and Cable Michigan
became a wholly owned subsidiary of Avalon Holdings (the "Merger").
Avalon Sub has the ability, subject to certain limitations and restrictions,
under Avalon Sub's Credit Agreement, to lend additional funds to the Company to
invest in the upgrade of its facilities. The 1998 construction budget includes
capital expenditures necessary to upgrade system capacity and network
reliability. 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.
-12-
<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
In accordance with the terms of the Agreement, each share of common stock, par
value $1.00 per share, 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) was
converted into the right to receive $40.50 in cash (the "Merger Consideration").
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 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.
On September 10, 1998, the Company, Cable Michigan and Mercom Acquisition, Inc.,
a Delaware corporation and a wholly owned subsidiary of Cable Michigan ("Merger
Subsidiary") entered into an Agreement and Plan of Merger (the "Mercom Merger
Agreement"). Pursuant to the Mercom Merger Agreement and subject to the terms
and conditions set forth therein, Merger Subsidiary will be merged with and into
the Company with the Company being the surviving corporation (the "Surviving
Corporation") and a wholly owned subsidiary of Cable Michigan. At the effective
time of the Mercom Merger, each outstanding share of common stock of the Company
held by the Company ("Common Stock") as treasury stock or owned by Cable
Michigan or any of Cable Michigan's subsidiaries immediately prior to the
effective time will be canceled, and no payment will be made with respect
thereto. Each share of common stock of the Merger Subsidiary outstanding
immediately prior to the effective time will be converted into and become one
share of common stock of the Surviving Corporation. At the effective time,
except as set forth above and except for shares with respect to which appraisal
rights have been properly exercised, each issued and outstanding share of Common
Stock will be converted into the right to receive $12.00 in cash. The
consummation of the Mercom Merger is subject to certain conditions, including
the approval of the Mercom Merger and the Mercom Merger Agreement by the
stockholders of the Company. In the Merger Agreement, Cable Michigan agreed to
vote in favor of the Mercom Merger and the Mercom Merger Agreement. Cable
Michigan owns approximately 62% of the outstanding Common Stock. Accordingly,
the adoption of the Mercom Merger Agreement and the Mercom Merger by the
Company's stockholders is expected to occur irrespective of the manner in which
the Company's other stockholders vote their shares of Common Stock.
-13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
REGULATORY MATTERS
The Company, like other operators of cable television systems, is subject to
regulation at the federal, state and local levels. No assurances can be given at
this time that the following matters will not have a material adverse effect on
the Company's business and results of operations in the future. Also, no
assurance can be given as to what other future actions Congress, the FCC or
other regulatory authorities may take or the effects thereof on the cable
industry in general or the Company in particular.
Cable Television Consumer Protection and Competition Act
- --------------------------------------------------------
On October 5, 1992, Congress passed the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Act") which regulated certain subscriber
rates and a number of other matters in the cable industry, such as mandatory
carriage of local broadcast stations and retransmission consent, and which will
increase the administrative costs of complying with such regulations. The most
significant provision of the 1992 Act required the FCC to establish rules to
ensure that rates for basic services are reasonable for subscribers in areas
without effective competition as defined in the 1992 Act.
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
September 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. These two orders
resolved all outstanding cable programming service tier rate complaints through
January 31, 1998.
-14-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 began construction in early 1998 and as of October 1998, has activated
approximately 90% of its network. To date, the nine competitive communities
have the ability to serve approximately 17% of the homes passed by the Company's
network.
IMPACT OF THE YEAR 2000 ISSUE
The Company has and will acquire certain financial, administrative and
operational systems. The Company is in the process of reviewing its existing
systems and intends to review each system that it acquires, as well as the
systems employed by third party service providers (including for billing
services) in order to analyze the extent, if any, to which the Company faces a
"Year 2000" problem (a problem that is expected to arise with respect to
computer programs that use only two digits to identify a year in the date field
and which were designed and developed without considering the impact of the
upcoming change in the century). Although the Company has not yet made a final
determination, the Company believes that any "Year 2000" problem, if it arises
in the future, should not be material to the Company's liquidity, financial
position or results of operations; however, there can be no assurance as to the
extent of any such liabilities.
-15-
<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 November 12, 1998, the Company filed an 8-K. On November 6, 1998 (the
"Closing Date"), Avalon Holdings acquired all of the outstanding shares of Cable
Michigan, which, at such time, owned approximately 62% of the common stock of
the Company, par value $1.00 per share (the "Mercom Common Stock"), issued and
outstanding as of the Closing Date (the "Shares"). Accordingly, on the Closing
Date, Avalon Holdings acquired indirect control of the Company. Such acquisition
occurred pursuant to the terms of the Cable Michigan Merger Agreement. On the
Closing Date, pursuant to the Cable Michigan Merger Agreement, Avalon Sub merged
with and into Cable Michigan (the "Merger"), with Cable Michigan as the
surviving corporation. In the Merger, Cable Michigan changed its name to "Avalon
Cable of Michigan, Inc." and became a wholly owned subsidiary of Avalon
Holdings. The discussion of the Merger Agreement is only a summary and is
qualified in its entirety by reference to the Exhibit to the Company's Form 8-K,
which was filed on November 12, 1998.
In the Merger, each share (a "Cable Michigan Share") of Common Stock, par value
$1.00 per share, of Cable Michigan issued and outstanding immediately prior to
the effective time of the Merger (other than Cable Michigan Shares held in
treasury, Cable Michigan Shares owned by Avalon Holdings or any subsidiary of
Avalon Holdings, and Cable Michigan Shares as to which dissenters' rights were
validly exercised) was converted into the right to receive $40.50 in cash. The
total amount of funds used to consummate the transactions contemplated by the
Cable Michigan Merger Agreement (the "Merger Financing"), including payments to
the former shareholders and repayment of Cable Michigan's existing indebtedness,
was approximately $426 million. The Merger Financing was obtained by Avalon
Holdings and its affiliates through borrowings under senior secured and
unsecured term loan facilities and equity contributions from ABRY Broadcast
Partners III, L.P. and others.
Prior to the Merger, Level 3 Telecom Holdings, Inc., a Delaware corporation
("LTTH") owned approximately 3,330,121 shares of Cable Michigan Common Stock
which represented approximately 48% of the outstanding Cable Michigan Common
Stock. Also, prior to the Merger, Cable Michigan owned approximately 62% of the
outstanding shares of the Company. Accordingly, prior to the Merger, LTTH
indirectly controlled the Company. Thus, in the Merger, Avalon Holdings obtained
indirect control over the Company from LTTH.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCOM, INC.
DATE: November 16, 1998 /s/ Joel C. Cohen
------------------
Joel C. Cohen
President, Chief Executive
Officer and Secretary
-17-
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
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QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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