<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17750
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MERCOM, INC.
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(Exact name or registrant as specified in its charter)
Delaware 38-2728175
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Carnegie Center
Princeton, New Jersey 08540-6215
--------------------------------
(Address of principle executive offices)
(Zip Code)
(609) 734-3737
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(Registrant's telephone number including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock ($1.00 par value), as of April 30, 1998.
Common Stock 4,787,060 shares
This Form 10-Q consists of 14 sequentially numbered pages.
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MERCOM, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations -
For the Three Months Ended March 31, 1998
and 1997 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 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 9-12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS:
Cash & temporary cash investments $ 5,021 $ 4,829
Accounts receivable:
Trade, net of reserve for doubtful accounts of $52 and $49 at
March 31, 1998, and December 31, 1997, respectively 296 365
Other 82 93
Prepaid expenses and other 163 134
Deferred income taxes 311 341
Property, plant and equipment 42,879 42,212
Less - accumulated depreciation 29,453 28,998
------- -------
Net property, plant and equipment 13,426 13,214
Intangible assets - net of accumulated amortization of $2,389 and $2,319
at March 31, 1998, and December 31, 1997, respectively 1,674 1,743
------- -------
Total Assets $20,973 $20,719
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable, trade $1,164 $980
Accounts payable, affiliate and related parties 355 539
Other liabilities 1,492 1,694
Accrued litigation costs 1,450 1,450
Deferred income taxes 764 626
Note payable, affiliate 14,151 14,151
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Total Liabilities 19,376 19,440
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SHAREHOLDERS' EQUITY:
Preferred stock, $100 par value, 150,000 shares authorized,
none issued and outstanding at March 31, 1998,
and December 31, 1997
Common stock, $1 par value, 5,000,000 shares authorized,
4,787,060, issued and outstanding at March 31, 1998,
and December 31, 1997 4,787 4,787
Additional paid-in capital 11,374 11,374
Accumulated deficit (14,564) (14,882)
------- -------
Total Shareholders' Equity 1,597 1,279
------- -------
Total Liabilities and Shareholders' Equity $20,973 $20,719
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Quarter Ended March 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Sales $4,120 $4,064
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Cost and expenses 2,643 2,568
Depreciation and amortization 727 722
------ ------
Total operating expenses 3,370 3,290
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Operating income 750 774
------ ------
Other (Income) Expenses:
Interest income (76) (42)
Other expense (income) 93 (16)
Interest expense 237 283
------ ------
Total other expenses, net 254 225
------ ------
Income before income taxes 496 549
Provision for income taxes 178 152
------ ------
Net income $318 $397
====== ======
Basic and diluted earnings per average common share $0.07 $0.08
====== ======
Weighted Average Common Shares Outstanding (in thousands) 4,787 4,787
====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Quarter Ended March 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Net Cash Provided By Operating Activities $1,156 $245
------ ------
Cash Flows From Investing Activities
Expansion, improvements and other (964) (437)
------ ------
Cash Flows From Financing Activities
Repayment of bank loans -- (929)
------ ------
Net increase (decrease) in cash & temporary cash investments 192 (1,121)
Cash & temporary cash investments, January 1, 4,829 3,054
------ ------
Cash & temporary cash investments, March 31, $5,021 $1,933
====== ======
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $235 $372
Taxes -- --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by Mercom, Inc. (the "Company"), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. However, in the opinion of
management, such statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
information. The condensed consolidated financial statements should be read in
conjunction with the annual statements and notes thereto included in the
Company's 1997 Annual Report to the Securities and Exchange Commission on Form
10-K/A. 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:
MARCH 31 DECEMBER 31
1998 1997
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Note Payable, Affiliate $14,151 $14,151
======= ===========
6
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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 March 31, 1998, the
Company was in compliance with all covenants associated with the Note Payable.
The weighted average effective interest rate for all debt at March 31, 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 the addback of non-deductible goodwill amortization.
(5) AFFILIATE AND RELATED PARTY TRANSACTIONS
The Company had amounts due to Cable Michigan of $348 and $521 at March 31,
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 March 31, 1998, and December
31, 1997, respectively, primarily for billing and customer service related
expenses.
7
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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.
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/A. 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 March 31, 1998, the Company had net income of $318 as
compared to $397 net income for the comparable period in 1997. This represents
a decrease of $79 or $0.01 per average common share for the three month period.
Sales for the three months ended March 31, 1998, increased by $56 or 1.4%, over
the comparable period in 1997. This increase is primarily due to increased
basic service revenue of approximately $140. Approximately $104 of the basic
service revenue increase is due to approximately 1,300 additional average basic
subscribers per month in 1998 compared to the same period in 1997. Also
contributing to the increase in 1998 is approximately $45 in advertising and
pay-per-view revenues. These increases are partially offset by a decrease in
sales of $139 from 1997, due to the sale of the Company's investment in Mercom
of Florida in July 1997.
Total costs and expenses for the three month period ended March 31, 1998,
increased by $75 or 2.9% compared to the same period in 1997. Excluding costs of
Mercom of Florida in 1997, expenses increased by $162 or 6.5%. The increase for
the three month period was primarily the result of higher programming costs of
approximately $183, exclusive of Mercom of Florida. These costs are directly
related to additional customers, new channels and higher programming rates from
suppliers.
Other expenses, excluding interest, increased $109 for the three month period
ended March 31, 1998, compared to the same period in 1997. The increase is due
primarily to a loss of approximately $93 from the retirement of plant as a
result of a system upgrade.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS, CONTINUED
Interest expense for the three month period ended March 31, 1998, decreased by
$46 or 16.3% as compared to the same period 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and temporary cash investments were $5,021, at March 31, 1998, as compared
to $4,829 at December 31, 1997. The increase in cash of $192 is primarily
attributed to cash provided from operations of $1,156 offset by capital
expenditures for the three month period of $964.
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 1997 rate increase provided
approximately $700 in additional annualized revenues, subject to a final
decision by the Federal Communications Commission (the "FCC") with respect to
this rate increase, of which no assurances can be given. In March 1998, the
Company commenced basic rate increase notifications to all subscribers for rate
increases which were implemented in May 1998. The 1998 rate increase is
expected to provide an estimated additional $775 in annualized revenues based on
the average number of subscribers budgeted for 1998. All rate increases are
implemented according to the rules and regulations established by the FCC.
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 provides 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 March 31, 1998, was $14,151. The
Company was in compliance with all of the terms of its Note Payable at March 31,
1998.
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 Note Payable provides for increased borrowing capacity as the Company
continues to invest in the upgrade of its facilities. The Company's
construction budget is estimated to be $8,393 in 1998. 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.
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. 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 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.
11
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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
March 31, 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
FCC 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.
12
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits
(27) Financial Data Schedule
(b). Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of 1998.
13
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCOM, INC.
DATE: May 15, 1998 /s/ Timothy J. Stoklosa
-----------------------
Timothy J. Stoklosa
Executive Vice President,
Chief Financial Officer and
Treasurer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,021
<SECURITIES> 0
<RECEIVABLES> 348
<ALLOWANCES> 52
<INVENTORY> 0
<CURRENT-ASSETS> 5,562
<PP&E> 42,879
<DEPRECIATION> 29,453
<TOTAL-ASSETS> 20,973
<CURRENT-LIABILITIES> 3,761
<BONDS> 14,151
4,787
0
<COMMON> 0
<OTHER-SE> (3,190)
<TOTAL-LIABILITY-AND-EQUITY> 20,973
<SALES> 0
<TOTAL-REVENUES> 4,120
<CGS> 0
<TOTAL-COSTS> 2,326
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 28
<INTEREST-EXPENSE> 237
<INCOME-PRETAX> 496
<INCOME-TAX> 178
<INCOME-CONTINUING> 318
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 318
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
