SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
|X| Filed by the Registrant
|_| Filed by a Party other than the Registrant
Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
MERCOM, INC.
- - - -------------------------------------------------------------------------------
(Name of Registrant as Specified In its Charter)
- - - -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
1) Title of each class of securities to which transaction applies:
Common Stock, par value $1.00 per share
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2) Aggregate number of securities to which transaction applies:
1,822,810
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
$12.00 (the consideration to be paid per share of Common Stock, par
value $1.00 per share, of MERCOM, INC. pursuant to the merger
described herein).
4) Proposed maximum aggregate value of transaction:
$21,873,720
5) Total fee paid:
$4,380
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[ ] Fee paid previously with preliminary materials
[x] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
$4,380
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2) Form, Schedule or Registration Statement No.:
Schedule 13E-3
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3) Filing Parties:
Avalon Cable of Michigan, Inc.
Mercom Acquisition, Inc.
Mercom, Inc.
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4) Date filed:
December 11, 1998
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[Mercom logo]
[Date], 1998
Dear Fellow Shareholder,
You are cordially invited to attend a Special Meeting of shareholders (the
"Special Meeting") of Mercom, Inc. ("Mercom" or the "Company") to be held on
[Date], 1998 at [11:00] a.m. at the Company's corporate headquarters, located
at 800 Third Avenue, Suite 3100, New York, New York 10022.
At the Special Meeting, you will be asked to approve and adopt the
Agreement and Plan of Merger, dated as of September 10, 1998 (the "Merger
Agreement"), among the Company, Avalon Cable of Michigan, Inc. (formerly known
as Cable Michigan, Inc.) ("Cable Michigan" or the "Buyer"), and Mercom
Acquisition, Inc. ("MergerSub"), a wholly owned subsidiary of Buyer, pursuant
to which MergerSub or its assignee will be merged with and into the Company
(the "Merger"). Under the terms and subject to the conditions described in the
attached Proxy Statement, each share (a "Share") of Common Stock, par value
$1.00 per share ("Company Common Stock") of the Company issued and outstanding
immediately prior to the effective time of the Merger (other than Shares held
by the Company as treasury stock, Shares owned by Buyer or any subsidiary of
Buyer, and Shares as to which appraisal rights have been validly exercised)
will be converted in the Merger into the right to receive $12.00 in cash,
without interest. The Buyer currently owns approximately 62% of the outstanding
Company Common Stock. A Special Committee of the Board of Directors of the
Company (the "Special Committee"), which is composed solely of directors
unaffiliated with Buyer, negotiated the $12.00 per Share price. Cable Michigan
would like to buy out the Public Shareholders (as defined below) of Mercom
because, among other things, Cable Michigan will be able to more closely
coordinate the activities of the two companies and save the costs of operating
Mercom as a separate public company.
Details of the proposed Merger and other important information are
described in the accompanying Notice of Special Meeting and Proxy Statement.
You are urged to read these important documents carefully before casting your
vote.
IN ORDER FOR THE MERGER TO BE CONSUMMATED, THE MERGER AGREEMENT MUST BE
APPROVED AND ADOPTED BY AT LEAST A MAJORITY OF THE OUTSTANDING SHARES OF
COMPANY COMMON STOCK ENTITLED TO VOTE AT THE SPECIAL MEETING. BUYER HAS AGREED
TO VOTE ITS 2,964,250 SHARES OF COMPANY COMMON STOCK, WHICH REPRESENT
APPROXIMATELY 62% OF THE OUTSTANDING COMPANY COMMON STOCK, IN FAVOR OF THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. ACCORDINGLY, THE APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT BY THE COMPANY'S STOCKHOLDERS IS EXPECTED TO
OCCUR IRRESPECTIVE OF WHETHER OR THE MANNER IN WHICH THE COMPANY'S OTHER
STOCKHOLDERS VOTE THEIR SHARES.
On September 10, 1998, the Board of Directors (the "Board"), on the
unanimous recommendation of the Special Committee, unanimously determined that
the Merger is fair to and in the best interests of the Public Shareholders (as
defined below) and approved the Merger Agreement by a unanimous vote. The
Special Committee and the Board each recommend that you vote FOR adoption of
the Merger Agreement.
The Board formed the Special Committee because some of the seven Board
members who were serving at the time of the negotiation and execution of the
Merger Agreement had potential conflicts of interests regarding the Merger
arising from their relationships with Cable Michigan and its affiliates. The
Special Committee is composed of three Mercom board members who are not
employees of Mercom or Cable Michigan or its affiliates and who do not have
material commercial relationships with Cable Michigan.
On September 10, 1998, the Special Committee unanimously determined that
the Merger, the Merger Agreement and the transactions contemplated thereby are
fair to and in the best interests of the stockholders of Mercom, other than
Cable Michigan (the "Public Shareholders"), and unanimously recommended that
the Board and the shareholders of the Company approve the Merger, the Merger
Agreement and the transactions contemplated thereby. In reaching its decision,
the Special Committee considered, among other things, the opinion of CIBC
Oppenheimer Corp. ("CIBC Oppenheimer", which includes all predecessor entities
of CIBC Oppenheimer Corp., including Oppenheimer & Co., Inc.), the financial
advisor to the Special Committee, that as of September 10, 1998 (the date that
the Special Committee approved the Merger Agreement) the consideration to be
received by the holders of Shares (other than Buyer and its subsidiaries)
pursuant to the Merger was fair from a financial point of view to the holders
of such Shares. A copy of CIBC Oppenheimer's written opinion dated September
10, 1998 is included as Annex B to the attached Proxy Statement.
It is important that your Shares be represented at the Special Meeting,
whether or not you plan to attend personally. Please complete, sign and date
the enclosed proxy card and return it as soon as possible in the postage-paid
envelope provided so that your Shares will be represented at the Special
Meeting. You may revoke your proxy at any time prior to its exercise, and you
may attend the special meeting and vote in person, even if you have previously
returned your proxy card. However, if you are a shareholder whose Shares are
not registered in your own name, you will need additional documentation from
your record holder to vote personally at the Special Meeting. PLEASE DO NOT
SEND IN ANY STOCK CERTIFICATES AT THIS TIME.
We thank you for your prompt attention to this matter and appreciate your
support.
Very truly yours,
Joel C. Cohen
President and Chief Executive Officer
YOUR VOTE IS IMPORTANT.
PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED
PROXY CARD PROMPTLY, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
Mercom, Inc.
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Notice of Special Meeting of Shareholders
To Be Held On
[Date], 1998
-----------------------
To the Shareholders of
Mercom, Inc.:
Notice is hereby given that a special meeting of shareholders (the
"Special Meeting") of Mercom, Inc. ("Mercom" or the "Company") will be held on
[Date], 1998 at [11:00] a.m. at the Company's corporate headquarters, located
at 800 Third Avenue, Suite 3100, New York, New York 10022, for the
following purposes:
1. To consider and vote on a proposal to approve and adopt an
Agreement and Plan of Merger, dated as of September 10, 1998 (the "Merger
Agreement") among the Company, Avalon Cable of Michigan, Inc. (formerly known
as Cable Michigan, Inc.) ("Cable Michigan" or "Buyer"), and Mercom Acquisition,
Inc. ("MergerSub"), a wholly owned subsidiary of Buyer, pursuant to which
MergerSub or its assignee will be merged with and into the Company (the
"Merger"). Pursuant to the Merger, each share (a "Share") of common stock,
$1.00 par value, of the Company issued and outstanding immediately prior to the
effective time of the Merger (other than Shares held by the Company as treasury
stock, Shares owned by Buyer or any subsidiary of Buyer, and Shares as to which
dissenters' rights have been validly exercised) will be converted into the
right to receive $12.00 in cash, without interest. A copy of the Merger
Agreement is included in the attached Proxy Statement and is incorporated
herein by reference.
2. To transact such other business as may properly come before the
Special Meeting. Management is not aware of any such business.
Any stockholder who does not wish to accept the merger consideration of
$12.00 per share and who properly demands appraisal under Delaware law will
have the right to have the fair value of his or her shares determined by the
Delaware Chancery Court. A copy of the relevant provisions of Delaware law are
included in the attached Proxy Statement. This appraisal right is subject to a
number of restrictions and technical requirements described in the attached
Proxy Statement.
Only shareholders of record as of the close of business on [Date], 1998
will be entitled to notice of the Special Meeting and to vote at the Special
Meeting and any adjournment thereof. Any shareholder will be able to examine a
list of holders of record, for any purpose related to the Special Meeting,
during the 10-day period before the meeting. The list will be available at the
Company's corporate headquarters located at the address above. Approval and
adoption of the Merger Agreement requires the affirmative vote by at least a
majority of the outstanding Shares entitled to vote at the Special Meeting.
By Order of the Board of Directors,
Joel C. Cohen
Corporate Secretary
New York, New York
[Date], 1998
EACH SHAREHOLDER IS URGED TO COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY
CARD IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES.
IF A SHAREHOLDER DECIDES TO ATTEND THE SPECIAL MEETING, HE OR SHE MAY, IF SO
DESIRED, REVOKE THE PROXY AND VOTE THE SHARES IN PERSON.
Mercom, Inc.
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Proxy Statement
For
Special Meeting of Shareholders
To Be Held On
[Date], 1998
-----------------------
This Proxy Statement is being furnished to holders of common stock, par
value $1.00 per share ("Company Common Stock"), of Mercom, Inc., a Delaware
corporation ("Mercom" or the "Company"), in connection with the solicitation of
proxies by the Board of Directors of the Company (the "Board") for use at the
special meeting of shareholders, and at any adjournment or postponement thereof
(the "Special Meeting"), to be held at the Company's corporate headquarters,
located at 800 Third Avenue, Suite 3100, New York, New York 10022 on
[Date], 1998 at [11:00] a.m. The Special Meeting has been called to consider
and vote upon a proposal to approve and adopt the Agreement and Plan of Merger,
dated as of September 10, 1998 (the "Merger Agreement"), among the Company,
Avalon Cable of Michigan, Inc. (formerly known as Cable Michigan, Inc.) ("Cable
Michigan" or "Buyer"), and Mercom Acquisition, Inc., a wholly owned subsidiary
of Buyer ("MergerSub"), pursuant to which MergerSub or its assignee will be
merged with and into the Company (the "Merger"). A copy of the Merger Agreement
is attached as Annex A.
Pursuant to the Merger, each share (a "Share") of Company Common Stock
issued and outstanding immediately prior to the effective time of the Merger
(other than Shares held by the Company as treasury stock, Shares owned by Buyer
or any subsidiary of Buyer, and Shares as to which appraisal rights have been
validly exercised) will be converted into the right to receive $12.00 in cash,
without interest (the "Merger Consideration"). As of the date hereof, Buyer
owns 2,964,250 Shares, representing approximately 62% of the outstanding
Company Common Stock. A Special Committee of the Board (the "Special
Committee"), which is composed solely of directors unaffiliated with Buyer,
negotiated the $12.00 price and the other terms of the Merger Agreement.
Pursuant to the Delaware General Corporation Law (the "DGCL"), the
affirmative vote of holders of at least a majority of all of the outstanding
shares of Company Common Stock is required to approve and adopt the Merger
Agreement. Buyer has agreed to vote its shares of Company Common Stock in favor
of the Merger Agreement. Accordingly, the adoption of the Merger Agreement by
the Company's stockholders is expected to occur irrespective of whether or the
manner in which the Company's other stockholders vote their shares of Company
Common Stock.
The Board formed the Special Committee because some of the seven board
members who were serving at the time of the negotiation and execution of the
Merger Agreement had potential conflicts of interests regarding the Merger
arising from their relationships with Cable Michigan and its affiliates. The
Special Committee is composed of three Mercom board members who are not
employees of Mercom or Cable Michigan or its affiliates and who do not have
material commercial relationships with Cable Michigan or its affiliates.
On September 10, 1998, the Special Committee unanimously determined that
the Merger, the Merger Agreement and the transactions contemplated thereby are
fair to and in the best interests of the stockholders of Mercom, other than
Buyer and its subsidiaries (the "Public Shareholders"), and unanimously
recommended that the Board and the shareholders of the Company approve the
Merger, the Merger Agreement and the transactions contemplated thereby.
On September 10, 1998, the Board, on the unanimous recommendation of the
Special Committee, unanimously determined that the Merger, the Merger Agreement
and the transactions contemplated thereby are fair to and in the best interests
of the Public Shareholders and recommended that the shareholders of the Company
approve and adopt the Merger, the Merger Agreement and the transactions
contemplated thereby.
All shares of Company Common Stock represented by properly executed
proxies received prior to or at the Special Meeting and not revoked will be
voted in accordance with the instructions indicated in such proxies. If no
instructions are indicated, such proxies will be voted FOR adoption and
approval of the Merger Agreement and in the discretion of the persons named in
the proxy with respect to such other matters as may properly come before the
Special Meeting. A stockholder may revoke his or her proxy at any time prior to
its use by delivering to the Secretary of the Company a signed notice of
revocation or a later-dated and signed proxy or by attending the Special
Meeting and voting in person.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT DOES NOT CONSTITUTE A SOLICITATION
OF A PROXY IN ANY JURISDICTION FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH PROXY SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS PROXY
STATEMENT SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
The Board knows of no additional matters that will be presented for
consideration at the Special Meeting. Execution of a proxy, however, confers on
the designated proxyholders discretionary authority to vote the Shares covered
thereby on such other business, if any, that may properly come before the
Special Meeting. This Proxy Statement and the accompanying form of proxy are
first being mailed to the Company's shareholders on or about [Date], 1998.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The date of this Proxy Statement is [Date], 1998.
AVAILABLE INFORMATION
The Company, Buyer and MergerSub have filed with the Securities and
Exchange Commission (the "SEC") a Rule 13e-3 Transaction Statement on Schedule
13E-3 (including any amendments thereto, the "Schedule 13E-3") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), with respect
to the Merger. This Proxy Statement does not contain all of the information set
forth in the Schedule 13E-3 and the exhibits thereto, certain parts of which
are omitted in accordance with the rules and regulations of the SEC. The
Company is subject to the informational requirements of the Exchange Act and,
in accordance therewith, files reports, proxy statements and other information
with the SEC.
The Schedule 13E-3 and the exhibits thereto, as well as such reports,
proxy statements and other information filed by the Company, can be inspected
and copied at the public reference facilities maintained by the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional
Offices at (i) Seven World Trade Center, 13th Floor, New York, New York 10048,
(ii) Suite 500 East, Tishman Building, 5757 Wilshire Boulevard, Los Angeles,
California, 90036, and (iii) 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511.
Copies of such materials also can be obtained at prescribed rates from the
Public Reference Section of the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The SEC maintains an Internet site on the World Wide
Web at "http://www.sec.gov." which contains reports, proxy and information
statements and other information regarding issuers that file electronically
with the SEC.
A copy of the written opinion of CIBC Oppenheimer Corp., the financial
advisor to the Special Committee, is attached as Annex B to this Proxy
Statement. Such opinion shall also be made available for inspection and copying
during regular business hours at the principal executive offices of the Company
by any interested equity security holder of the Company or the representative
of such security holder who has been so designated in writing.
This Proxy Statement incorporates by reference documents which are not
presented herein or delivered herewith. These documents other than exhibits to
such documents, are available, without charge, to any person to whom this Proxy
Statement is delivered, on written or oral request, to the Company at its
offices located at 800 Third Avenue, Suite 3100, New York, New York 10022,
Attention: Corporate Secretary (telephone number 212-421-0600).
FORWARD-LOOKING STATEMENTS
Certain information contained in this Proxy Statement as to the future
financial or operating performance of the Company may constitute
"forward-looking statements." The Private Securities Litigation Reform Act of
1995 provides certain "safe harbor" protections for forward-looking statements
in order to encourage companies to provide prospective information about their
businesses. Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance, and underlying
assumptions and other statements which are other than statements of historical
facts. Forward-looking statements can be identified by, among other things, the
use of forwardlooking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "pro forma" or "anticipates," "intends" or the negative of
any thereof, or other variations thereon or comparable terminology, or by
discussions of strategy or intentions. Forward-looking statements involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Company, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors include,
but are not limited to, the competitive environment in the cable television
industry in general and in the Company's specific market areas; changes in
technology; the availability of and terms of financing; inflation; changes in
costs and availability of goods, services and programming; economic conditions
in general and in the Company's specific market areas; demographic changes;
changes in federal, state and/or local government law and regulations;
franchise related matters; changes in operating strategy or development plans;
the ability to attract and retain qualified personnel; labor disturbances;
changes in the Company's acquisition and capital expenditure plans; and other
factors referenced herein. In addition, such forward-looking statements are
necessarily dependent upon assumptions, estimates and dates that may be
incorrect or imprecise and involve known and unknown risks, uncertainties and
other factors. Accordingly, any forward-looking statements included herein do
not purport to be predictions of future events or circumstances and may not be
realized. Given these uncertainties, shareholders are cautioned not to place
undue reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the results of
any revisions to any of the forward-looking statements contained herein to
reflect future events or developments.
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TABLE OF CONTENTS
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Page
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INTRODUCTION..................................................................1
AVAILABLE INFORMATION.........................................................3
FORWARD-LOOKING STATEMENTS....................................................3
SUMMARY.......................................................................8
The Company..............................................................8
The Buyer................................................................8
Avalon Holdings..........................................................8
MergerSub................................................................9
The Special Meeting......................................................9
The Merger .............................................................10
Summary Selected Historical Consolidated Financial Data.................14
SPECIAL FACTORS..............................................................15
Background of the Merger................................................15
Recommendation of the Special Committee and the Board of Directors......19
Reasons of the Company for the Merger; Fairness of the Merger...........20
Opinion of Financial Advisor to the Special Committee...................22
Certain Transactions....................................................27
Purpose and Structure of the Merger; Reasons of Buyer for the Merger....27
Certain Effects of the Transaction......................................28
Plans for the Company after the Merger..................................29
Conduct of the Business of the Company If the Merger Is Not
Consummated...........................................................29
PRICE OF THE COMPANY COMMON STOCK............................................30
THE COMPANY..................................................................31
Company Strategy........................................................32
Buyer Management Agreement..............................................32
Service Offerings.......................................................32
Programming and Suppliers...............................................33
Advertising Revenues....................................................33
Customer Service and Billing............................................33
Franchises..............................................................33
Competition.............................................................34
Regulation..............................................................36
Employees...............................................................41
Property................................................................42
Legal Proceedings.......................................................42
THE SPECIAL MEETING..........................................................43
Matters to Be Considered................................................43
Required Votes..........................................................43
Voting and Revocation of Proxies........................................43
Record Date; Stock Entitled to Vote; Quorum.............................44
Appraisal Rights........................................................44
Solicitation of Proxies.................................................44
THE MERGER...................................................................45
Merger Consideration....................................................45
Effective Time of the Merger............................................45
Conduct of Business Pending the Merger..................................45
Conditions to the Consummation of the Merger............................45
Certain Federal Income Tax Consequences.................................45
Accounting Treatment....................................................46
Interests of Certain Persons in the Merger..............................46
Merger Financing........................................................47
CERTAIN PROVISIONS OF THE MERGER AGREEMENT...................................48
The Merger..............................................................48
Merger Consideration....................................................49
Surrender and Payment...................................................49
The Surviving Corporation...............................................50
Representations and Warranties..........................................50
Certain Pre-Closing Covenants...........................................50
Indemnification and Insurance...........................................51
Best Efforts; Certain Filings...........................................51
Conditions to the Consummation of the Merger............................52
Termination.............................................................52
Amendment and Waiver....................................................53
Fees and Expenses.......................................................53
CERTAIN PROJECTIONS OF FUTURE OPERATING RESULTS..............................55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...........................................................56
Nine Months Ended September 30, 1998 Compared With Nine Months
Ended September 30, 1997............................................56
Year Ended December 31, 1997 Compared With Year Ended
December 31, 1996....................................................57
Year Ended December 31, 1996 Compared With Year Ended
December 31, 1995....................................................57
Liquidity and Capital Resources.........................................58
Regulatory Issues.......................................................59
Competition.............................................................59
Year 2000 Information and Readiness Discussion..........................60
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............61
Security Ownership in the Company by Company Management.................61
Security Ownership in the Company by Certain Beneficial Owners..........61
Security Ownership in the Company by Cable Michigan Management..........62
REGULATORY CONSIDERATIONS....................................................63
Antitrust...............................................................63
Franchises..............................................................63
BUYER AND MERGERSUB..........................................................63
AVALON HOLDINGS..............................................................64
DISSENTING SHAREHOLDERS' RIGHTS.............................................64
INDEPENDENT ACCOUNTANTS......................................................66
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...........................F-1 - F-18
Annex A Merger Agreement.............................................A-1
Annex B Opinion of CIBC Oppenheimer Corp.............................B-1
Annex C Rights of Dissenting Stockholders Under Delaware
General Corporation Law...................................C-1
Annex D Management of Cable Michigan, the Company and MergerSub......D-1
SUMMARY
The following summary is intended only to highlight certain information
contained elsewhere in this Proxy Statement. This summary is not intended to be
complete and is qualified in its entirety by the more detailed information
contained elsewhere in this Proxy Statement, the Annexes hereto and the
documents otherwise referred to herein. Shareholders are urged to review this
entire Proxy Statement carefully, including the Annexes hereto and such other
documents.
The Company
Mercom, Inc., a Delaware corporation (the "Company" or "Mercom"), is a
cable television operator with three cable systems in southern Michigan (the
"Systems"). The Systems are operated through Mercom's wholly-owned subsidiary,
Communications and Cablevision, Inc. ("CCV"). As of September 30, 1998, the
Systems served approximately 41,500 subscribers. Mercom is managed by Avalon
Cable of Michigan, Inc. (formerly known as Cable Michigan, Inc.), a
Pennsylvania corporation ("Cable Michigan" or "Buyer"), which also owns
2,964,250 shares, or approximately 62%, of the Common Stock, par value $1.00
per share, of the Company ("Company Common Stock"). See "The Company."
Mercom's principal executive offices are located at 800 Third Avenue,
Suite 3100, New York, New York 10022 and its telephone number is (212)
421-0600.
The Buyer
Cable Michigan operates cable television systems in the State of Michigan.
As of September 30, 1998, Cable Michigan served more than 215,000 subscribers
(including Mercom's subscribers) in municipalities surrounding Grand Rapids,
Traverse City, Lapeer and Monroe in Michigan. Cable Michigan's principal
executive offices are located at 800 Third Avenue, Suite 3100, New York,
New York 10022 and its telephone number is (212) 421-0600.
Cable Michigan became a separate, publicly traded company on September 30,
1997 (the "Distribution Date"), when it was spun off from Commonwealth
Telephone Enterprises, Inc. (formerly C-TEC Corporation) ("CTE"). On November
6, 1998, pursuant to an Agreement and Plan of Merger dated as of June 3, 1998
(as amended, the "Buyer Merger Agreement") among Cable Michigan, Inc., Avalon
Cable of Michigan Holdings, Inc. ("Avalon Holdings"), and Avalon Cable of
Michigan, Inc., a wholly owned subsidiary of Avalon Holdings ("Buyer
MergerSub"), Buyer MergerSub merged with and into Cable Michigan, Inc., with
Cable Michigan, Inc. as the surviving corporation (the "Buyer Merger") . In the
Buyer Merger, Cable Michigan, Inc. changed its name to Avalon Cable of
Michigan, Inc. and became a wholly owned subsidiary of Avalon Holdings.
Immeditately prior to the time of the Buyer Merger, Level 3 Telecom
Holdings Inc., a Delaware corporation ("LTTH") owned approximately 48% of the
outstanding shares of Common Stock, par value $1.00 per share of Cable Michigan
("Cable Michigan Common Stock"). LTTH is a subsidiary of Level 3 Communications,
Inc., a Delaware corporation ("LTC")
Avalon Holdings
Avalon Holdings is a holding company that was formed in June, 1998 for
purposes of the Buyer Merger. Avalon Holdings has not carried on any activities
to date other than those incident to its formation, the acquisition and
operation of Cable Michigan and related financing transactions. Avalon Holdings
is a wholly owned subsidiary of Avalon Cable Holdings, LLC, a Delaware limited
liability company ("Avalon"). Avalon was formed in 1997 by David Unger, Joel
Cohen and ABRY Broadcast Partners III, L.P. ("ABRY III") to acquire, operate
and develop cable television systems in mid-sized suburban and exurban markets.
In addition to providing cable television services in Michigan through Cable
Michigan, Avalon also provides cable television services to approximately
20,700 basic subscribers in western New England. ABRY III is the controlling
member of Avalon. The general partner of ABRY III is ABRY Equity Investors,
L.P., a Delaware limited partnership ("AEI"). The general partner of AEI is
ABRY Holdings III, Inc., a Delaware corporation ("ABRY Inc."). Royce Yudkoff,
an individual resident of the state of Massachusetts, is the controlling
shareholder of ABRY Inc. The address of the principal office of Avalon Holdings
is 800 Third Avenue, Suite 3100, New York, New York 10022 and its
telephone number is (212) 421-0600.
MergerSub
Mercom Acquisition, Inc. ("MergerSub"), a Delaware corporation, was
incorporated on September 2, 1998 and has not carried on any activities to date
other than those incident to its formation and the transactions contemplated by
the Merger Agreement (as defined below). All of the outstanding stock of
MergerSub is owned by Buyer. The address of the principal office of MergerSub
is 800 Third Avenue, Suite 3100, New York, New York 10022 and MergerSub's
telephone number is (212) 421-0600. See "Buyer and MergerSub."
The Special Meeting
Time and Place of Meeting
The Special Meeting will be held at the Company's corporate headquarters,
located at 800 Third Avenue, Suite 3100, New York, New York 10022 on
[Date], 1998, starting at [11:00] a.m., local time. At the Special Meeting, or
at any adjournment or postponement thereof, holders of Company Common Stock
will be asked to approve and adopt the Agreement and Plan of Merger dated as of
September 10, 1998 (the "Merger Agreement") among the Company, Cable Michigan
and MergerSub, pursuant to which MergerSub will be merged with and into the
Company (the "Merger"). See "The Special Meeting."
Matter to be Considered
The Special Meeting has been called to consider and vote upon a proposal
to approve and adopt the Merger Agreement. See "The Merger" and "Certain
Provisions of the Merger Agreement."
Record Date; Vote Required
Holders of record of Company Common Stock at the close of business on
[Date] , 1998 (the "Record Date") have the right to receive notice of and to
vote at the Special Meeting. On the Record Date, there were approximately
[4,787,060] shares (each, a "Share") of Company Common Stock outstanding and
entitled to vote. Each share of Company Common Stock is entitled to one vote on
each matter that is properly presented to shareholders for a vote at the
Special Meeting. Under the Delaware General Corporation Law (the "DGCL"), the
affirmative vote of the holders of a majority of the outstanding shares of the
Company Common Stock entitled to vote thereon is required to approve and adopt
the Merger Agreement. Buyer beneficially owns a sufficient number of Shares
(approximately 62%) to cause the Merger Agreement to be approved and adopted
without the vote of any other Company stockholders. Buyer has agreed to vote
its Shares in favor of the proposal to approve and adopt the Merger Agreement.
Security Ownership of Management
As of the Record Date, directors and executive officers of the Company and
their affiliates as a group beneficially owned an aggregate of 5,000 Shares
(less than 1%) of the Company Common Stock eligible to vote at the Special
Meeting, excluding the Shares owned by Cable Michigan. The directors and
executive officers of the Company have indicated that they intend to vote their
shares of Company Common Stock in favor of the adoption of the Merger
Agreement. See "Security Ownership of Certain Beneficial Owners and
Management."
Recommendation of the Special Committee and the Company's Board of Directors
The Board of Directors of the Company (the "Board") established a Special
Committee (the "Special Committee"), which is composed solely of directors
unaffiliated with Buyer to act on behalf of the stockholders of Mercom, other
than Buyer (the "Public Shareholders") for purposes of negotiating the price
and other terms of a transaction with the Buyer and evaluating the fairness of
the Merger, the Merger Agreement and the transactions contemplated thereby.
The Special Committee and the Board have each unanimously determined that
the Merger, the Merger Agreement and the transactions contemplated thereby are
fair to and in the best interests of the Public Shareholders and have
recommended that holders of Shares vote in favor of approval and adoption of
the Merger, the Merger Agreement and the transactions contemplated thereby. See
"Special Factors--Recommendation of the Special Committee and the Board of
Directors" and "--Reasons for the Merger; Fairness of the Merger."
Opinion of Financial Advisor
CIBC Oppenheimer Corp. ("CIBC Oppenheimer", which includes all predecessor
entities of CIBC Oppenheimer Corp., including CIBC Oppenheimer & Co., Inc.) has
served as financial advisor to the Special Committee in connection with the
Merger. CIBC Oppenheimer has rendered its opinion to the Special Committee and
the Board that, as of the date of such opinion, the consideration to be
received pursuant to the Merger by the Public Shareholders was fair from a
financial point of view to the holders of such Shares. CIBC Oppenheimer's
opinion was delivered in writing to the Special Committee at its meeting on
September 10, 1998. A copy of the opinion delivered by CIBC Oppenheimer on such
date (the "CIBC Oppenheimer Opinion") is attached to this Proxy Statement as
Annex B and should be read in its entirety with respect to assumptions made,
matters considered, and limitations on the review undertaken by CIBC
Oppenheimer in rendering its opinion. See "Special Factors--Opinion of
Financial Advisor to the Special Committee" and Annex B.
The Merger
Effective Time of the Merger
As soon as practicable after satisfaction or, to the extent permitted,
waiver of all conditions to the Merger, MergerSub will be merged with and into
the Company, with the Company as the surviving corporation (the "Surviving
Corporation"). The Merger will become effective at such time as the certificate
of merger is duly filed with the Secretary of State of the State of Delaware or
at such later time as is specified in the certificate of merger (the "Effective
Time"). From and after the Effective Time, the Surviving Corporation will
possess all the rights, privileges, powers and franchises, and be subject to
all of the restrictions, disabilities and duties of the Company and MergerSub,
all as provided under the DGCL.
Merger Consideration
At the Effective Time (subject to certain provisions as described herein
with respect to Shares owned by Buyer or any subsidiary of Buyer, Shares held
in treasury, and Shares as to which appraisal rights have been validly
exercised) each share of Company Common Stock shall be converted into the right
to receive $12.00 per share in cash, without interest (the "Merger
Consideration"). See "Certain Provisions of the Merger Agreement--The Merger"
and "--Merger Consideration."
Conditions to the Consummation of the Merger
The obligations of the parties to the Merger Agreement to consummate the
Merger are subject to the satisfaction or waiver of a number of conditions.
Mutual conditions are as follows: (i) adoption of the Merger Agreement by the
shareholders of the Company and (ii) absence of statutes, regulations, or
judicial or administrative orders that would prevent, or pending proceedings
instituted by governmental authorities to prevent, alter or materially delay,
the consummation of the Merger.
There are additional conditions to the obligation of Buyer and MergerSub
to consummate the Merger. These are: (i) the Company's compliance with its
obligations under the Merger Agreement in all material respects, and the
accuracy of its representations and warranties thereunder with such exceptions
as do not, individually or in the aggregate, have a material adverse effect on
the business, assets, operations, condition (financial or otherwise), results
of operations or the conduct of business of the Company and its subsidiaries
taken as a whole (a "Material Adverse Effect"); (ii) receipt by Buyer of all
customary documents Buyer may reasonably request relating to the existence of
the Company and the authority of the Company to enter into the Merger
Agreement; and (iii) 120 calendar days shall have elapsed since the effective
time of the Buyer Merger, which occurred on November 6, 1998. Buyer currently
intends to waive this last condition and, subject to the satisfaction of the
other applicable conditions, complete the Merger promptly after the Special
Meeting.
There are additional conditions to the obligations of the Company to
consummate the Merger. These are: (i) Buyer and MergerSub's compliance with its
obligations under the Merger Agreement in all material respects, and the
accuracy of its representations and warranties thereunder with such exceptions
as do not, individually or in the aggregate, have a material adverse effect on
the business, assets, operations, condition (financial or otherwise), results
of operations or the conduct of business of Buyer and its subsidiaries taken as
a whole (a "Buyer MAE"); (ii) receipt by the Company of all customary documents
it may reasonably request relating to the existence of Buyer or MergerSub and
the authority of Buyer and MergerSub to enter into the Merger Agreement; and
(iii) the fairness opinion delivered by CIBC Oppenheimer shall not have been
withdrawn or modified in any materially adverse respect. See "Certain
Provisions of the Merger Agreement--Conditions to the Consummation of the
Merger."
Termination of the Merger Agreement
Either Buyer or the Company may terminate the Merger Agreement under the
following circumstances: (i) the mutual written consent of the parties; (ii)
the failure of the parties to consummate the Merger by March 31, 1999; or (iii)
the prohibition of the Merger by a law, regulation or final court order.
In addition, Buyer may terminate the Merger Agreement in the event of a
material breach by the Company of its obligations under the Merger Agreement,
or of its representations and warranties thereunder with such exceptions as do
not, individually or in the aggregate, have a Material Adverse Effect, which
breach is not cured within ten business days after notice by Buyer thereof.
The Company may terminate the Merger Agreement in the event of a material
breach by Buyer or MergerSub of its obligations under the Merger Agreement, or
of its representations and warranties thereunder with such exceptions as do
not, individually or in the aggregate, have a Buyer MAE, which breach is not
cured within ten business days after notice by the Company thereof.
Expenses
Except as described above or otherwise provided in the Merger Agreement,
all costs and expenses incurred in connection with the Merger will be paid by
the party incurring such cost or expense. See "Certain Provisions of the Merger
Agreement--Fees and Expenses."
Merger Financing
The total amount of cash required to consummate the transactions
contemplated by the Merger Agreement (the "Merger Financing"), including
payment of related fees and expenses, is estimated to be approximately $22
million. Buyer expects to obtain the Merger Financing from borrowings under a
secured credit facility of Buyer and its affiliates (the "Avalon Credit
Facility") and cash on hand. The Avalon Credit Facility, which provides for
maximum borrowings of $320,888,000 was provided by a syndicate of banks and
other financial institutions (the "Avalon Senior Lenders") for which Lehman
Commercial Paper, Inc. ("LCPI") acts as administrative agent. The Avalon Credit
Facility was established in connection with the closing of the Buyer Merger and
the initial borrowings under the Avalon Credit Facility were used to finance,
in part: (i) the consummation of the Buyer Merger, (ii) the refinancing of
indebtedness of Cable Michigan outstanding at the time of the Buyer Merger and
indebtedness of Avalon incurred in connection with prior acquisitions and (iii)
the payment of related fees and expenses. Borrowings under the Avalon Credit
Facility are also available for working capital purposes, including
acquisitions. See "The Merger--Merger Financing."
Appraisal Rights
Under Section 262 of the DGCL, holders of Company Common Stock who: (i)
hold shares of Company Common Stock on the date of making a demand for
appraisal; (ii) continuously hold such shares through the Effective Time; (ii)
deliver a properly executed written demand for appraisal to the Company prior
to the Special Meeting; (iv) do not vote in favor of the Merger or consent
thereto in writing; (v) file any necessary petition in the Delaware Court of
Chancery within 120 days after the Effective Time; and (vi) otherwise satisfy
all procedural requirements, are entitled, if the Merger is consummated, to
receive payment of the fair value of their shares of Company Common Stock as
appraised by the Delaware Court of Chancery; provided, however, that if any
such holder of Dissenting Shares shall have failed to establish his entitlement
to appraisal rights as provided in Section 262 of the DGCL, if any such holder
of Dissenting Shares shall have effectively withdrawn his demand for appraisal
of such Shares or lost his right to apprisal and payment for his Shares under
Section 262 of the DGCL or if neither any holder of Dissenting Shares nor the
Surviving Corporation shall have filed a petition demanding a determination of
the value of all Dissenting Shares within the time provided in Section 262 of
the DGCL, such holder will forfeit the right to appraisal of such Shares and
each such Share will be treated as if it had been a Share with respect to which
no election has been made and had been converted, as of the Effective Time,
into a right to receive the Merger Consideration, without interest thereon,
from the Surviving Corporation. See "Dissenting Stockholders' Rights."
Interests of Certain Persons in the Merger
Certain directors and executive officers of the Company may have had at
the time the Merger Agreement was negotiated and executed, and currently may
have, interests, described herein, that present them with potential conflicts
of interest in connection with the Merger. The Special Committee and the Board
were and are aware of the conflicts described herein and considered them in
addition to the other matters described under "Special Factors--Recommendation
of the Special Committee and the Board of Directors" and "--Reasons for the
Merger; Fairness of the Merger."
At the time the Merger Agreement was negotiated and executed, certain
directors and executive officers of the Company owned Shares and/or interests
in one or more of Cable Michigan, CTE, LTTH and RCN Corporation ("RCN") which
was spun-off from CTE at the same time as Cable Michigan. In addition, at such
time, certain executive officers and directors of the Company were executive
officers and/or directors of one or more of Cable Michigan, CTE, LTTH and RCN.
At the time of the Buyer Merger, such persons resigned as directors and
executive officers of the Company and its subsidiaries and were replaced by
persons who also serve as executive officers and directors (or the equivalent)
of Avalon Holdings and certain of its affiliates. See "Special
Factors--Background of the Merger" and "The Merger--Interests of Certain
Persons in the Merger."
Pursuant to the Merger Agreement, Buyer has agreed for six years after the
Effective Time to indemnify all past and present directors and officers of the
Company and, subject to certain limitations, to use its reasonable best efforts
to maintain for six years a directors' and officers' insurance and
indemnification policy and a fiduciary liability policy on terms with respect
to coverage and amount not less favorable in any material respect than any such
policies in effect on September 10, 1998. See "Certain Provisions of the Merger
Agreement--Indemnification and Insurance."
Regulatory Considerations
Mercom's franchise agreements with 4 townships (representing approximately
10% of Mercom's subscribers) include provisions requiring the approval of those
townships for certain transactions. An argument could be made that the Merger
is a transaction requiring such approval. Mercom and Cable Michigan intend to
request approval of the Merger from those townships. The closing of the Merger
is not, however, conditioned upon receipt of these approvals.
Certain Effects of the Transaction
Following the Merger, Cable Michigan's beneficial interest in the net book
value and net earnings of the Company will increase to 100%. Cable Michigan
will be the sole beneficiary of any future earnings and growth of the Company
(until shares of capital stock, if any, are issued to other stockholders) and
will have the ability to benefit from any divestitures, strategic acquisitions
or other corporate opportunities that may be pursued by the Company in the
future. The Public Shareholders will cease to have any ownership interest in
the Company or rights as holders of Shares. The Public Shareholders will no
longer benefit from any increases in the value of the Company and will no
longer bear the risk of any decreases in value of the Company.
As a result of the Merger, the Company will be privately held and there
will be no public market for the Company Common Stock. In addition, Cable
Michigan currently intends to cause the Company to terminate the registration
of the Company Common Stock under the Securities Exchange Act of 1934, as
amended, as soon after consummation of the Merger as the requirements for
termination of registration are met. After such registration is terminated, the
Company will no longer be required to file periodic reports with the Securities
and Exchange Commission. See "Special Factors -- Certain Effects of the
Transaction."
Plans for the Company after the Merger
One of the reasons for Cable Michigan proposing the Merger is to achieve
certain efficiencies that may result from integrating certain functions and
operations of the Company and its subsidiaries with those of Cable Michigan.
Thus, after the Merger, Avalon Holdings intends to transfer substantially all
of the assets of Cable Michigan and the Company to one of its subsidiaries,
Avalon Cable of Michigan LLC. If the Merger is not completed, the Company
Common Stock will be contributed to Avalon Cable of Michigan LLC and the
Company will become a subsidiary of Avalon Cable of Michigan LLC.
Certain Federal Income Tax Consequences
For a summary of the material U.S. federal income tax consequences of the
Merger, see "The Merger--Certain Federal Income Tax Consequences."
EACH SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING
THE FEDERAL INCOME, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE
MERGER.
Mercom, Inc.
Summary Selected Historical Consolidated Financial Data
(Dollars in thousands, except per Share amounts)
The selected historical consolidated financial data for the years ended
December 31, 1994 and 1993 and as of December 31, 1995, 1994 and 1993 are
derived from the Company's audited historical consolidated financial statements
not included in this Proxy Statement. The selected historical consolidated
financial data of the Company for the years ended December 31, 1997, 1996, and
1995 and as of December 31, 1997 and 1996 are derived from and should be read
in conjunction with the Company's audited historical consolidated financial
statements (the "Financial Statements") included elsewhere in this Proxy
Statement. The selected historical consolidated financial data for the nine
month periods ended September 30, 1998 and 1997 and as of those dates are
derived from and should be read in conjunction with the Company's unaudited
historical consolidated financial statements included elsewhere in this Proxy
Statement. In the opinion of the Company's management, these nine month
consolidated historical financial statements include all adjustments,
consisting of normal recurring adjustments, necessary for a fair statement of
the results for the unaudited interim periods. The results for such interim
periods are not necessarily indicative of the results for the full year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Data:
Statement of Operations Data:
Sales................................... $ 12,894 $ 12,399 $ 16,439 $ 15,570 $ 13,939 $ 12,927 $ 12,606
Costs and expenses, excluding
depreciation and amortization........ 8,603 7,762 10,340 9,927 8,748 7,875 7,490
Depreciation and amortization...........
2,206 2,166 2,894 3,018 3,022 3,010 3,219
--------- --------- --------- --------- --------- --------- ---------
Operating income........................ 2,085 2,471 3,205 2,625 2,169 2,042 1,897
Litigation costs........................... -- -- -- (12) (188) 643 --
Interest income............................ (232) (131) (195) (127) (83) (30) (26)
Interest expense........................... 718 812 1,056 1,227 1,900 2,067 2,132
Loss (income) from asset disposal.......... 197 13 13 37 (7) 24 10
Gain from sale of Mercom of Florida, Inc... -- (2,571) (2,571) -- -- -- --
Other expenses, net........................ (3) 41 39 -- -- -- --
Provision (benefit) for income taxes....... 630 480 665 28 (2) (4) 17
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).......................... $ 775 $ 3,827 $ 4,198 $ 1,472 $ 549 $ (658) $ (236)
========= ========= ========= ========= ========= ========= =========
Balance Sheet Data:
Total assets............................... $ 22,084 $ 19,529 $ 20,719 $ 19,851 $ 20,390 $ 19,823 $ 22,244
Total liabilities.......................... 20,030 18,621 19,440 22,770 24,781 33,019 34,782
Total shareholders' equity (deficit)....... 2,054 908 1,279 (2,919) (4,391) (13,196) (12,538)
</TABLE>
SPECIAL FACTORS
Background of the Merger
Cable Michigan was formerly a subsidiary of Commonwealth Telephone
Enterprises, Inc. (formerly known as CTEC Corporation) ("C-TEC" or "CTE").
C-TEC originally purchased a portion of the shares of Company Common Stock in
1990 as an investment in the Company. Thereafter, C-TEC became concerned about
the condition and management of the Company. Following litigation, a proxy
contest and a special meeting of the shareholders of the Company, C-TEC
nominees were elected to the Board in December 1991. Such nominees constituted
a majority of the Board. At that time, C-TEC owned approximately 476,000 shares
of Company Common Stock, which constituted approximately 19.87% of the
outstanding shares of Company Common Stock.
Between July and August 1995, the Company effected a rights offering (the
"Rights Offering") of 2,393,530 Shares. C-TEC purchased a total of 1,920,056
Shares in the Rights Offering. This brought its total ownership of Company
Common Stock to 2,964,250 Shares, or 61.92% of the 4,787,060 Shares then
outstanding.
On February 12, 1997, the Board of Directors of C-TEC approved a plan to
separate its operations along business lines into three separate,
publicly-traded companies, with the transaction to occur by the end of 1997.
Pursuant to that plan, C-TEC proposed to spin-off to its shareholders a
subsidiary (which was later named Cable Michigan, Inc. and, as a result of the
Buyer Merger, is currently known as Avalon Cable of Michigan, Inc.) that would
hold its Michigan cable television operations, including its 62% interest in
Mercom. On May 12, 1997, C-TEC announced that it had proposed to acquire the
38.08% of the Company Common Stock not then owned by it, in exchange for 8.75%
of the common stock of Cable Michigan. Under that proposal, the Company would
have become a wholly owned subsidiary of Cable Michigan. The Board of Directors
of the Company formed the Special Committee of independent directors to
consider this proposal. The Special Committee retained independent legal
counsel. The Special Committee held discussions with CIBC Oppenheimer about
retaining CIBC Oppenheimer as its financial advisor in connection with
consideration of this proposal. On June 18, 1997, C-TEC announced that it had
suspended this proposal until after completion of its restructuring.
On September 30, 1997, C-TEC distributed 100% of the outstanding shares of
common stock of its wholly owned subsidiaries, RCN and 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 (the "Distribution") in accordance
with the terms of a Distribution Agreement dated September 5, 1997 (the
"Distribution Agreement") among RCN, CTE and Cable Michigan. Prior to the
Distribution, C-TEC contributed its 62% interest in the Company to Cable
Michigan. The Special Committee approved for purposes of Section 203 of the DGCL
(which regulates business combinations between a corporation and 15%
stockholders) the transfer of the 62% interest in the Company from C-TEC to
Cable Michigan. As a result of the Distribution, RCN and Cable Michigan became
separate, public companies. After the Distribution, LTTH owned approximately 48%
of the outstanding Cable Michigan Common Stock and RCN provided certain
administrative services for Cable Michigan in exchange for a fee. Pursuant to
the terms of a management agreement (which was approved by the independent
directors of the Company), Cable Michigan manages the business and operations of
the Company.
On April 30, 1998, the Board of Directors of Cable Michigan authorized
Cable Michigan to explore strategic alternatives including potential joint
ventures, mergers or other business combinations between Cable Michigan and one
or more third parties. No decision was made at that time to pursue a
transaction of any sort. On May 7, 1998, pursuant to the authorization of the
Cable Michigan Board, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Cable Michigan's financial advisor, began contacting third
parties potentially interested in pursuing some form of strategic transaction
with Cable Michigan. Prior to such engagement, Merrill Lynch had, over a period
of time, provided financial advisory services and financing services to Cable
Michigan and its affiliates and had received fees for rendering such services.
On May 8, 1998, the Company's Board approved a request by Cable Michigan
for permission to provide confidential information regarding the Company to
parties potentially interested in pursuing some form of strategic transaction
with Cable Michigan; provided that such information would be protected by
appropriate confidentiality undertakings. The Board granted such request after
the members of the Board who were unaffiliated with Cable Michigan concluded
that granting the request would be in the best interests of the Company.
Starting on May 4, 1998, when Cable Michigan received an unsolicited
letter from an affiliate of Avalon Holdings proposing to acquire Cable Michigan
for a purchase price per share of Cable Michigan of $38.00, Cable Michigan held
discussions with Avalon and ABRY (together, "Avalon/ABRY") regarding a
strategic transaction. Starting on May 7, 1998, Cable Michigan also held
discussions with another group regarding a strategic transaction. On May 18,
1998 Cable Michigan's legal advisors circulated a draft Buyer Merger Agreement
to Avalon/ABRY, and separately to another group, for discussion purposes. The
draft Buyer Merger Agreement provided for the acquisition of Cable Michigan. On
May 21, 1998, Cable Michigan issued a press release in which it announced that
it had retained Merrill Lynch & Co. to advise it on strategic alternatives for
Cable Michigan.
The draft Buyer Merger Agreement included a provision allowing Cable
Michigan to acquire for cash the publicly held minority interest in the
Company. The draft Buyer Merger Agreement left in blank the price at which
Cable Michigan would be permitted to acquire the minority interest in Mercom.
On May 22, 1998, Avalon/ABRY inquired of Cable Michigan whether it would be
necessary, as a part of a transaction between Avalon/ABRY and Cable Michigan,
for Avalon/ABRY to permit Cable Michigan to acquire the minority interest in
Mercom, and indicated that it would be its preference that Cable Michigan not
do so. Cable Michigan replied that such an agreement would be necessary.
After continued discussions, on May 28, 1998 Avalon/ABRY made a proposal
to Cable Michigan that included, among other things, a purchase price for the
Cable Michigan Common Stock of $40.00 per share (the "Cable Michigan Price")
and an agreement that Cable Michigan would be permitted to acquire the minority
interest in Mercom at a price per Share (the "Mercom Price") of $10.00. After
further negotiations between the parties, on June 1, 1998 Cable Michigan made a
proposal to Avalon/ABRY that included, among other things, a Cable Michigan
Price of $41.00 and a Mercom Price of $12.00. In response, Avalon/ABRY made a
proposal to Cable Michigan that included, among other things, a Cable Michigan
Price of $40.50 (subject to certain adjustments) and a Mercom Price of $11.00.
After consultation with Cable Michigan, Merrill Lynch subsequently requested
from Avalon/ABRY, among other things, an increase in the Mercom Price.
Avalon/ABRY refused, however, to increase the Mercom Price and reiterated their
preference for Cable Michigan not to acquire the minority interest in Mercom.
On June 2, 1998, those members of the Board of Directors who are members
of the Special Committee discussed with separate legal counsel the advisability
of approving the transaction between Cable Michigan and Avalon/ABRY under
Section 203 of the DGCL.
After further discussions, on June 3, 1998, the Cable Michigan Board
approved the Buyer Merger Agreement in the form in which it existed on that
date, as well as the transactions contemplated thereby and resolved to
recommend the same to the shareholders of Cable Michigan. Also on June 3, 1998,
the Board, including the independent directors of the Company approved the
transaction between Cable Michigan and Avalon/ABRY under Section 203 of the
DGCL as it related to the Company. The Board and the Special Committee did not
at that time, however, approve of any particular transaction involving the
acquisition by Cable Michigan of Shares not then owned by Cable Michigan or of
the proposed terms of any such transaction. Shortly thereafter, Cable Michigan,
Avalon Holdings, and a subsidiary of Avalon Holdings entered into the Buyer
Merger Agreement.
The Buyer Merger Agreement provided, among other things, that Cable
Michigan would be entitled (i) either (a) to negotiate and enter into an
agreement with the Company (the "Mercom Agreement") to purchase the 1,822,810
Shares that Cable Michigan does not own for cash consideration of $11.00 per
Share, or (b) to make a cash tender offer (the "Mercom Tender Offer") for such
Shares at a price of $11.00 per Share, (ii) to consummate the purchase pursuant
to such Mercom Agreement or such Mercom Tender Offer, (iii) to borrow funds for
such purpose under Cable Michigan's credit facilities existing at the time of
the execution of the Buyer Merger Agreement (and to amend such facilities to
permit such borrowings for such purpose) and (iv) to take such customary
actions in connection with the foregoing as Cable Michigan should reasonably
conclude were appropriate. The terms (other than the cash consideration, which
would be as set forth above, except as otherwise agreed by Cable Michigan and
Avalon Holdings) of any such Mercom Agreement or Mercom Tender Offer would be
reasonably acceptable to Avalon Holdings, and Cable Michigan would not waive
any material term or condition under such Mercom Agreement or Mercom Tender
Offer without the consent of Avalon Holdings. No such transaction would be
consummated involving the acquisition of Shares without the approval of a
committee of the Board composed solely of independent directors. The closing of
any such purchase could be conditioned upon the closing of the Buyer Merger,
the closing of such purchase could occur before or after the effective time of
the Buyer Merger, and none of the entering into of a Mercom Agreement, the
commencement of a Mercom Tender Offer or the closing of any such purchase
pursuant to a Mercom Agreement or Mercom Tender Offer would be a condition to
the Buyer Merger. Under the Buyer Merger Agreement, Cable Michigan was not
obligated to enter into the Mercom Agreement or make a Mercom Tender Offer.
On June 4, 1998, Buyer sent the following letter (the "Initial Mercom
Offer Letter") to the Board, proposing to the Board that Buyer acquire all
Shares not owned by Buyer (the "Mercom Proposal") for $11.00 per Share in cash:
[Cable Michigan letterhead]
June 4, 1998
Board of Directors
Mercom, Inc.
105 Carnegie Center
Princeton, NJ 08540
Gentlemen:
As you know, Cable Michigan, Inc. ("Cable Michigan") owns approximately
62% of the Common Stock, par value $1.00 per share ("Common Stock") of Mercom,
Inc. ("Mercom"). Cable Michigan has recently entered into an Agreement and Plan
of Merger with an affiliate of Avalon Partners (the "Merger Agreement")
pursuant to which Cable Michigan will be acquired by Avalon. Under the Merger
Agreement, Cable Michigan is permitted to acquire the minority interest in
Mercom at a price of $11.00 per share of Common Stock. With this in mind, I am
pleased to inform you of the unanimous decision of the Board of Directors of
Cable Michigan to propose to acquire all the remaining Common Stock of Mercom
not owned by Cable Michigan for $11.00 per share in cash. We believe this is an
attractive opportunity for shareholders of Mercom.
Our proposal is subject to the execution and delivery of mutually
satisfactory definitive documentation, receipt of all required regulatory
approvals and other customary conditions. We assume that you will be forming a
special committee of directors to evaluate this proposal, and we look forward
to providing every assistance to the committee's work. For reasons you can
appreciate, we plan to issue a press release informing the public of our
proposal by 9:00 A.M. New York City time, today.
Very truly yours,
/s/ Mark Haverkate
-------------------------------------
Mark Haverkate
President and Chief Operating Officer
On June 4, 1998, the Board confirmed the re-establishment of the Special
Committee to review the Mercom Proposal reflected in the Initial Offer Letter.
The Special Committee once again retained CIBC Oppenheimer to serve as its
financial advisor and retained Shereff, Friedman, Hoffman & Goodman LLP, now
Swidler Berlin Shereff Friedman, LLP as its independent legal counsel.
During the remainder of June 1998, CIBC Oppenheimer conducted due
diligence meetings regarding the Company with various members of management of
Cable Michigan. On July 2, 1998, the Special Committee conducted a telephonic
meeting. At that meeting, CIBC Oppenheimer presented its preliminary analysis
concerning the $11.00 per share offer made in the Initial Offer Letter. CIBC
Oppenheimer noted that although its due diligence was not yet complete, it had
preliminarily concluded that the offer of $11.00 per Share was not within the
range of fairness. At the conclusion of that meeting, CIBC Oppenheimer's
preliminary analysis was communicated to Cable Michigan. During the following
two weeks, CIBC Oppenheimer had various discussions with management at Cable
Michigan concerning the offer of $11.00 per share. On July 16, 1998, the
Special Committee conducted a telephonic meeting to receive an update of the
discussions among CIBC Oppenheimer, Cable Michigan and Avalon Holdings.
Subsequent to the July 16, 1998 meeting, there were further discussions between
CIBC Oppenheimer on the one hand and Cable Michigan and Avalon/ABRY on the
other hand. On July 30, 1998, the Special Committee conducted a telephonic
meeting to receive an update of conversations held between CIBC Oppenheimer,
Cable Michigan and Avalon/ABRY concerning values. During the early part of
August 1998, there were several more conversations concerning an increase in
the price from $11.00 per share. As a result of these conversations, Buyer
recommended to increase the offer to $12.00 per Share.
On August 11, 1998, Avalon Holdings authorized Cable Michigan to increase
the price at which Cable Michigan was permitted to purchase the minority
interest in the Company to $12.00 per Share in cash. Avalon Holdings also
informed Cable Michigan that the $12.00 price was the highest price it would
authorize. Accordingly, on August 11, 1998, Avalon Holdings, Cable Michigan and
Buyer MergerSub entered into Amendment No. 2 ("Amendment No. 2") to the Buyer
Merger Agreement, which increased the price at which Buyer was permitted to
purchase the minority interest in the Company to $12.00 per Share in cash.
Later that day, Buyer sent the following letter (the "Second Mercom Offer
Letter") to the Board, proposing to the Board that Buyer acquire all Shares not
owned by Buyer for $12.00 per Share in cash:
[Cable Michigan letterhead]
August 11, 1998
Board of Directors
Mercom, Inc.
105 Carnegie Center
Princeton, NJ 08540
Gentlemen:
I am pleased to inform you that Cable Michigan, Inc. ("Cable Michigan") is
increasing to $12.00 per share the price of its proposal for the acquisition of
the 38% interest in Mercom, inc. ("Mercom") that it does not already own. The
increased price has been authorized under the Agreement and Plan of Merger
between Cable Michigan, Avalon Cable of Michigan Holdings Inc. ("Avalon") and
Avalon Cable of Michigan Inc. Avalon has informed Cable Michigan that the
$12.00 price is the highest price that it will authorize.
As previously noted, our proposal is subject to the execution and delivery
of mutually satisfactory definitive documentation, receipt of all required
regulatory approvals and other customary conditions. For reasons you can
appreciate, we plan to issue a press release informing the public of our
increased proposal by 9:00 A.M. New York City time, tomorrow.
Very truly yours,
/s/ Mark Haverkate
-------------------------------------
Mark Haverkate
President and Chief Operating Officer
From August 11, 1998 through September 10, 1998, representatives of the
Special Committee negotiated the terms and conditions of the Merger Agreement
with representatives of Cable Michigan and Avalon/ABRY.
On September 10, 1998, the Special Committee unanimously determined that
the Merger, the Merger Agreement and the transactions contemplated thereby are
fair to and in the best interests of the Public Shareholders, and recommended
that the Board and the shareholders of the Company approve and adopt the
Merger, the Merger Agreement and the transactions contemplated thereby.
On September 10, 1998, the Board unanimously (i) determined that the
Merger, the Merger Agreement and the transactions contemplated thereby are fair
to and in the best interests of the Public Shareholders, (ii) approved and
authorized in all respects the acquisition of the Company by Buyer, (iii)
approved the Merger Agreement and authorized the execution and delivery thereof
and (iv) recommended that the shareholders of the Company approve and adopt the
Merger, the Merger Agreement and the transactions contemplated thereby.
On September 10, 1998, the shareholders of Cable Michigan approved the
Buyer Merger Agreement.
On November 6, 1998, the Buyer Merger was consummated and Buyer MergerSub
was merged with and into Cable Michigan, Inc. pursuant to the Buyer Merger
Agreement. As a result of the Buyer Merger, Cable Michigan, Inc. became a
wholly owned subsidiary of Avalon Holdings and was renamed Avalon Cable of
Michigan, Inc. In connection with the Buyer Merger, on November 6, 1998 Bruce
Godfrey, David C. McCourt, Michael J. Mahoney, and Raymond B. Ostroski resigned
as Directors of the Company and were replaced by David W. Unger, Joel C. Cohen,
Jay M. Grossman, and Peggy J. Koenig, who are officers and directors of Avalon
Holdings. Messrs. Godfrey, McCourt, Mahoney and Ostroski had been directors
and/or executive officers of Cable Michigan prior to the Buyer Merger. Also in
connection with the Buyer Merger, the officers of the Company serving prior to
November 6, 1998 resigned and new officers were appointed. These new officers
included Joel C. Cohen (Chief Executive Officer, President and Secretary), David
W. Unger (Assistant Secretary), Jay M. Grossman (Vice President and Assistant
Secretary) and Peggy J. Koenig (Vice President and Assistant Secretary).
Except for one previous engagement in the past two years, in which the
amount of compensation was $50,000, and except as otherwise described herein,
other than their engagements by the Special Committee in connection with the
Merger, CIBC Oppenheimer has had no material relationship with the Company,
Cable Michigan or its affiliates in the past two years.
Recommendations of the Special Committee and the Board of Directors
On September 10, 1998, the Special Committee unanimously determined that
the Merger, the Merger Agreement and the transactions contemplated thereby are
fair to and in the best interests of the Public Shareholders, and recommended
that the Board and the shareholders of the Company approve and adopt the
Merger, the Merger Agreement and the transactions contemplated thereby.
On September 10, 1998, the Board, on the unanimous recommendation of the
Special Committee, unanimously determined that the Merger, the Merger Agreement
and the transactions contemplated thereby are fair to and in the best interests
of the Public Shareholders, and recommended that the shareholders of the
Company approve and adopt the Merger, the Merger Agreement and the transactions
contemplated thereby. Prior to participating in the determinations and
recommendations of the Board, the members of the Board who were also directors
or officers of Buyer identified their affiliations with Buyer and noted that as
a result of such affiliations they had a potential conflict of interest.
Reasons of the Company for the Merger; Fairness of the Merger
Special Committee. In reaching its determinations referred to under
"Recommendations of the Special Committee and the Board of Directors", the
Special Committee considered the factors listed below, each of which, in the
view of the Special Committee, supported such determinations. The following
discussion of the factors considered by the Special Committee is not intended
to be exhaustive but summarizes the material factors considered:
In its consideration of the Merger, the Special Committee met with CIBC
Oppenheimer on two separate occasions and had numerous other discussions with
CIBC Oppenheimer and between themselves. At each meeting, one or more of the
material factors were discussed among the members of the Special Committee and
whichever of its advisors were then present. In addition, the members of the
Special Committee met with CIBC Oppenheimer and representatives of Cable
Michigan and Avalon/ABRY to discuss the Merger.
(i) The Special Committee considered the historical market prices and
recent trading activity of the Company Common Stock and the fact that the
Merger Consideration would enable the Public Stockholders to realize a
premium over the prices at which the Company Common Stock has traded in
the last year (including the ten business day average of reported closing
bids for the Company Common Stock ending with the day prior to June 3,
1998, the date of the public announcement that Cable Michigan had proposed
to acquire the Shares held by the Public Shareholders for $11.00 per share
which was $10.93); and that the Merger Consideration represented a
0.69% premium over such ten business day average price and a 12.98% premium
over the average of the closing prices during the 120 business days prior
to such announcement. The historical market prices of the Company's Common
Stock for the past year were deemed relevant because they indicate the
arms-length trading prices of the Company Common Stock for that period as
determined in the open market.
(ii) The Special Committee considered the oral opinion (subsequently
confirmed in writing) of CIBC Oppenheimer to the effect that, as of the
date of such opinion, the Merger Consideration of $12.00 in cash per share
of Company Common Stock to be received by the Public Stockholders in the
Merger was fair to such stockholders from a financial point of view, and
also considered the analysis underlying such opinion. See "Opinion of
Financial Advisor to the Special Committee." A copy of the CIBC
Oppenheimer Opinion, setting forth the assumptions made, matters
considered and limitations on the review undertaken in connection with
such opinion, is attached as Annex B to this Proxy Statement and should be
read carefully in its entirety.
(iii) The Special Committee considered information with respect to
the financial condition, results of operations, business and prospects of
the Company, as well as the risks involved in achieving such prospects,
the current state of the cable industry, and the economic and market
conditions affecting the Company.
(iv) The Special Committee also considered the likelihood of the
consummation of the proposed transaction, the significant percentage of
Company Common Stock owned by Cable Michigan, the proposed structure of
the transaction and anticipated closing date, and the impact on the
Company of a delay or further uncertainty both with respect to the market
for the Company Common Stock and the fiduciary obligations of the Special
Committee to the Public Shareholders.
(v) The Special Committee considered the risks to the Company and the
Public Shareholders of entering into the Merger Agreement with Cable
Michigan, including the condition that the Buyer Merger Agreement be
consummated.
(vi) The Special Committee also considered that fact that
consummation of the Merger would preclude the Public Shareholders from
having the opportunity to participate in the future growth prospects of
the Company. Accordingly, in reaching its conclusion to approve the Merger
Agreement, the Special Committee considered management's projections of
future sales and earnings of the Company and determined that the future
prospects of the Company are adequately reflected in the Merger
Consideration. See "--Opinion of Financial Advisor to the Special
Committee." In addition, the Special Committee recognized that Cable
Michigan will have the opportunity to benefit from any increases in the
value of the Company following the Merger.
(vii) The Special Committee also considered the fact that the Merger
would afford the Public Shareholders an opportunity to dispose of their
Company Common Stock at fair value without the possible diminution of
value resulting from the lack of an active trading market.
(viii) The Special Committee considered that it had been advised by
Cable Michigan that, if the Merger were not consummated, they would not
consider any alternative transaction.
(ix) In addition to the above, the Special Committee discussed and
considered whether there were other alternatives to the Merger and
determined that there were no other viable alternatives other than for the
Company to remain a publicly traded entity.
The following members of the Board of Directors had potential conflicts of
interests due to their relationships with Cable Michigan during the negotiation
and execution of the Buyer Merger Agreement: Bruce Godfrey, David C. McCourt,
Michael J. Mahoney, Raymond B. Ostroski. None of these directors were members
of the Special Committee.
In view of the various factors considered by the Special Committee in
connection with its evaluation of the Merger and the Merger Consideration, the
Special Committee did not find it necessary to quantify or otherwise attempt to
assign relative importance to the specific factors considered in making its
determination, nor did it evaluate whether such factors were of equal
importance. However, based upon these factors, the evaluation of all the
relevant information provided to them by the Company's financial advisor and
taking into account the existing trading ranges for the Company Common Stock,
the Special Committee determined that the Merger, including the Merger
Consideration, was fair from a financial point of view, to the Public
Stockholders. In considering the factors described above, individual
members of the Special Committee may have given different weights to
different factors. As further described below, the Special Committee
believes that the Merger was considered in a manner that was procedurally
fair to the Public Stockholders.
Board of Directors. In reaching its determinations referred to under
"Special Factors--Recommendations of the Special Committee and the Board of
Directors", the Board considered the following factors: (i) the determinations
and recommendations of the Special Committee; (ii) the factors referred to above
as having been taken into account by the Special Committee; and (iii) the fact
that the Merger Consideration and the terms and conditions of the Merger
Agreement were the result of arm's-length negotiations between the Special
Committee, on the one hand, and Buyer and Avalon/ABRY, on the other hand.
In view of the wide variety of factors considered by the members of the
Board in connection with the evaluation of the Merger and the complexity of such
matters, the Board did not consider it practicable to, nor did it attempt to,
quantify, rank or otherwise assign relative weights to the specific factors it
considered in reaching its decision. The Board also relied on the experience and
expertise of the financial advisors of the Special Committee for quantitative
analysis of the financial terms of the Merger. See "Special Factors--Opinion of
Financial Advisor to the Special Committee." In addition, the Board did not
undertake to make any specific determination as to whether any particular factor
(or any aspect of any particular factor) was determinative to its ultimate
determination. Rather, the Board conducted a discussion of, among other things,
the factors described above, including asking questions of the Company's
management and legal and financial advisors, and reached a general consensus
that the Merger was advisable and in the best interests of the Company, the
Public Shareholders and the Company's other constituencies. In considering the
factors described above, individual members of the Board may have given
different weight to different factors.
The Board, including the members of the Special Committee, believes that
the Merger is procedurally fair because, among other things: (i) the Special
Committee consisted entirely of non-management, non-affiliated independent
directors appointed to represent the interests of the Public Shareholders; (ii)
the Special Committee retained and was advised by independent legal counsel;
(iii) the Special Committee retained CIBC Oppenheimer as its independent
financial advisor to assist it in evaluating a potential transaction with Buyer
and received advice from CIBC Oppenheimer; (iv) the Special Committee engaged
in extensive deliberations in evaluating the Merger and alternatives thereto;
and (v) the $12.00 per Share price and the other terms and conditions of the
Merger Agreement resulted from active arm's-length bargaining between the
Special Committee and its representatives, on the one hand, and Buyer and
Avalon/ABRY and their respective representatives, on the other hand.
Opinion of Financial Advisor to the Special Committee
On June 25, 1998, CIBC Oppenheimer was retained as financial advisor to
the Special Committee in connection with the proposed acquisition by Cable
Michigan of all of the outstanding shares of Company Common Stock not currently
owned by Cable Michigan or its affiliates. As part of its role as financial
advisor to the Special Committee, CIBC Oppenheimer rendered an opinion on
September 10, 1998 (later confirmed in writing) to the Special Committee and to
the Board that the consideration to be received by the Public Shareholders
pursuant to the Merger Agreement was fair, from a financial point of view, to
such Public Shareholders, subject to the assumptions, factors, limitations and
other matters set forth therein. The CIBC Oppenheimer fairness opinion is
referred to herein as the "CIBC Oppenheimer Opinion."
THE FULL TEXT OF THE CIBC OPPENHEIMER OPINION IS ATTACHED HERETO AS ANNEX B.
HOLDERS OF COMPANY COMMON STOCK ARE URGED TO READ THE CIBC OPPENHEIMER
OPINION IN ITS ENTIRETY FOR THE ASSUMPTIONS MADE, THE MATTERS CONSIDERED AND
THE LIMITS OF THE REVIEW MADE BY CIBC OPPENHEIMER. THE FOLLOWING DISCUSSION OF
THE CIBC OPPENHEIMER OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF ANNEX B. THE CIBC OPPENHEIMER OPINION ADDRESSES ONLY THE FAIRNESS
OF THE CONSIDERATION TO BE RECEIVED PURSUANT TO THE MERGER AGREEMENT, FROM A
FINANCIAL POINT OF VIEW, TO THE PUBLIC SHAREHOLDERS AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY HOLDER OF COMPANY COMMON STOCK AS TO HOW TO VOTE ON THE
MERGER.
A copy of the CIBC Oppenheimer financial analysis discussed below has been
filed as an exhibit to the Schedule 13E-3 filed with the SEC with respect to
the Merger, may be inspected and copied, and obtained by mail, from the SEC as
set forth in "Available Information" and will be made available for inspection
and copying at the principal executive offices of the Company at 201 East 69th
Street, Suite 3100, New York, NY 10022 during regular business hours by any
interested stockholder of the Company or his or her representative who has been
so designated in writing.
The Merger Agreement is the result of arm's length negotiations between
the Special Committee, on the one hand, and Cable Michigan and Avalon/ABRY, on
the other hand. Representatives of CIBC Oppenheimer advised the Special
Committee during such negotiations. No limitations were imposed by the Company,
the Board or the Special Committee upon CIBC Oppenheimer with respect to the
investigations made or procedures followed in its role as financial advisor to
the Special Committee, except that in light of Cable Michigan's determination,
as expressed to the Special Committee, that Cable Michigan had no current
intention to sell the Company to a third party, CIBC Oppenheimer was not
authorized to, and did not, solicit any indications of potential interest from
any third party to acquire all or any part of the Company, its assets or its
capital stock.
In connection with the CIBC Oppenheimer Opinion, CIBC Oppenheimer, among
other things: (i) reviewed certain publicly available financial statements and
other information of the Company; (ii) reviewed certain internal financial
statements, including projections and other financial and operating data
concerning the Company prepared by the management of the Company; (iii)
discussed past and current operations and the financial condition and prospects
of the Company with senior executives of the Company; (iv) reviewed the Merger
Agreement; (v) reviewed the reported prices and trading activity for the
Company Common Stock; (vi) compared the financial performance of the Company
and the prices and trading activity of the Company Common Stock with that of
certain other publicly traded companies and their securities that CIBC
Oppenheimer deemed comparable; (vii) reviewed the financial terms, to the
extent publicly available, of acquisition of minority interest transactions
that CIBC Oppenheimer deemed comparable; (viii) compared the multiple of cash
flow and the per subscriber value paid for the Company with those implied by
the Buyer Merger Agreement; (ix) reviewed the financial terms, to the extent
publicly available, of acquisition transactions of other cable properties that
CIBC Oppenheimer deemed comparable; and (x) performed discounted cash flow and
other such analyses, reviewed such other information, and considered such other
factors as CIBC Oppenheimer deemed appropriate.
In rendering the CIBC Oppenheimer Opinion, CIBC Oppenheimer relied upon
and assumed the accuracy and completeness of all the financial and other
information reviewed by it for purposes of its opinion, without any independent
verification of such information. Without limiting the foregoing, CIBC
Oppenheimer assumed that the financial forecasts prepared by the management of
the Company and other information as provided or otherwise discussed had been
reasonably prepared on a basis reflecting the best currently available
judgments and estimates of the Company. CIBC Oppenheimer did not make an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of the Company or any of its subsidiaries, and was not furnished
with any such evaluation or appraisal, nor did CIBC Oppenheimer make a physical
inspection of any properties or assets of the Company. The CIBC Oppenheimer
Opinion is based on economic, market and other conditions as in effect on, and
the information made available to CIBC Oppenheimer as of, the date of its
opinion, and CIBC Oppenheimer was not requested, nor has it undertaken any
responsibility, to update the CIBC Oppenheimer Opinion to reflect subsequent
developments. CIBC Oppenheimer further assumed that (i) the representations and
warranties contained in the Merger Agreement were true and correct in all
material respects and (ii) the Merger will be consummated in accordance with
the terms described in the Merger Agreement, without any amendment thereto, and
without waiver by the Company of any of the conditions to its obligation to
close thereunder. The CIBC Oppenheimer Opinion does not address the tax
consequences of the Merger to any holders of shares of Company Common Stock.
The following is a summary of the material financial analyses performed by
CIBC Oppenheimer in connection with the CIBC Oppenheimer Opinion and the
related presentation to the Special Committee and the Board on September 10,
1998 (subsequently confirmed in writing). A copy of the CIBC Oppenheimer
Opinion is attached hereto as Annex B.
Comparable Publicly Traded Company Analysis. CIBC Oppenheimer compared
certain historical and estimated earnings, operating and financial data, and
ratios and multiples of income statement and operating cash flow parameters of
the Company to certain other publicly traded cable companies that CIBC
Oppenheimer deemed to have operations similar to those of the Company. The
publicly traded companies selected by CIBC Oppenheimer for the purpose of this
analysis were: Adelphia Communications Corporation, Cable Michigan, Inc.,
Cablevision Systems Corp., Century Communications Corp., Comcast Corporation,
Cox Communications, Inc., Jones Intercable, Inc., MediaOne Group, Inc., TCA
Cable TV, Inc., and TCI Group, Inc. (collectively, the "Comparable Companies").
Although CIBC Oppenheimer used the Comparable Companies for comparative
purposes, none of the Comparable Companies are truly comparable to the Company
due to the Company's significantly smaller size. CIBC Oppenheimer reviewed the
enterprise value (defined as the sum of the face value of a company's debt plus
the market value of its equity securities ("market capitalization") less cash
and cash equivalents) for the Comparable Companies as a multiple of their run
rate (i.e. last quarter annualized) ("RR") and their latest twelve-months
("LTM") revenues, earnings before interest, taxes, depreciation and
amortization ("EBITDA") and per subscriber values.
Such analyses indicated that enterprise value as a multiple of RR revenues
ranged from 1.8x to 6.4x, with a median of 5.3x, compared to 3.8x implied for
the enterprise value of the Company based upon a $12.00 per share price for the
Company Common Stock (the "Mercom Enterprise Value"), enterprise value as a
multiple of RR EBITDA ranged from 6.8x to 15.6x, with a median of 12.0x,
compared to 9.9x for the Mercom Enterprise Value and enterprise value per
subscriber ranged from $1,347 to $3,140 with a median of $2,279, compared to
$1,673 for the Mercom Enterprise Value. Also, such analysis indicated
enterprise value as a multiple of LTM revenues ranged from 3.1x to 6.4x, with a
median of 5.7x, compared to 4.0x for the Mercom Enterprise Value and enterprise
value as a multiple of LTM EBITDA ranged from 7.9x to 15.5x, with a median of
12.7x, compared to 10.8x for the Mercom Enterprise Value.
CIBC Oppenheimer applied a discount in the range of 20% to 30% to the
Comparable Companies to arrive at the equity value of the Company. CIBC
Oppenheimer considered that in recent months, values of large publicly traded
cable companies had risen significantly (index of Comparable Companies up by
approximately 50% between January 1, 1998 to September 3, 1998) due to a desire
by telecommunications companies and investors to buy cable properties to gain
access to homes. According to CIBC Oppenheimer estimates, smaller cable
companies have not benefitted proportionally from this trend and, as such,
should be discounted when compared to large publicly traded cable companies. In
addition, CIBC Oppenheimer concluded that large cable operators (greater than $9
billion total enterprise value) traded at an average of 13.5x RR EBITDA as of
September 3, 1998 and that medium cable operators ($1 billion to $9 billion)
traded at an average of 10.9x RR EBITDA, or a 20% discount. There are no
publicly held small operators that are not subject to sale agreements; however,
extrapolating the foregoing would result in an estimated range of 8.0x to 9.0x
RR EBITDA (approximately a 20% to 30% discount to the total group). This
analysis implied an equity value range of $10.08 to $12.52 per share of Common
Stock. CIBC Oppenheimer noted that the price per share for the Company Common
Stock contemplated by the Merger was within this range of values assuming the
above valuation discounts. CIBC Oppenheimer drew no specific conclusion from
this analysis but subjectively factored its observations from this analysis into
its qualitative assessment of the relevant facts and circumstances.
Comparable M&A Transactions Analysis. CIBC Oppenheimer reviewed the
implied valuation multiples of several transactions completed since May 1997
involving companies in the cable industry. These cable transactions included
the then pending acquisition of Cable Michigan by Avalon Holdings, the
acquisition of Cable One of Marcus Cable and the acquisition by
Tele-Communications, Inc. of Frontier Vision, Inc., among others. From May 1997
to July 1998, all merger and acquisition transactions for cable companies or
properties with transaction size greater than $75 million, when compared to
transactions less than $75 million, were valued at approximately a 43% premium
based on the weighted average purchase price/LTM EBITDA multiple and
approximately a 24% premium based on the price paid per subscriber.
Accordingly, CIBC Oppenheimer applied a similar discount range of 20% to 30%
for transactions with a total consideration greater than $75 million. CIBC
Oppenheimer paid particular attention to those transactions with a total
consideration less than $75 million. No discount was applied to transactions
with total consideration less than $75 million. The analysis involved complex
considerations and judgments concerning differences in size of the companies
that affect public or private trading values.
To the extent that information was publicly available for these
transactions, CIBC Oppenheimer reviewed the Aggregate Transaction Values
(defined as the sum of the total price paid for all equity securities of a
company plus the face value of a company's debt less cash and cash equivalents)
to LTM EBITDA and per subscriber. Such analysis indicated Aggregate Transaction
Value as a multiple of LTM EBITDA for transactions from May 1997 to July 1998
ranged from 6.6x to 14.0x, with a median of 12.4x, compared to 9.9x for the
Company at an Aggregate Transaction Value based upon a $12.00 per share price
for the Company Common Stock (the "Mercom Transaction Value"); and Aggregate
Transaction Value per subscriber of $2,662, compared to $1,673 for the Mercom
Transaction Value. Such analysis also indicated transaction values as a
multiple of LTM EBITDA for transactions from January 1998 to July 1998 ranged
from 6.6x to 14.0x, compared to 9.9x for the Mercom Transaction Value; and
median Aggregate Transaction Value per subscriber of $2,878, compared to $1,673
for the Mercom Transaction Value. The analysis also indicated Aggregate
Transaction Value less than $75 million as a multiple of LTM EBITDA for
transactions from May 1997 to July 1998 ranged from 6.6x to 10.4x, with a
median of 8.9x, compared to 9.9x for the Mercom Transaction Value; and median
Aggregate Transaction Value per subscriber of $1,788, compared to $1,673 for
the Mercom Transaction Value.
As noted above, CIBC Oppenheimer applied a 20% to 30% discount for
transactions having an Aggregate Transaction Value greater than $75 million. No
discount was applied to transactions having an Aggregate Transaction Value less
than $75 million. The foregoing analysis implied an equity value range of $9.58
to $16.43 per share of the Company Common Stock. CIBC Oppenheimer noted that
the price per share for the Company Common Stock contemplated by the Merger was
within the range of value assuming the appropriate discounts. CIBC Oppenheimer
noted its belief that the multiples paid in these completed transactions should
be considered in light of the differences of valuations of larger to smaller
sized companies. CIBC Oppenheimer noted that the price per share for the
Company contemplated by the Merger was within this range of values. CIBC
Oppenheimer drew no specific conclusion from this analysis but subjectively
factored its observations from this analysis into its qualitative assessment of
the relevant facts and circumstances.
Value Based on Purchase Price of Cable Michigan by Avalon Holdings
Analysis. CIBC Oppenheimer performed an analysis valuing Cable Michigan on a
stand-alone basis based on the Avalon Holdings proposal to acquire Cable
Michigan under the Buyer Merger Agreement. CIBC Oppenheimer believed that the
relevant comparable transaction to the Company is the value of Cable Michigan
on a stand-alone basis implied by the Avalon Holdings proposal assuming $40.50
per share of Cable Michigan Common Stock. CIBC Oppenheimer calculated the
enterprise value of Cable Michigan and the Company combined by adding the value
of the 38.08% of the Company not owned by Cable Michigan at $12.00 per share to
the equity value of Cable Michigan. This analysis implies that both companies
are being purchased at a multiple of enterprise value to EBITDA and per
subscriber of 11.6x and $2,086, respectively. By backing out the enterprise
value of the Company assuming $12.00 per share for all of its outstanding
shares, CIBC Oppenheimer derived the implied enterprise value of Cable Michigan
on a stand-alone basis and compared its EBITDA multiple of approximately 12.0x
and per subscriber transaction value of $2,185 with the Company's EBITDA
multiple on a stand-alone basis of approximately 9.9x and per subscriber
transaction value of $1,673. CIBC Oppenheimer believed that due to certain
operating and size factors and an implied premium control, a discount range of
15% to 25% discount to Cable Michigan's stand-alone valuation multiples was
appropriate when using such multiples to value the Company. CIBC Oppenheimer
concluded that the appropriate multiple was 9.6x for EBITDA and $1,748 per
subscriber assuming the midpoint discount of 20%. This analysis implied an
equity value range of $11.59 to $12.62 per share of Common Stock. CIBC
Oppenheimer noted that the price per share for the Company contemplated by the
Merger was within the range of values given the appropriate discounts. CIBC
Oppenheimer drew no specific conclusion from this analysis but subjectively
factored its observations from this analysis into its qualitative assessment of
the relevant facts and circumstances.
Premiums Paid for Comparable Minority Interest Transactions Analysis. CIBC
Oppenheimer reviewed the premiums paid in transactions completed since January
1994 in which owners of a majority interest acquired the remaining publicly
owned shares to achieve complete ownership. Such analysis indicated that the
prices paid for the equity in the 14 minority acquisition transactions analyzed
relative to the market price of the equity at the market closing price one day,
one week and four weeks prior to the announcement date of such transactions,
yielded premiums that ranged from 2.2% to 77.8%, with a median of 9.4%, 17.6%
and 21.6% for the one day, one week and four week periods, respectively. CIBC
Oppenheimer noted that the price contemplated by the Merger yields premiums
within the market value of the Company Common Stock for the periods comprised
of one day, one week and four weeks prior to the announcement date of June 3,
1998 of 12.9%, 12.9% and 14.3%, respectively. The ability to rely upon the
foregoing analysis is somewhat diminished as a result of a relatively illiquid
trading market for the Company Common Stock. This analysis implied an equity
value range of $11.62 to $12.76 per share of Company Common Stock. CIBC
Oppenheimer noted that the price contemplated by the Merger was within the
range of values. CIBC Oppenheimer drew no specific conclusion from this
analysis but subjectively factored its observation from this analysis into its
qualitative assessment of the relevant facts and circumstances.
Discounted Cash Flow Analysis. CIBC Oppenheimer performed a discounted
cash flow analysis ("DCF") of the Company on a stand-alone basis. In conducting
its analysis, CIBC Oppenheimer relied on certain assumptions, financial
forecasts and other information provided by the Company's management;
specifically, CIBC Oppenheimer relied upon the internal forecast of future
results of operations developed by the Company's management for the fiscal
years ending December 31, 1999 through December 31, 2003. CIBC Oppenheimer
selected a range of terminal exit multiples of 10.5x to 11.5x EBITDA and a
range of discount rates of 11% to 12% based upon its subjective judgments
about, among other things, the capital markets, the Company's prospects and the
cable industry in general. The terminal exit multiple represents an estimate of
the value of the Company's future projected cash flows following the end of the
five-year period used in this analysis. Based on management's five-year
projections for the fiscal years ending December 31, 1999 through December 31,
2003, the analysis implied an equity value range of $11.28 to $12.98 per share
of Company Common Stock. CIBC Oppenheimer noted that the price contemplated by
the Merger was within the range evidenced by the DCF analysis. CIBC Oppenheimer
drew no specific conclusion from this analysis but subjectively factored its
observations from this analysis into its qualitative assessment of the relevant
facts and circumstances.
Conclusion. Taking into account the foregoing analyses, CIBC Oppenheimer
determined that the range of fairness for the acquisition (the "Acquisition") of
the Company Common Stock not owned by Cable Michigan was $11.25 to $13.00 per
Share, regardless of whether the Acquisition was structured as a cash tender
offer or as a merger. In reaching this conclusion, CIBC Oppenheimer placed
relatively more emphasis on the Comparable M&A Transaction Analysis, the Value
Based on Purchase Price of Cable Michigan by Avalon Cable Analysis and the
Discounted Cash Flow Analysis and relatively less emphasis on the Comparable
Publicly Traded Company Analysis and Premiums Paid for Comparable Minority
Interest Transactions Analysis.
The summary set forth above does not purport to be a complete description
of the analyses performed and factors considered by CIBC Oppenheimer, and is
qualified by reference to the full text of the CIBC Oppenheimer Opinion set
forth in Annex B hereto. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and, therefore, an opinion is not readily susceptible to partial analysis or
summary description. Accordingly, notwithstanding the separate factors
summarized above, CIBC Oppenheimer believes that its analysis must be
considered as a whole and that selecting portions of its analysis and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its opinion.
Furthermore, in arriving at its fairness opinion, CIBC Oppenheimer did not
attribute any specific weight to any analysis, or factor considered by it, but
rather made subjective and qualitative judgments as to the significance and
relevance of each analysis and factor.
In performing its analyses, CIBC Oppenheimer made numerous assumptions
with respect to industry performance, business and economic conditions and
other matters. CIBC Oppenheimer also relied upon the current and projected
financial results of the Company as provided by management. The Company does
not publicly disclose internal management forecasts of the type provided to
CIBC Oppenheimer in connection with the review of the Merger Agreement. Such
forecasts were not prepared with a view toward public disclosure. The forecasts
were based on numerous variables and assumptions which are inherently
uncertain, including, without limitation, factors related to general economic
and competitive conditions. Accordingly, actual results could vary
significantly from those set forth in such forecasts. The analyses performed by
CIBC Oppenheimer were solely for the purposes of rendering the CIBC Oppenheimer
Opinion and do not purport to be appraisals or necessarily reflect the prices
at which businesses or securities actually may be sold. The range of valuation
for any particular analysis should not be taken to be the view of CIBC
Oppenheimer of the actual value of the Company or the Common Stock.
The Special Committee selected CIBC Oppenheimer as its financial advisor
because CIBC Oppenheimer is an internationally recognized investment banking
firm and the principals of CIBC Oppenheimer have substantial experience in
transactions similar to the Merger, are familiar with the Company, Cable
Michigan and their respective businesses and are familiar with the cable
industry in general. As part of its investment banking business, CIBC
Oppenheimer is continually engaged in the valuation of businesses and their
securities in connection with mergers, acquisitions, negotiated underwritings,
competitive biddings, secondary sales and distributions of listed and unlisted
securities, and private placements. In the ordinary course of business, CIBC
Oppenheimer and its affiliates may actively trade the securities of the Company
for its own account or for the accounts of its customers and, accordingly., may
at any time hold a long or short position in such securities.
Pursuant to a letter agreement, dated as of June 25, 1998 (the "Engagement
Letter"), the Special Committee engaged CIBC Oppenheimer to act as its
financial advisor in connection with the proposed transaction with Cable
Michigan. The Company paid CIBC Oppenheimer $50,000 upon execution of the
Engagement Letter and an additional $250,000 upon delivery of the CIBC
Oppenheimer Opinion to the Special Committee. In addition, CIBC Oppenheimer was
paid a $50,000 retainer in 1997 for its preliminary work on the C-TEC/Cable
Michigan proposal to acquire the minority interest in the Company in 1997. In
addition, the Company has agreed to reimburse CIBC Oppenheimer for its
out-of-pocket fees and expenses (including, but not limited to, reasonable fees
and expenses of CIBC Oppenheimer's counsel) incurred in connection with its
engagement upon such consummation. The Company has also agreed to indemnify
CIBC Oppenheimer from and against certain liabilities and expenses in
connection with its engagement, including certain liabilities under the federal
securities laws.
Certain Transactions
On September 29, 1997, Cable Michigan acquired and assumed all of the
interest of a bank under a term credit agreement (the "Company Credit
Agreement") that the bank had with CTE. As of September 30, 1998,
$14,151,000 of principal was outstanding under the Company Credit Agreement and
owed by the Company to Cable Michigan. The interest expense to the Company
under the Company Credit Agreement was $241,000 in 1997 and $714,000 for the
nine months ended September 30, 1998. See "Financial Statements of the
Company--Unaudited Financial Statements" and Note 3 thereto.
The Company entered into a Management Agreement dated January 1, 1992 (the
"CCS Management Agreement") with C-TEC Cable Systems, Inc., ("CCS") a Delaware
corporation and wholly owned subsidiary of CTE, an affiliate of Cable Michigan.
The CCS Management Agreement provided that the Company would 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 $10,000,000 of revenues to 4% of
revenues in excess of $20,000,000); and (b) an annual incentive bonus equal to
25% of the Company's earnings before interest, depreciation, amortization and
taxes ("EBITDA") as adjusted, during the applicable fiscal year less the base
year EBITDA of $3,850,000. During 1996, CCS earned management and incentive
fees of approximately $1,398,000 pursuant to the CCS Management Agreement.
The Company entered into a Management Agreement with C-TEC Cable Systems
Michigan, Inc. ("C-TEC Michigan") dated January 1, 1997 (the "Management
Agreement"). Subsequently, C-TEC Michigan assigned its rights and duties under
the Management Agreement to Buyer. The Management Agreement replaced the CSS
Management Agreement. Under the terms of the Management Agreement, Mercom pays
to Buyer a management fee equal to the greater of $500,000 or an amount equal to
a certain percentage of Mercom's annual revenue. The fee schedule ranges from 5%
of revenue up to $10 million to 4% of revenue over $20 million. In addition to
the basic fee, Buyer is also entitled to an annual incentive fee based on
increases in Mercom's operating cash flow. For 1997, the total fee charged to
the Company by Buyer under the Management Agreement was $1,204,000 and for the
nine months ending September 30, 1998 the fee charged was $998,000. The term of
the Management Agreement is three years. The Management Agreement was approved
by a committee of the Board composed of directors unaffiliated with the Company.
The terms of the Company Credit Agreement and the Management Agreement
were not affected by the Buyer Merger. Pursuant to the Avalon Credit Facility,
Buyer pledged the shares of Company Common Stock it owns to the Avalon Senior
Lenders. As subsidiaries of Buyer, the Company and its subsidiaries are subject
to the restrictive covenants under the Avalon Credit Facility, and other debt
agreements of Buyer and its affiliates. See "The Merger--The Merger Financing."
Purpose and Structure of the Merger; Reasons of Buyer for the Merger
The principal purpose of the Merger is for Cable Michigan to increase its
ownership of Shares from approximately 62% to 100%. The acquisition of the
Shares not held by Cable Michigan has been structured as a merger in order to
effect a prompt and orderly transfer of ownership of the Company from the
Public Shareholders to Cable Michigan and provide such Public Shareholders with
cash for their Shares. One alternative that Cable Michigan considered was a
cash tender offer for all of the Shares held by the Public Shareholders, to be
followed by a merger. Cable Michigan ultimately rejected this alternative in
the belief that the Merger would be more efficient than a transaction involving
a tender offer. In addition, while the Merger will result in Cable Michigan
holding 100% of the Shares, it is unlikely that a tender offer would yield the
same result.
Cable Michigan's principal reasons for the Merger are: (a) after the
proposed Merger, Cable Michigan will be able to manage the Company without
having to consider the positions of minority or unaffiliated holders of Company
Common Stock; (b) the Merger will permit Cable Michigan to consolidate the
operations and the cash flow of the Company with that of Cable Michigan; (c) as
a privately held company, the Company can be managed with a greater emphasis on
long-term growth than on short-term profits; (d) the assumption by the Company
of the status of a private company will allow the Company to eliminate the time
devoted by its management and certain other employees to matters which relate
exclusively to the Company being a public company; and (e) the Company will be
able to eliminate certain other costs which relate to being a public company,
including: the costs of certain accounting, auditing and SEC counsel
activities, the cost of preparing, printing and mailing corporate reports and
proxy statements, the expense of a transfer agent and the cost of investor
relations activities.
The Buyer determined to propose an offer to acquire the shares of Company
Common Stock owned by the Public Shareholders in connection with its
determination to explore strategic alternatives. See "--Background of the
Merger".
Cable Michigan believes that the consideration to be received by the Public
Shareholders pursuant to the Merger is fair to the Public Shareholders. Cable
Michigan bases its belief on the following facts: (i) the fact that the Special
Committee and the Board, based on the factors discussed under "Reasons of the
Company for the Merger; Fairness of the Merger" concluded that the Merger is
fair to, and in the best interests of, the Public Shareholders, (ii)
notwithstanding the fact that CIBC Oppenheimer's opinion was addressed to the
Special Committee and the Board and that Cable Michigan is not entitled to rely
upon such opinion, the fact that the Special Committee and the Board received an
opinion from CIBC Oppenheimer that, as of the date of such opinion and based on
and subject to certain matters stated in such opinion, the consideration to be
paid in the Merger is fair to the holders of Shares (other than Cable Michigan
or its affiliates) from a financial point of view and (iii) the negotiations
between Cable Michigan and Avalon/ABRY, on the one hand, and the Special
Committee, on the other hand, of the terms of the Merger Agreement were
conducted on an arm's-length basis. Cable Michigan did not find it practicable
to assign, nor did it assign, relative weights to the individual factors
considered in reaching its conclusion as to fairness. In light of the nature of
the Company's business, Cable Michigan did not deem net book value or
liquidation value to be relevant indicators of the value of the Shares.
Certain Effects of the Transaction
If the Merger Agreement is approved by the holders of Shares, and the
other conditions to the closing of the Merger are satisfied or waived,
MergerSub or its assignee will merge with and into the Company, with the
Company as the surviving corporation, and the Company will become a wholly
owned subsidiary of Cable Michigan. Upon the consummation of the Merger,
approximately 1,822,810 Shares currently held by the Public Shareholders
(representing approximately 38% of the Shares currently issued and outstanding)
will be converted into the right to receive $12.00 in cash per Share, without
interest. In addition, upon consummation of the Merger, the certificate of
incorporation of the Company shall be amended and restated as set forth in
Exhibit A to the copy of the Merger Agreement attached as Annex A hereto.
Following the Merger, Cable Michigan's beneficial interest in the net book
value and net earnings of the Company would increase to 100%. At September 30,
1998, the net book value of the Company was approximately $2,054,000, and the
net earnings of the Company for the nine months ended September 30, 1998 were
approximately $775,000, based on the unaudited financial statements of the
Company as of September 30, 1998. Cable Michigan will be the sole beneficiary
of any future earnings and growth of the Company (until shares of capital
stock, if any, are issued to other stockholders) and will have the ability to
benefit from any divestitures, strategic acquisitions or other corporate
opportunities that may be pursued by the Company in the future. The Public
Shareholders will cease to have any ownership interest in the Company or rights
as holders of Shares. The Public Shareholders will no longer benefit from any
increases in the value of the Company or the payment of dividends on the
Company Common Stock and will no longer bear the risk of any decreases in value
of the Company.
As a result of the Merger, the Company will be privately held and there
will be no public market for the Company Common Stock. In addition, Cable
Michigan currently intends to cause the Company to terminate the registration
of the Company Common Stock under the Exchange Act as soon after consummation
of the Merger as the requirements for termination of registration are met.
After such registration is terminated, the Company will no longer be required
to file periodic reports with the SEC.
If the Merger closes, it is expected that there will not be another
meeting for Public Shareholders.
The Company believes that the Merger will be treated for Federal income
tax purposes as a purchase by Cable Michigan of the Company Common Stock held
by the Public Shareholders and, therefore, will not give rise to gain, loss or
other income to the Company or to MergerSub.
Plans for the Company after the Merger
One of the reasons for Cable Michigan proposing the Merger is to achieve
certain efficiencies that may result from integrating certain functions and
operations of the Company and its subsidiaries with those of Cable Michigan.
Thus, after the Merger, Avalon Holdings intends to transfer substantially all
of the assets of Cable Michigan and the Company to one of its subsidiaries,
Avalon Cable of Michigan LLC. If the Merger is consummated, the Company Credit
Agreement and the Management Agreement will be terminated.
Conduct of the Business of the Company if the Merger is not Consummated
If the Merger is not completed, the Company Common Stock held by Cable
Michigan will be contributed to Avalon Cable of Michigan LLC and the Company
will become a subsidiary of Avalon Cable of Michigan LLC. In such event, the
Company Credit Agreement and the Management Agreement will continue in
accordance with their terms. Buyer has no plans (other than pursuant to the
Merger Agreement) to acquire the shares of Company Common Stock held by the
Public Shareholders.
PRICE OF THE COMPANY COMMON STOCK
The Company 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 prices listed below represent the
high ask and low bid prices reported by the OTC Bulletin Board during the
periods presented. Prices listed below 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 Common Stock
has been limited and sporadic and thus does not constitute an established
public trading market.
High Low
------- -------
1997
First Quarter........................................... 7 5 3/4
Second Quarter.......................................... 7 5 1/2
Third Quarter........................................... 9 6 1/4
Fourth Quarter.......................................... 9 3/4 7 7/8
1998
First Quarter........................................... 10 1/4 8 1/2
Second Quarter ......................................... 11 3/4 10 1/4
Third Quarter .......................................... 11 7/8 10 1/4
Fourth Quarter(1) ...................................... [ ] [ ]
- - - -------------------
(1) Through [Date], 1998
On May 20, 1998, the last trading day before the public announcement by
Cable Michigan that it had retained Merrill Lynch & Co. to advise it on
strategic alternatives for Cable Michigan, the closing bid price of the Company
Common Stock was $11 5/8 per share.
On June 3, 1998, the last trading day before the public announcement that
Cable Michigan had proposed to acquire the Shares held by the Public
Shareholders for $11.00 per Share, the closing bid price of the Company Common
Stock was $11.00 per share.
On August 10, 1998, the last trading day before the public announcement
that the Buyer Merger Agreement had been amended to permit Cable Michigan to
offer $12.00 per Share for the shares of Company Common Stock, the closing bid
price was $10 5/8.
On September 9, 1998, the last trading day before public announcement of
the execution of the Merger Agreement, the closing price of the Company Common
Stock was $11 1/8 per share. On this date, the high and low sale prices of the
Company Common Stock were $11 1/8 and $11 1/8 respectively.
On [Date], 1998, the closing price of the Company Common Stock as reported
was $[ ] per share.
On [Date], 1998, there were approximately [ ] holders of Company Common
Stock.
Shareholders should obtain current market price quotations for the Company
Common Stock in connection with voting their Shares.
The Company has not paid any cash dividends on its Common Stock in recent
years and it does not have any present intention to commence payment of any
cash dividends. In addition, payments of dividends on the Company Common Stock
are restricted by the Avalon Credit Facility.
THE COMPANY
The following description of the Company and its business, including
information regarding the Company's plans and intentions, was prepared on the
basis that the Company would not become a wholly-owned subsidiary of Buyer. For
information regarding the plans Buyer and Avalon Holdings have for the Company
if the Merger is consummated, see "Special Factors -- Plans For the Company
After the Merger".
Mercom is a cable television operator with three cable systems in southern
Michigan (the "Systems"). The Systems are operated through Mercom's
wholly-owned subsidiary, Communications and Cablevision, Inc. ("CCV"). As of
September 30, 1998, the Systems had approximately 41,500 subscribers. The
Systems provide cable service to Monroe County, Allegan County and the
Coldwater and Sturgis areas. Cable Michigan owns approximately 62% of the
Company Common Stock. The Company was organized on April 22, 1992 and is the
survivor of the merger of Mercom, Inc., a Michigan corporation ("Mercom
Michigan") with the Company. Mercom Michigan became a separate legal entity on
May 26, 1989.
The following table indicates the development of the Company by
summarizing, as of December 31 of each of the last five years and as of
September 30 of 1997 and 1998, 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
the last month of the period reported.
<TABLE>
<CAPTION>
As of December 31, As of September 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Homes Passed(1).......................... 61,730 63,721 65,449 65,998 65,291 64,963 66,172
Basic subscribers(2)..................... 34,714 37,324 38,853 40,012 39,360 39,974 41,483
Basic subscribers as a percentage of
homes passed.......................... 56.2% 58.6% 59.4% 60.6% 60.3% 61.5% 62.7%
Tier subscribers(3)...................... 32,945 34,789 36,120 36,989 37,923 38,593 39,399
Tier subscribers as a percentage of basic
subscribers........................... 94.9% 93.2% 93.0% 92.4% 96.3% 96.5% 95.0%
Premium service units(4)................. 12,816 14,312 17,834 15,493 15,857 15,708 16,527
Premium service units as a percentage of
basic subscribers..................... 36.9% 38.3% 45.9% 38.7% 40.3% 39.3% 39.8%
$35.34e revenue per subscriber for last
month of period(5).................... $ 29.70 $ 29.36 $ 30.41 $ 32.72 $ 33.89 $ 34.09 $ 35.34
- - - -------------------
The table above includes Mercom of Florida, Inc. ("Mercom of Florida")
information for 1993 through 1996. At December 31 of each of those years,
Mercom of Florida had 800, 1,100, 1,500, and 1,800 basic subscribers,
respectively. On July 1, 1997, Mercom sold Mercom of Florida, which operated a
cable system in Port St. Lucie, Florida, to Adelphia Communications Corporation
for $3,650,000 in cash.
(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 was not available
in Mercom of Florida.
(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.
(5) Calculated by dividing total cable related revenues for the last month of
the period by the number of basic subscribers at the end of the month.
</TABLE>
The Company derives the majority of its revenues from recurring
subscription services and generates additional revenues from non-subscription
services such as advertising, pay-per-view, installations and commissions from
electronic retailing. Monthly subscription rates and related charges vary
according to the type of service or equipment selected.
Company Strategy
The Company intends to maintain and enhance the value of its current cable
television systems through upgrading their networks as appropriate depending on
the characteristics of the particular service area. The Company also intends to
institute new services as they are developed and become economically viable. At
this stage, the Company's highest priority is to increase system capacity and
improve system reliability and picture quality. Such network improvements are
necessary to enable the Company to better withstand competition, expand channel
lineups (which would permit the Company to increase revenue) and facilitate new
services when economically viable. The Company's strategic plan calls for a
capital expenditure program intended to result in over 95% of the Company's
customers being served by systems with a capacity of 550 MHZ or 750 MHZ by the
end of 2001. The Company's systems include 5 headends and are currently built
to 400-450 MHZ.
Capital expenditures for system extensions and upgrades and the
development of new services are subject to the availability of cash generated
from operations and debt or equity financing. The capital resources needed to
accomplish these strategies are expected to be provided by cash flow from
operations, and existing cash on hand. There can be no assurances that the
capital resources necessary to accomplish the Company's plans will be available
on terms and conditions acceptable to the Company, or at all.
Buyer Management Agreement
The Company is a party to the Management Agreement. Under the terms of the
Management Agreement, Mercom pays a management fee equal to the greater of
$500,000 or an amount equal to a certain percentage of Mercom's annual revenue.
The fee schedule ranges from 5% of revenue up to $10 million to 4% of revenue
over $20 million. In addition to the basic fee, Buyer is also entitled to an
annual incentive fee based on increases in Mercom's operating cash flow. For
1997, the total fee charged by Buyer under the Management Agreement was
$1,204,000 and for the nine months ended September 30, 1998 the fee charged was
$998,000. The term of the Management Agreement is three years. The Management
Agreement was approved by a committee of the Board composed of directors
unaffiliated with the Company.
Service Offerings
The Company offers a variety of basic and pay cable programming packages.
Since 1993, the Company has divided its service into three levels: Limited
Basic Service, Expanded Basic Service and the Family Value Package.
The first level of service is referred to as Limited Basic Service. It
consists primarily of off-air broadcast networks, access channels and the home
shopping networks. Expanded Basic Service includes Limited Basic Service plus
certain channels regulated by the Federal Communications Commission ("FCC") as
"Cable Programming Service" or "CPS" tier channels. These include ESPN, USA
Network, MTV, Lifetime and other traditional cable channels.
The Family Value Package was created through the conversion of some of its
traditional cable channels such as CNN and Discovery and the launch of new
channels such as ESPN 2 and fX to form a new level.
Like many cable operators in the United States, over the last four years
the Company has modified its existing programming services, equipment and rates
in an effort to comply with changing FCC regulations.
Monthly service rates include fees for Limited Basic Service, Expanded
Basic Service, the Family Value Package, and premium services. At September
30, 1998, monthly residential subscriber rates were as follows: Limited Basic
Service rates ranged from $8.50 to $13.54; Expanded Basic Service rates ranged
from $9.50 to $14.22; Family Value Package rates ranged from $3.77 to $7.45;
and premium service rates ranged from $4.95 to $12.95 per service. In addition,
the Company earns revenues from pay-per-view programs and advertising fees.
Pay-per-view programs, which usually are either unique sporting events or
recently released movies, are available on many of the Company's cable
television systems. Subscribers are permitted to choose individual movies for a
set fee of $3.95 per movie and individual special events for a set fee ranging
from $5.95 to $44.95 or higher per event. Related charges may include a
nonrecurring installation fee that ranges from $20.00 to $37.00; however, from
time to time the Company has followed the common industry practice of reducing
the installation fee during promotional periods. Commercial subscribers such as
hotels, motels and hospitals are charged a nonrecurring connection fee that
usually covers the cost of installation. Except under the terms of certain
contracts with commercial subscribers and residential apartment and condominium
complexes, subscribers are free to discontinue the service at any time without
penalty, and most terminations occur because a subscriber moves to another home
or another city. For the year ended December 31, 1997, of the total subscriber
fees received by the Company's Systems, Limited Basic Service, Expanded Basic
Service and Family Value Package fees accounted for approximately 77% of total
revenues, premium service fees accounted for approximately 11% of total
revenues, pay-per-view fees were approximately 1% of total revenues,
advertising fees were approximately 2% of total revenues and the remaining 9%
of total revenues came from equipment rentals, installation fees, home
shopping, franchise fees and program guide charges.
Programming and Suppliers
The Company obtains all of its programming through Cable Michigan.
A wide range of national manufacturers are the primary sources of
supplies, equipment and material utilized in the construction and upgrade of
the Company's cable television systems. The Company anticipates that its
programming and construction, rebuild and upgrade costs will be significant in
future periods. The amount of such costs will depend on numerous factors, many
of which are beyond the Company's control.
Advertising Revenues
Advertising accounts for approximately 2% of the Company's revenues.
Advertising sales are managed primarily by Cable Time, an independent turnkey
advertising sales contractor. Cable Time provides sales, billing, collection
and production services. It remits an agreed portion of its collected revenues
to the Company. The Company's net advertising revenue for 1997 was
approximately $0.53 per subscriber per month after compensation to Cable Time.
Customer Service and Billing
The Company places a great deal of importance on customer service. Mercom
administers its own customer service function, primarily out of its office in
Monroe.
Franchises
The Company's cable television systems are constructed and operated under
fixed-term franchises or other types of operating authorities (referred to
collectively herein as "franchises") that are generally non-exclusive and are
granted by local governmental authorities. These franchises typically contain
many conditions, such as time limitations on commencement and completion of
construction, conditions of service, including the number of channels, the
provision of free service to schools and certain other public institutions, and
the maintenance of insurance and indemnity bonds. The provisions of these local
franchises are subject to federal regulation.
The Company holds approximately 78 franchises. These franchises provide for
the payment of fees to the issuing authorities and generally range from 3% to 5%
of revenues. The Communications Policy Act of 1984 (the "1984 Act") prohibits
franchising authorities from imposing annual franchise fees in excess of 5% of
gross revenues and also permits the cable television system operator to seek
renegotiation and modification of franchise requirements if warranted by changed
circumstances.
The durations of the Company's outstanding franchises expire at various
points in time through the year 2015. The Company's ability to provide cable
television service is dependent to a large extent on its ability to obtain and
renew its franchises on acceptable terms. To date, all of the Company's cable
franchises have been renewed or extended, generally at or prior to their stated
expirations and on acceptable terms. During 1997 and the first nine months of
1998, the Company completed negotiations with three and ten communities,
respectively, resulting in franchise renewals on terms which are acceptable to
it. Some of the issues involved in recent renewal negotiations include customer
service standards, access facilities and equipment, cable plant upgrade or
replacement and shorter terms of franchise agreements. 17 of the Company's
franchises are due for renewal within the next three years. No one franchise
accounts for more than 12% of the Company's total revenue.
Competition
Cable television systems face competition from alternative methods of
receiving and distributing single and/or multiple channels of video programming,
including direct-to-the-home satellite programming and off-air television
broadcast signals, and from other sources of news, information and entertainment
such as newspapers, movie theaters, live sporting events, interactive online
computer services and home video products, including videotape cassette
recorders. There is also the potential for competition with the Company's
systems from other operators of cable television systems, including systems
operated by local governmental authorities. Other distribution systems capable
of delivering programing to homes and businesses include direct broadcast
satellite ("DBS") systems, private satellite master antenna television ("SMATV")
systems and wireless terrestrial program distribution services such as
multipoint, multichannel distribution service ("MMDS"). In recent years, there
has been significant national growth in the number of subscribers to DBS
services. Additionally (i) Congress and the FCC have recently proposed
regulations that could make it easier for DBS providers to legally deliver
certain distant and local broadcast signals and (ii) recent changes in federal
law and recent administrative and judicial decisions have removed certain of the
restrictions that have limited entry into the cable television business by
potential competitors such as telephone companies, registered utility holding
companies and their subsidiaries. Such developments will permit local telephone
companies to provide a wide variety of video services in the telephone company's
service area which would be directly competitive with services provided by cable
television systems. The extent to which a cable television system is competitive
depends, in part, upon the cable system's ability to provide, at a reasonable
price to consumers, a greater variety of programming and other services than are
available off-air or through other alternative delivery sources and upon
superior technical performance and customer service. Many of the Company's
present and potential competitors have substantially greater resources than the
Company. The Company cannot predict the extent to which competition will
materialize in its franchise areas from other cable television operators, other
distribution systems for delivering video programming and other broadband
telecommunications services to the home, or from other potential competitors, or
if such competition materializes, the impact such competition will have on the
Company.
Congress has adopted legislation and the FCC has implemented regulations
which provide a more favorable operating environment for new and existing
technologies that provide, or have the potential to provide, substantial
competition to cable systems. These technologies include, among others, DBS
service whereby signals are transmitted by satellite to receiving facilities
located on customer premises. The availability of reasonably priced home
satellite dish earth stations ("HSDs") enables individual households to receive
many of the satellite-delivered program services formerly available only to
cable subscribers. Furthermore, the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Act") contains provisions, which the FCC has
implemented with regulations, to enhance the ability of cable competitors to
purchase and make available to HSD owners certain satellite-delivered cable
programming at competitive costs. The Telecommunications Act of 1996 (the "1996
Act") and FCC regulations implementing that law preempt certain local
restrictions on the use of HSDs and roof-top antennae to receive satellite
programming and over-the-air broadcasting services.
DBS systems use video compression technology to increase the channel
capacity of their systems to provide movies, broadcast programming and other
program services comparable to those of cable systems. Digital satellite service
("DSS") offered by DBS systems currently has certain advantages over cable
systems with respect to programming and digital quality. DBS providers currently
face technical and legal obstacles to providing broadcast signals, although
certain DBS providers are attempting to provide local and distant broadcast
signals in certain major markets, and Congress and the FCC has recently proposed
regulations that would reduce the impact of the existing legal obstacles DBS
providers face with respect to such services. While DBS presents a competitive
threat to cable, the Company has implemented a program to increase its channel
capacity in many of its systems by upgrading its networks. These upgrades will
enable the Company to introduce new premium channels, pay-per-view programming,
interactive computer-based services and may enable these systems to deliver
digital video along with other communications services. These upgrades, when
combined with superior customer service and technical support, will enhance the
Company's ability to compete.
The 1996 Act makes it easier for local exchange telephone companies
("LECs") and others to provide a wide variety of video services which are
competitive with services provided by multi cable systems and to provide channel
video programming services directly to subscribers. Various LECs currently are
providing video services within and outside their telephone service areas
through a variety of distribution methods, including both the deployment of
broadband wire facilities and the use of wireless terrestrial transmission
facilities. Cable systems could be placed at a competitive disadvantage if the
delivery of video services by LECs becomes widespread since LECs may not be
required, under certain circumstances, to obtain local franchises to deliver
such video services or to comply with many of the obligations imposed upon cable
systems under such franchises. Issues of cross-subsidization by LECs of video
and telephony services also pose strategic disadvantages for cable operators
seeking to compete with LECs which provide video services.
Ameritech Corporation ("Ameritech") has obtained cable television
franchises in south eastern Michigan and has overbuilt some cable operators
thereby creating a competitive environment. To date, Ameritech has not applied
for cable franchises where the Company operates. The Company cannot predict the
likelihood of success of video service ventures by LECs or the impact on the
Company of such competitive ventures.
Cable television systems generally operate pursuant to franchises granted
on a non-exclusive basis. The 1992 Act prohibits franchising authorities from
unreasonably denying requests for additional franchises and permits franchising
authorities to operate cable systems. Well-financed businesses from outside the
cable industry (such as the public and municipally owned utilities that own
certain of the poles on which cable is attached) may become competitors for
franchises or providers of competing services. Certain municipal power companies
have been exploring building new video networks to compete with the Company
within the areas where such companies deliver power. See "--Regulation." The
Company has eight franchises within its service areas where other 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. Approximately 17%
of homes passed by the Company's wholly owned system have been overbuilt.
Cable operators face additional competition from SMATV systems that
serve condominiums, apartment and office complexes and private residential
developments. The 1996 Act broadens the definition of SMATV systems not subject
to regulation as a franchised cable television service. A July 1998 FCC
decision allowing SMATVs to interconnect facilities using common carrier
facilities located in public rights of way without obtaining cable television
franchises could spur growth of SMATV systems. SMATV systems offer both
improved reception of local television stations and many of the same satellite-
delivered programming services offered by franchised cable television systems.
SMATV operators often enter into exclusive agreements with building owners or
homeowners' associations, although some states have enacted laws to provide
franchised cable systems access to such private complexes, and the 1984 Act
gives a franchised cable operator the right to use existing compatible easements
within its franchise area under certain circumstances. These laws have been
challenged in the courts with varying results. In addition, some companies are
developing and/or offering packages of telephony, data and video services to
these private residential and commercial developments. The ability of the
Company to compete for subscribers in residential and commercial developments
served by SMATV operators is uncertain.
Other new technologies, including Internet-based services, may become
competitive with services that cable television systems can offer. The 1996 Act
directed the FCC to establish, and the FCC has adopted, regulations and
policies for the issuance of licenses for digital television ("DTV") to
incumbent television broadcast licensees. DTV is expected to deliver high
definition television pictures, multiple digital-quality program streams, as
well as CD-quality audio programming and advanced digital services, such as
data transfer and subscription video. The FCC is currently considering whether
to grant "must-carry" rights to DTV stations. See "Must Carry/Retransmission
Consent" below. The FCC also has authorized television broadcast stations to
transmit textual and graphic information useful both to consumers and
businesses. The FCC also permits commercial and non-commercial FM stations to
use their subcarrier frequencies to provide non-broadcast services including
data transmissions. The FCC established an over-the-air Interactive Video and
Data Service that will permit two-way interaction with commercial and
educational programming along with informational and data services. LECs and
other common carriers also provide facilities for the transmission and
distribution to homes and businesses of interactive computer-based services,
including the Internet, as well as data and other non-video services. The FCC
has conducted spectrum auctions for licenses to provide personal communications
services ("PCS"). PCS will enable license holders, including cable operators,
to provide voice and data services.
Advances in communications technology as well as changes in the
marketplace and the regulatory and legislative environment are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or
future developments might have on the cable television industry or on the
operations of the Company.
Regulation
The 1984 Act, 1992 Act and 1996 Act amended the Communications Act of
1934 (as amended, the "Communications Act") and established a national policy to
guide the development and regulation of cable systems. Principal responsibility
for implementing the policies of the Communications Act relating to cable
television is allocated between the FCC and state agencies or local franchising
authorities. The following is a summary of federal laws and regulations
materially affecting the growth and operation of the cable television industry
and a description of certain state and local laws.
The 1992 Act authorized rate regulation for cable television services and
equipment in communities that are not subject to "effective competition," as
defined by federal law. Except for certain small systems, basic cable service
and equipment are subject to regulation by local franchising authorities that
choose to become certified by the FCC to regulate rates. Such local regulation
occurs with oversight by the FCC, which has prescribed detailed criteria for the
regulation of basic services. The 1992 Act also requires the FCC to resolve
certain complaints about rates for cable programming services tiers ("CPST")
(other than programming offered on a per channel or per program basis, which is
not subject to rate regulation) and to reduce any such rates found to be
unreasonable.
The 1996 Act deregulates rates for CPSTs in March 1999 and immediately for
certain small systems. The 1996 Act also modifies the uniform rate provisions of
the 1992 Act by prohibiting regulation of non-predatory, bulk discount rates
offered to subscribers in commercial residential developments and permits
regulated equipment rates to be computed by aggregating costs of broad
categories of equipment at the franchise, system, regional or company level. The
1996 Act eliminates the right of individual subscribers to file rate complaints
with the FCC concerning CPSTs and permits franchising authorities to file CPST
rate complaints with the FCC only after having received multiple subscriber
complaints within prescribed time frames. The FCC is required to issue a final
order within 90 days after receipt of a CPST rate compliant filed by any
franchising authority.
FCC regulations, which became effective in September 1993, pursuant to the
1992 Act govern rates that may be charged to subscribers for basic cable service
and certain CPSTs (together, the "Regulated Services"). The FCC uses a benchmark
methodology as the principal method of regulating rates for Regulated Services.
Cable operators are also permitted to justify rates using various
cost-of-service methodologies. In 1994, the FCC's benchmark regulations required
operators to implement rate reduction for Regulated Services up to 17% of the
rates for such services in effect on September 30, 1992, adjusted for inflation
and changes in programming costs, equipment costs and certain operating costs.
The FCC has also adopted comprehensive and restrictive regulations allowing
operators to modify their regulated rates on a quarterly or annual basis using
various methodologies that account for changes in number of regulated channels,
inflation and increases in certain external costs, such as franchise and other
governmental fees, copyright and retransmission consent fees, taxes, programming
costs and the cost of franchise-related obligations. In 1995, for qualified
small systems, the FCC adopted a generally less restrictive method to compute
allowed rates and to adjust those rates. The Company cannot predict whether the
FCC will modify these "going forward" regulations in the future.
Franchising authorities are empowered to regulate the rates charged for
additional outlets and for the installation, lease and sale of equipment used
by subscribers to receive the basic cable service tier, such as converter boxes
and remote control units. The FCC's rules require franchising authorities to
regulate these rates on the basis of actual cost plus a reasonable profit, as
defined by the FCC. Cable operators required to reduce rates may also be
required to refund overcharges with interest.
Under the FCC's standard cost of service analysis, a cable operator can
demonstrate that existing rates for Regulated Services are reasonable using the
FCC's cost-of-service rate regulations which require, among other things, the
exclusion from the rate base of 34% of system acquisition costs related to
intangible and tangible assets used to provide Regulated Services. The FCC's
cost-of-service regulations contain a rebuttable presumption of an
industry-wide 11.25% after tax rate of return on an operator's allowable rate
base, but in 1996 the FCC initiated a further rule making in which it proposed
to use an operator's actual debt cost and capital structure to determine an
operator's cost of capital or rate of return.
As of November 1, 1998, there was one CPST rate complaint pending in one
community served by the Company. In addition, in many of the communities where
the Company provides cable service, local franchising authorities have become
certified to regulate rates for basic service.
The FCC has issued decisions approving the Company's rates through January
31, 1998.
"Anti-Buy Through" Provisions
The 1992 Act requires cable systems to permit subscribers to purchase
video programming offered by the operator on a per channel or a per program
basis without the necessity of subscribing to any tier of service, other than
the basic cable service tier, unless technological limitations prevent the
system from doing so. There is a statutory exemption for cable systems that do
not have the technological capability to offer programming in the manner
required by the statute. This exemption is available until a system obtains
such capability, but not later than December 2002. The FCC may waive such time
periods. The Company expects that its systems will be in compliance with this
requirement by the December 2002 deadline.
Must Carry/Retransmission Consent
The 1992 Act contains broadcast signal carriage requirements that allow
local commercial television broadcast stations to elect once every three years
to require a cable system to carry the station ("must-carry"), subject to
certain exceptions, or to withhold consent and negotiate the terms of carriage
("retransmission consent"). A cable system generally is required to devote up
to one-third of its activated channel capacity for the carriage of local
commercial television stations whether pursuant to the mandatory carriage or
retransmission consent requirements of the 1992 Act. Local non-commercial
television stations are also given mandatory carriage rights; however, such
stations are not given the option to negotiate retransmission consent for the
carriage of their signals by cable systems. Additionally, cable systems are
required to obtain retransmission consent for all "distant" commercial
television stations (except for certain commercial satellite-delivered
independent "superstations"), commercial radio stations and low-power
television stations carried by such systems. In March 1997, the U.S. Supreme
Court affirmed a three-judge district court decision upholding the
constitutional validity of the 1992 Act's mandatory signal carriage
requirements.
The FCC recently issued rules establishing standards for DTV. Among other
provisions, the FCC's rules require television stations to simulcast their NTSC
and DTV signals for a period of years. The FCC is currently considering in a
rule-making proceeding whether to impose must-carry requirements for DTV
stations. The Company cannot predict the ultimate outcome of such a rule making
or the impact of new carriage requirements on the Company or its business.
Access Channels
The Communications Act permits franchising authorities to require cable
operators to set aside certain channels for public, educational and
governmental ("PEG") access programming. The 1984 Act also requires a cable
system with 36 or more channels to designate a portion of its channel capacity
for commercial leased access by third parties to provide programming that may
compete with services offered by the cable operator. The FCC has adopted rules
regulating: (i) the maximum reasonable rate a cable operator may charge for
commercial use of the designated channel capacity; (ii) the terms and
conditions for commercial use of such channels; and (iii) the procedures for
the expedited resolution of disputes concerning rates or commercial use of the
designated channel capacity. The U.S. Supreme Court recently held parts of the
1992 Act regulating "indecent" programming on PEG access channels to be
unconstitutional, but upheld the statutory right of cable operators to prohibit
or limit the provision of "indecent" programming on commercial leased access
channels.
Franchise Procedures
Cable Television companies operate under franchises granted by state and
local authorities which are subject to renewal and renegotiation from time to
time. The Company's business is dependent upon the retention and renewal of its
local franchises. A franchise is generally granted for a fixed term ranging from
five to 15 years but in many cases is terminable if the franchisee fails to
comply with any material provisions thereof.
The 1984 Act affirms the right of franchising authorities (state or local,
depending on the practice in individual states) to award one or more franchises
within their jurisdictions and prohibits non-grandfathered cable systems from
operating without a franchise in such jurisdictions. The 1992 Act encourages
competition with existing cable systems by (i) allowing municipalities to
operate their own cable systems without franchises; (ii) preventing franchising
authorities from granting exclusive franchises or from unreasonably refusing to
award additional franchises covering an existing cable system's service area;
and (iii) prohibiting (with limited exceptions) the common ownership of cable
systems and co-located MMDS or SMATV systems. In January, 1995, the FCC relaxed
its restrictions on ownership of SMATV systems to permit a cable operator to
acquire SMATV systems in the operator's existing franchise area so long as the
programming services provided through the SMATV system are offered according to
the terms and conditions of the cable operator's local franchise agreement. The
1996 Act provides that the cable/SMATV and cable/MMDS cross-ownership rules do
not apply in any franchise area where the operator faces "effective
competition" as defined by federal law.
The Communications Act also provides that in granting or renewing
franchises, local authorities may establish requirements for cable-related
facilities and equipment, but not for video programming or information services
other than in broad categories. In September 1998, the Policy and Rules Division
of the FCC's Cable Services Bureau issued a discussion paper analyzing the
regulatory classification of Internet and other information services. The FCC
identified three likely classifications: (1) as cable services; (2) as
telecommunications services; and (3) as information services that are currently
unregulated. The ultimate classification could have significant impact on any
regulation of these services, the ability of third parties to use the cable
plant and the authority to provide these services under existing franchises.
Until the FCC formally decides these classification issues, it is not possible
to gauge the impact, if any, such classifications would have on the Company or
the Company's business. The Communications Act limits the payment of franchise
fees to 5% of revenues derived from cable operations and permits the cable
operator to obtain modification of franchise requirements by the franchise
authority or judicial action if warranted by changed circumstances. The
Company's franchises typically provide for periodic payment of fees to
franchising authorities of up to 5% of "revenues" (as defined by each franchise
agreement), which fees may be passed on to subscribers. The 1996 Act generally
prohibits franchising authorities from (i) imposing requirements in the cable
franchising process that require, prohibit or restrict the provision of
telecommunications services by an operator, (ii) imposing franchise fees on
revenues derived by the operator from providing telecommunications services over
its cable system, or (iii) restricting an operator's use of any type of
subscriber equipment or transmission technology.
The 1984 Act provides for a franchise renewal process which, if properly
invoked, contains procedural and substantive provisions designed to protect
cable operators from unreasonable denials of franchise renewals. No assurance
can be given that the Company will be able to retain or renew franchises or that
the terms of any such renewals will be on terms as favorable to the Company as
the existing terms. The non-renewal or termination of franchises relating to a
significant portion of the Company's subscribers could have a material adverse
effect on the Company's results of operations. Historically, franchises have
been renewed for cable operators that have provided satisfactory services and
have complied with the terms of their franchises. The Company believes that it
has generally met the terms of its franchises and has provided quality levels of
service. As such, the Company anticipates that its future franchise renewal
prospects generally will be favorable.
Similarly, if a franchising authority's consent is required for the
purchase or sale of a cable system or franchise, the franchising authority may
attempt to impose more burdensome or onerous franchise requirements in
connection with a request for such consent. The Company's future acquisitions
will be dependent on its ability to obtain franchise transfer or change of
control approvals in a timely manner. Subject to limitations imposed by federal
law, each city has some flexibility in determining the terms of a franchise
(including franchise fees), and to some extent can impose conditions on such
franchise, such as build-out and upgrade requirements.
Inside Wiring Instructions
The 1992 Cable Act directed the FCC to prescribe regulations governing
the disposition of inside wiring after a customer terminates service. In a
series of rulemakings and orders, with the most recent order issued in October
1997, the FCC developed regulations that limit a cable operator's right to
control its inside wiring after a subscriber terminates service or after a
multiple dwelling unit ("MDU") owner terminates the cable operator's rights to
access the MDU.
After a subscriber terminates service or an MDU owner terminates access
rights, the regulations generally require the cable operator to offer its inside
wiring for sale to the subscriber or to the MDU owner at replacement cost or a
negotiated price. If the cable operator does not sell the inside wiring within a
specified period after termination of service or access rights, then the cable
operator must remove the wiring. If the cable operator neither sells nor removes
its wiring, the wiring is deemed abandoned. A competing provider can then use
the inside wiring to provide service to the individual subscriber or to the MDU.
For the Company and the cable industry generally, these regulations increase the
risk for cable operators that a competing provider can gain access to existing
inside wiring after termination of service by a subscriber or termination of
access rights by a MDU owner.
The FCC has also issued a Further Notice of Proposed Rulemaking on
other inside wiring issues including possible restrictions on exclusive MDU
contracts and the applicability of the inside wiring rules to all video
providers, not just cable operators. The Company cannot predict the ultimate
outcome of this rulemaking or its impact on the Company or the Company's
business.
Ownership Limitations
Pursuant to the 1992 Act, the FCC adopted rules prescribing national
subscriber limits and limits on the number of channels that can be occupied on a
cable system by a video programmer in which the operator has an attributable
interest. The effectiveness of these FCC horizontal ownership limits has been
stayed because a federal district court found the statutory limitation to be
unconstitutional. An appeal of that decision has been consolidated with appeals
challenging the FCC's regulatory ownership restrictions and is pending. On June
26, 1998 the FCC released an Order on Reconsideration (the "Order") of its
horizontal ownership rules, although it did not lift its stay of those rules. In
that Order the FCC denied petitions requesting that it lower its horizontal
ownership limits. The 1996 Act eliminated the statutory prohibition on the
common ownership, operation or control of a cable system and a television
broadcast station in the same service area and directed the FCC to review its
broadcast/cable ownership restrictions to determine if they are necessary in the
public interest. Pursuant to the mandate of the 1996 Act, the FCC eliminated its
regulatory restriction on cross-ownership of cable systems and national
broadcasting networks. In addition, pursuant to the 1996 Act, the FCC recently
released a Notice of Inquiry seeking comment on all of the broadcast ownership
rules not already under review in other proceedings. This review includes a
television/cable television cross ownership rule. In a recently released Notice
of Proposed Rulemaking, the FCC is requesting comment on whether to change the
definition of ownership that constitutes a cognizable interest in a cable
system. The result of this proceeding could affect all ownership prohibitions.
Competition with LECs
The 1996 Act made far-reaching changes in the regulation of LECs that
provide cable services. The 1996 Act eliminates the requirement that LECs obtain
FCC approval under Section 214 of the Communications Act before providing video
services in their telephone service areas and removes the statutory telephone
company/cable television cross-ownership prohibition, thereby allowing LECs to
offer video services in their telephone service areas. LECs may provide service
as traditional, franchised cable operators or they may opt to provide their
programming over unfranchised "open video systems," subject to certain
conditions, including, but not limited to, making available up to two-thirds of
their channel capacity for use by unaffiliated program distributors. The 1996
Act prohibits a LEC from acquiring an existing cable system in its telephone
service area except in limited circumstances. The 1996 Act removes barriers to
entry into the local telephone exchange market by preempting state and local
laws that restrict competition and by requiring all LECs to provide
nondiscriminatory access and interconnection to potential competitors, such as
cable operators, wireless telecommunications providers and long distance
companies.
Regulations promulgated by the FCC under the 1996 Act require LECs to open
their telephone networks to competition by providing competitors
interconnection, access to unbundled network elements and retail services at
wholesale rates. As a result of these changes, companies are now able to
interconnect with the incumbent LECs in order to provide local exchange
services. Numerous parties appealed certain aspects of these regulations, and
the appeals were consolidated in the United States Court of Appeals for the
Eighth Circuit. On July 18, 1997, the Eighth Circuit found constitutional
challenges to certain practices implementing cost provisions of the 1996 Act
that were ordered by certain state public utility companies ("PUCs") to be
premature; vacated significant portions of the FCC's nationwide pricing rules;
and overturned FCC rules that required that LECs combine unbundled elements, on
request, for the benefit of a competitive carrier. On October 14, 1997, the
Eighth Circuit issued a decision vacating additional FCC rules that will likely
have the effect of increasing the cost of obtaining the use of combinations of
an incumbent LEC's unbundled network elements. On January 26, 1998, the Supreme
Court of the United States granted a writ of certiorari under which it will
review the July 18 Eighth Circuit decision; the Supreme Court heard arguments on
this case in the fall of 1998. Although state PUCs may still choose to implement
at their discretion some of the FCC rules that were overturned by the Eighth
Circuit, the Eighth Circuit decisions create uncertainty about the rules
governing pricing and terms and conditions of interconnection agreements, and
could make negotiating and enforcing such agreements more difficult and
protracted and may require renegotiation of existing agreements.
Pole Attachment
The Communications Act requires the FCC to regulate the rates, terms and
conditions imposed by public utilities for cable systems' use of utility pole
and conduit space unless state authorities certify to the FCC that they
adequately regulate pole attachment rates. In the absence of state regulation,
the FCC administers pole attachment rates on a formula basis. In some cases,
utility companies have increased pole attachment fees for cable systems that
have installed fiber optic cables and that are using such cables for the
distribution of non-video services. The FCC concluded that, in the absence of
state regulation, it has jurisdiction to determine whether utility companies
have justified their demand for additional rental fees and that the
Communications Act does not permit disparate rates based on the type of service
provided over the equipment attached to the utility's pole. The 1996 Act and the
FCC's implementing regulations immediately permit certain providers of
telecommunications services to rely upon the protections of the current law and
require that utilities provide cable systems and telecommunications carriers
with nondiscriminatory access to any pole, conduit or right-of-way controlled by
the utility. As required by the 1996 Act, the FCC has established new
regulations to govern the charges for pole attachments used by companies
providing telecommunications services, including cable operators. Although the
FCC has issued its regulations, they are subject to changes on reconsideration
(or appeal), and some issues that may affect the ultimate rates for
telecommunications attachments to utility poles remain outstanding. These new
pole attachment rate regulations will become effective five years after
enactment of the 1996 Act, and any increase in attachment rates resulting from
the FCC's new regulations will be phased in equal annual increments over a
period of five years beginning in February 2001.
Other Statutory Provisions
The 1992 Act, the 1996 Act and FCC regulations preclude any satellite
video programmer affiliated with a cable company, or with a common carrier
providing video programming directly to its subscribers, from favoring an
affiliated company over competitors and require such programmers to sell their
programming to other multichannel video distributors. These provisions limit
the ability of program suppliers affiliated with cable companies or with common
carriers providing satellite delivered video programming directly to their
subscribers to offer exclusive programming arrangements to their affiliates.
The 1998 Act requires operators to block fully both the video and audio portion
of sexually explicit or indecent programming on channels that are primarily
dedicated to sexually oriented programming or alternatively to carry such
programming only at "safe harbor" time, periods currently defined by the FCC as
the hours between 10 p.m. and 6 a.m. Several adult-oriented cable programmers
have challenged the constitutionality of this statutory provision, but the U.S.
Supreme Court recently refused to overturn a lower court's denial of a
preliminary injunction motion seeking to enjoin the enforcement of this law.
The FCC's regulations implementing this statutory provision are now in effect.
The 1996 Act also contains provisions regulating the content of video
programming and computer services. Specifically, the new law prohibits the use
of computer services to transmit "indecent" material to minors. The U.S.
Supreme Court has ruled that the provisions relating to the regulation of
indecent material are unconstitutional. In accordance with the 1996 Act, the
television industry recently adopted a voluntary ratings system for violent and
indecent video programming. The 1996 Act also requires all new television sets
to contain a so-called "V-chip" capable of blocking all programs with a given
rating. The Communications Act also includes provisions, among others,
concerning horizontal and vertical ownership of cable systems, customer
service, subscriber privacy, marketing practices, equal employment opportunity,
obscene or indecent programming, regulation of technical standards and
equipment compatibility.
The 1996 Act modifies the existing statutory provisions governing cable
system technical standards, equipment compatibility, subscriber notice
requirements and program access, permits certain operators to include losses
incurred prior to September 1992 in setting regulated rates and repeals the
three-year anti-trafficking prohibition adopted in the 1992 Act.
Other FCC Regulations
In addition to the FCC regulations noted above, there are other FCC
regulations covering such areas as signal leakage equal employment opportunity,
syndicated program exclusivity, network program non-duplication, registration of
cable systems, maintenance of various records and public inspection files,
microwave frequency usage, lockbox availability, sponsorship identification,
antenna structure notification, tower marking and lighting, carriage of local
sports broadcast programming, application of rules governing political
broadcasts, limitations on advertising contained in non-broadcast children's
programming, consumer protection and customer service, ownership of internal
wiring, indecent programming, programmer access to cable systems, programming
agreements, technical standards, consumer electronics equipment compatibility
and closed captioning. The FCC has the authority to enforce its regulations
through the imposition of substantial fines, the issuance of cease and desist
orders and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses needed to operate certain transmission facilities
often used in connection with cable operations.
Other bills and administrative proposals pertaining to cable television
have previously been introduced in Congress or considered by other governmental
bodies over the past several years. It is probable that there will be
legislative proposals in the future by Congress and other governmental bodies
relating to the regulation of communications services.
Copyright
Cable television systems are subject to federal compulsory copyright
licensing covering the retransmission of television and radio broadcast signals.
In exchange for filing certain reports and contributing a percentage of their
basic tier gross revenues to a federal copyright royalty pool, cable operators
obtain, by operation of law, blanket licenses to retransmit thecannot be
predicted at this time. The possible simplification, modification or elimination
of the compulsory copyright license is the subject of continuing legislative
review. The elimination or substantial modification of the cable compulsory
license could adversely affect the Company's ability to obtain suitable
programming and could substantially increase the cost of programming available
for distribution to the Company's subscribers. The Company cannot predict the
outcome of this legislative activity.
Cable operators distribute programming and advertising that use music
controlled by three major music performing rights organizations, American
Society of Composers, Authors and Publishers ("ASCAP") and Broadcast Music, Inc.
("BMI") and SESAC, Inc. ("SESAC"). In October 1989, the special rate court of
the U.S. District Court for the Southern District of New York imposed interim
rates on the cable industry's use of ASCAP-controlled music. The same federal
district court recently established a special rate court for BMI. BMI and cable
industry representatives recently concluded negotiations for a standard
licensing agreement covering the performance of BMI music contained in
advertising and other information inserted by operators into cable programming
and on certain local access and origination channels carried on cable systems.
ASCAP and cable industry representatives have met to discuss the development of
a standard licensing agreement covering ASCAP-controlled music in local
origination and access channels and pay-per-view programming. Although the
Company cannot predict the ultimate outcome of these industry negotiations or
the amount of any license fees it may be required to pay for past and future use
of ASCAP-controlled music, it does not believe such license fees will be
significant to the Company's financial position, results of operations or
liquidity. SESAC and cable industry representatives have agreed on an interim
licensing plan pending adoption of a standard licensing agreement.
State and Local Regulation
Because a cable television system uses local streets and rights-of-way,
cable systems are subject to state and local regulation, typically imposed
through the franchising process. Cable television systems generally are
operated pursuant to non-exclusive franchises, permits or licenses granted by a
municipality or other state or local government entity. Franchises generally
are granted for fixed terms and in many cases are terminable if the franchisee
fails to comply with material provisions. The terms and conditions of
franchises vary materially from jurisdiction to jurisdiction. Each franchise
generally contains provisions governing cable service rates, franchise fees,
franchise term, system construction and maintenance obligations, system channel
capacity, design and technical performance, customer service standards,
franchise renewal, sale or transfer of the franchise, territory of the
franchisee, indemnification of the franchising authority, use and occupancy of
public streets and types of cable services provided. A number of states subject
cable television systems to the jurisdiction of centralized state governmental
agencies, some of which impose regulation of a character similar to that of a
public utility. Attempts in other states to regulate cable television systems
are continuing and can be expected to increase. At this time, the state of
Michigan does not regulate rates on behalf of its municipalities. State and
local franchising jurisdiction is limited, however, and must be exercised
consistently with federal law.
The 1992 Act immunizes franchising authorities from monetary damage awards
rising from regulation of cable systems or decisions made on franchise grants,
renewals, transfers and amendments.
The foregoing does not purport to describe all present and proposed
federal, state, and local regulations and legislation affecting the cable
industry. Other existing federal regulations, copyright licensing, and, in many
jurisdictions, state and local franchise requirements, are currently the subject
of judicial proceedings, legislative hearings, legislative initiatives
(including active legislation) and administrative proposals which could change,
in varying degrees, the manner in which cable television systems operate.
Neither the outcome of these proceedings nor their impact upon the cable
television industry or the Company can be predicted at this time.
Employees
As of September 30, 1998, the Company had a total of approximately 54
full-time employees. The Company believes that its relationships with its
employees are good.
Property
The principal assets of the Company include headends, distribution systems
and subscriber connection equipment. The Company owns five 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 1,363 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. The
Company's management believes that substantially all of its physical assets are
in good condition.
The Company owns one small parcel of real property used as a headend site,
and it owns most of the buildings which contain headend equipment for the
Systems. The remainder of the Company's facilities are leased.
Legal Proceedings
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.
THE SPECIAL MEETING
Matters to Be Considered
The primary purpose of the Special Meeting is to vote upon a proposal to
approve and adopt the Merger Agreement among the Company, Buyer and MergerSub.
If the Merger Agreement is approved by the shareholders of the Company and the
other conditions to the Merger are satisfied or waived, MergerSub or its
assignee will merge with and into the Company and all Shares currently held by
shareholders (other than Shares held by the Company as treasury stock, Shares
owned by Buyer or any subsidiary of Buyer, and Shares as to which appraisal
rights have been validly exercised) will be converted into the right to receive
$12.00 in cash, without interest. See "Certain Provisions of the Merger
Agreement--The Merger; Merger Consideration." At the Special Meeting, the
shareholders will also be asked to transact such other business as properly may
come before the meeting. The Board is not presently aware of any such other
business.
Representatives of the independent accountants of the Company are not
expected to be present at the Special Meeting.
A copy of the Merger Agreement is attached to this Proxy Statement as
Annex A. See also "The Merger" and "Certain Provisions of the Merger
Agreement." The Special Committee and the Board have, by unanimous vote,
approved the Merger Agreement and recommend a vote FOR adoption and approval of
the Merger Agreement.
Required Votes
The affirmative vote of at least a majority of the outstanding of Shares
entitled to vote thereon is required to approve and adopt the Merger Agreement
and the transactions contemplated thereby. The transaction is not structured so
that the approval of at least a majority of unaffiliated security holders is
required.
Cable Michigan beneficially owns a sufficient number of shares of Company
Common Stock to cause the Merger Agreement to be adopted without the vote of
any other Company stockholders.
As of the Record Date, directors and executive officers of the Company and
their affiliates were beneficial owners of an aggregate of 5,000 Shares (less
than 1%) of the Company Common Stock, excluding the Shares owned by Cable
Michigan. The directors and executive officers of the Company have indicated
that they intend to vote their shares of Company Common Stock in favor of the
adoption of the Merger Agreement. See "Security Ownership of Certain Beneficial
Owners and Management."
Cable Michigan has agreed to vote its approximately 62% of the Shares in
favor of the adoption of the Merger Agreement. Accordingly, the approval and
adoption of the Merger Agreement by the Company's stockholders is expected to
occur irrespective of whether or the manner in which the Company's other
stockholders vote their Shares.
Voting and Revocation of Proxies
Shares that are entitled to vote and are represented by a Proxy properly
signed and received at or prior to the Special Meeting, unless subsequently
properly revoked, will be voted in accordance with the instructions indicated
thereon. If a Proxy is signed and returned without indicating any voting
instructions, Shares represented by such Proxy will be voted FOR the proposal
to approve and adopt the Merger Agreement. The Board is not currently aware of
any business to be acted upon at the Special Meeting other than as described
herein. If, however, other matters are properly brought before the Special
Meeting or any adjournments or postponements thereof, the persons appointed as
proxies will have the discretion to vote or act thereon in accordance with
their best judgment, unless authority to do so is withheld in the Proxy. The
persons appointed as proxies may not exercise their discretionary voting
authority to vote any such Proxy in favor of any adjournments or postponements
of the Special Meeting if instruction is given to vote against the approval and
adoption of the Merger Agreement.
Any Proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the Shares represented by such Proxy are voted at
the Special Meeting by (i) by attending and voting in person at the Special
Meeting, (ii) by giving notice of revocation of the Proxy at the Special
Meeting, or (iii) delivering to the Secretary of the Company (a) a written
notice of revocation or (b) a duly executed Proxy relating to the same Shares
and matters to be considered at the Special Meeting, bearing a date later than
the Proxy previously executed. Attendance at the Special Meeting will not in
and of itself constitute a revocation of a Proxy. All written notices of
revocation and other communications with respect to revocation of proxies
should be addressed as follows: Mercom, Inc., 800 Third Avenue, Suite 3100,
New York, NY 10022 Attention: Corporate Secretary, and must be received
before the taking of the votes at the Special Meeting.
Record Date; Stock Entitled to Vote; Quorum
Only holders of Shares at the Record Date will be entitled to receive
notice of and to vote at the Special Meeting. At the close of business on the
Record Date, there were outstanding and entitled to vote [4,787,060] shares of
Company Common Stock. The presence, in person or by proxy, at the Special
Meeting of the holders of at least a majority of outstanding Shares is
necessary to constitute a quorum for the transaction of business. Abstentions
will be counted as present for the purposes of determining whether a quorum is
present but will not be counted as votes cast in favor of approval and adoption
of the Merger Agreement. Because the vote on the Merger Agreement requires the
approval of the majority of the votes entitled to be cast by the stockholders
of the outstanding shares of Company Common Stock, abstentions will have the
same effect as a negative vote on these proposals. Proxies relating to "street
name" Shares that are voted by brokers will be counted as Shares present for
purposes of determining the presence of a quorum on all matters, but will not
be treated as Shares having voted at the Special Meeting as to any proposal as
to which authority to vote is withheld by the broker.
Appraisal Rights
Each stockholder of Company Common Stock has a right to dissent from the
Merger, and, if the Merger is consummated, to receive "fair value" for his or
her shares in cash by complying with the provisions of the DGCL, including
Section 262 of the DGCL. The dissenting stockholder must deliver to the
Company, prior to the vote being taken on the Merger Agreement at the Special
Meeting, written notice of his or her intent to demand payment for his or her
Shares if the Merger is effected and must not vote in favor of approval and
adoption of the Merger Agreement. The full text of Section 262 of the DGCL is
attached as Annex D hereto. See "Dissenting Shareholders' Rights" for a further
discussion of such rights and the legal consequences of voting shares of
Company Common Stock in favor of the approval and adoption of the Merger
Agreement.
Solicitation of Proxies
The cost of solicitation of proxies will be borne by the Company. In
addition to the use of the mails, proxies may be solicited by telephone by
officers and directors and a small number of regular employees of the Company
who will not be specially compensated for such services. The Company may also
request banks and brokers to solicit proxies from their customers, where
appropriate, and will reimburse such persons for reasonable expenses incurred
in that regard.
THE MERGER
Merger Consideration
If the Merger is consummated, (i) each Share held by the Company as
treasury stock or owned by Buyer or any Subsidiary of Buyer immediately prior
to the Effective Time shall be canceled, and no payment will be made with
respect thereto; (ii) each share of common stock of MergerSub outstanding
immediately prior to the Effective Time will be converted into and become one
share of common stock of the Surviving Corporation with the same rights, powers
and privileges as the shares so converted and will constitute the only
outstanding shares of capital stock of the Surviving Corporation; and (iii)
each other Share outstanding immediately prior to the Effective Time (except
Shares as to which appraisal rights have been validly exercised) will be
converted into the right to receive $12.00 per Share in cash, without interest
(the "Merger Consideration").
Effective Time of the Merger
The Merger Agreement provides that as soon as practicable after
satisfaction or, to the extent permitted, waiver of all conditions to the
Merger, the Company and MergerSub will file a certificate of merger with the
Secretary of State of the State of Delaware and make all other filings or
recordings required by Delaware Law in connection with the Merger. The Merger
shall become effective at such time as the certificate of merger is duly filed
with the Secretary of State of the State of Delaware or at such later time as
is specified in the certificate of merger by agreement of Buyer and the Company
(the "Effective Time"). Subject to certain limitations, the Merger Agreement
may be terminated by either party if, among other reasons, the Merger has not
been consummated by March 31, 1999. See "Certain Provisions of the Merger
Agreement--Conditions to the Consummation of the Merger" and "--Termination."
Conduct of Business Pending the Merger
Pursuant to the Merger Agreement, the Company has agreed to carry on its
business and that of its subsidiaries prior to the Effective Time in the
ordinary course consistent with past practice in all material respects. See
"Certain Provisions of the Merger Agreement--Certain Pre-Closing Covenants."
Conditions to the Consummation of the Merger
The obligations of the Company and MergerSub to consummate the Merger are
subject to various conditions, including, without limitation, 120 calendar days
elapsing after the date the Buyer Merger was consummated (November 6, 1998),
obtaining requisite shareholder approval and the absence of any injunction or
other legal restraint or prohibition preventing the consummation of the Merger.
See "Certain Provisions of the Merger Agreement-Conditions to the Consummation
of the Merger."
Certain Federal Income Tax Consequences
The following is a summary of certain federal income tax consequences of
the Merger to holders of Company Common Stock. The discussion is for general
information only and does not purport to consider all aspects of federal income
taxation that might be relevant to holders of Company Common Stock. The
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), existing regulations promulgated thereunder and
administrative and judicial interpretations thereof, all of which are subject
to change (possibly with retroactive effect). The discussion applies only to
shareholders who hold shares of Company Common Stock as capital assets within
the meaning of Section 1221 of the Code, and may not apply to Company Common
Stock received pursuant to compensation arrangements, Company Common Stock held
as part of a "straddle," "hedge," "conversion transaction," "synthetic
security," or other integrated investment, or to certain types of shareholders
(such as financial institutions, insurance companies, tax-exempt organizations
and broker-dealers) who may be subject to special rules. This discussion does
not address the federal income tax consequences to a shareholder who, for
federal income tax purposes, is a non-resident alien individual, a foreign
corporation, a foreign partnership or a foreign estate or trust (as defined in
the Code), nor does it consider the effect of any foreign, state, local or
other tax laws.
BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH HOLDER OF COMPANY COMMON
STOCK SHOULD CONSULT HIS OWN TAX ADVISOR TO DETERMINE THE TAX EFFECTS TO SUCH
SHAREHOLDER OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF FOREIGN,
STATE, LOCAL AND OTHER TAX LAWS.
The receipt of cash for Company Common Stock pursuant to the Merger will
be a taxable transaction for federal income tax purposes, and may also be a
taxable transaction under applicable foreign, state, local or other tax laws.
In general, for federal income tax purposes, a shareholder will recognize
capital gain or loss equal to the difference between the shareholder's adjusted
tax basis in his Company Common Stock and the amount of cash received therefor.
Gain or loss must be determined separately for each block of Company Common
Stock (i.e., Shares acquired at the same cost in a single transaction) held by
the shareholder.
Under recently enacted amendments to the Code, net capital gain (i.e.,
generally capital gain in excess of capital loss) recognized by an individual
investor upon a disposition of Company Common Stock that has been held for more
than 12 months will generally be subject to a maximum tax rate of 20% or, in
the case of Company Common Stock that has been held for 12 months or less, will
be subject to tax at ordinary income tax rates. There are also limitations on a
shareholder's deductibility of capital losses.
Payments in connection with the Merger may be subject to "backup
withholding" at a rate of 31%, unless a shareholder (i) is a corporation or
comes within certain exempt categories and, when required, demonstrates this
fact or (ii) provides a correct taxpayer identification number ("TIN") (which,
for an individual shareholder, would be the shareholder's social security
number) to the Transfer Agent (as defined below), and otherwise complies with
applicable requirements of the backup withholding rules. A shareholder who does
not provide a correct TIN may be subject to penalties imposed by the Internal
Revenue Service (the "IRS"). Any amount paid as backup withholding does not
constitute an additional tax and will be creditable against the shareholder's
federal income tax liability, provided that the required information is
furnished to the IRS. Each shareholder should consult with his own tax advisor
as to his qualification or exemption from backup withholding and the procedure
for obtaining such exemption. Shareholders may prevent backup withholding by
completing a Substitute Form W-9 and submitting it to the Transfer Agent.
Accounting Treatment
The Buyer will account for the Merger as "purchase" in accordance with
generally accepted accounting principles. Therefore, the aggregate
consideration paid by Buyer in connection with the Merger will be allocated to
the Company's assets and liabilities based upon their fair values, with any
excess being treated as goodwill. The assets and liabilities and results of
operations of the Company are currently consolidated with the assets and
liabilities and results of operations of Buyer for purposes of Buyer's
financial reporting and will continue to be so consolidated subsequent to the
consummation of the Merger.
Interests of Certain Persons in the Merger
Shareholders should be aware that certain directors and executive officers
of the Company may have had at the time the Merger Agreement was negotiated and
executed, and currently may have, interests, described herein, that are
different from, or in addition to, the interests of holders of Shares
generally. These interests may present them with potential conflicts of
interest in connection with the Merger. The Special Committee and the Board
were and are aware of the interests and conflicts described below and elsewhere
in this Proxy Statement and considered them in addition to the other matters
described under "Special Factors -- Recommendation of the Special Committee and
the Board of Directors" and "--Reasons for the Merger; Fairness of Merger." For
information on the role of the Special Committee, see also "Special Factors--
Background of the Merger."
The members of the Special Committee were compensated as follows: The
chairman was paid $1,000 for each meeting attended. The other two members of
the Special Committee were paid $500 for each meeting attended.
Pursuant to the Merger Agreement, the Company has agreed for six years
after the Effective Time to indemnify all present directors and officers of the
Company and, subject to certain limitations, use its best efforts to maintain
for six years a directors' and officers' insurance and indemnification policy
and a fiduciary liability policy on terms with respect to coverage and amount
not less favorable in any material respect, than any such policies in effect on
September 10, 1998. See "Certain Provisions of the Merger Agreement --
Indemnification and Insurance."
As of the Record Date, the executive officers and directors of the Company
beneficially owned an aggregate of 5,000 Shares (excluding Shares held by Cable
Michigan). Based on the Merger Consideration of $12.00 per Share, the aggregate
consideration which would be received in the Merger by the executive officers
and directors of the Company in respect of such Shares would be $60,000. See
"Security Ownership of Certain Beneficial Owners and Management."
Certain executive officers and directors of the Company are executive
officers and/or directors of one or more of Buyer and its affiliates. See Annex
D hereto.
Merger Financing
The Merger Financing is estimated to be approximately $22 million. Buyer
expects to obtain the Merger Financing from borrowings under the Avalon Credit
Facility and cash on hand.
On November 6, 1998, Buyer and certain affiliates entered into agreements
providing for the Avalon Credit Facility. The Avalon Credit Facility is a
secured credit facility of Buyer and two other subsidiaries of Avalon (Avalon
Cable of New England LLC, a Delaware limited liability company, and Avalon Cable
Finance, Inc., a Delaware corporation) (collectively, the "Borrowers"). The
Avalon Credit Facility was provided to the Borrowers by the Avalon Senior
Lenders for which LCPI acts as administrative agent (the "Administrative
Agent"). The Avalon Credit Facility provides for (i) term loan borrowings (the
"Tranche A Term Loan") under the Tranche A term loan facility (the "Tranche A
Term Loan Facility"), (ii) term loan borrowings (the "Tranche B Term Loan")
under the Tranche B term loan facility (the "Tranche B Loan Facility" and
together with the Tranche A Term Loan Facility, the "Senior Term Loan
Facilities"), and (iii) revolving credit borrowings of up to $30,000,000 (the
"Revolving Credit Loans") under a revolving credit facility (the "Revolving
Credit Facility"). In addition, prior to November 6, 2001, subject to the
approval of the Administrative Agent and, in certain instances, to the approval
of the Required Lenders (as defined in the Avalon Credit Facility), the
Borrowers may request that incremental term loan facilities of up to $75,000,000
be established in accordance with the terms of the Avalon Credit Facility. On
_____________, ____ there were $____ million of Tranche A Loans outstanding,
$________ million of Tranche B Loans outstanding, $____ million of availability
under the Tranche A Term Loan Facility and $____ million of availability under
the Revolving Credit Facility. The remaining commitments under the Tranche A
Term Loan Facility will terminate on March 31, 1999, and the Revolving Credit
Facility will terminate on October 31, 2005. Additional borrowings may be made
under the Tranche A Term Loan Facility only to complete the Merger and other
pending Avalon acquisitions (including repayment of related indebtedness and
payment of fees and expenses). Borrowings under the Revolving Credit Facility
may also be used for acquisitions. The Tranche A Term Loans are subject to
quarterly amortization payments commencing on January 31, 2001 and maturing on
October 31, 2005. The Tranche B Term Loans are subject to minimal quarterly
amortization payments commencing on January 31, 2001, with substantially all of
the Tranche B Term Loans scheduled to be repaid in two equal installments on
July 31, 2006 and October 31, 2006.
The interest rate under the Avalon Credit Facility is a rate based on
either (i) the Base Rate (as defined in the Avalon Credit Facility) or (ii) the
Eurodollar Rate (as defined in the Avalon Credit Facility) plus, in either
case, the applicable margin. As of ________, 1998, the applicable margin (a)
with respect to the Tranche B Term Loans was ___% per annum for Base Rate loans
thereunder and ___% per annum for Eurodollar Rate loans thereunder and (b) with
respect to the Tranche A Term Loans and the Revolving Credit Loans was ___% per
annum for Base Rate loans and ___% per annum for Eurodollar Rate loans. The
applicable margin for the Tranche A Term Loans and Revolving Credit Loans is
subject to performance-based grid pricing which is determined based upon the
combined consolidated leverage ratio of the Borrowers as calculated in
accordance with the Avalon Credit Facility.
The Avalon Credit Facility provides for mandatory prepayments and
commitment reductions (in each case subject to certain exceptions and/or
thresholds) out of net cash proceeds from issuances of capital stock, the
incurrence of indebtedness, certain asset sales, insurance proceeds and excess
cash flow. Voluntary prepayments are permitted in whole or in part at the
option of the Borrowers, in minimum principal amounts, without premium or
penalty (except that Tranche B Term Loans must be prepaid, at 102% and 101% of
the principal amount thereof, for the first year and second year,
respectively), subject to reimbursement of certain of the Avalon Senior
Lenders' costs under certain conditions.
The Avalon Credit Facility provides that the Borrowers must meet or exceed
a consolidated interest coverage ratio, fixed charge coverage ratio and debt
service coverage ratio and must not exceed certain consolidated leverage
ratios, each as set forth in the Avalon Credit Facility. The Avalon Credit
Facility also contains customary affirmative covenants (including required
interest rate protection arrangements and the pledge of additional collateral
in certain circumstances) and certain negative covenants (including covenants
that limit certain indebtedness, liens, fundamental changes, disposition of
property, restricted payments, capital expenditures, investments, optional
payments and modifications of debt instruments, transactions with affiliates
and sales and leasebacks). As a subsidiary of one of the Borrowers, the Company
is also subject to such covenants. The Avalon Credit Facility also includes
customary events of default.
The obligations of the Borrowers under the Avalon Credit Facility are
secured by substantially all the assets of the Borrowers, including a pledge of
the shares of Company Common Stock owned by the Buyer. In addition, the
obligations of the Borrowers under the Credit Facility are guaranteed by each
of Avalon, Avalon Holdings and other subsidiaries of Avalon.
CERTAIN PROVISIONS OF THE MERGER AGREEMENT
The following summarizes certain material provisions of the Merger
Agreement. A copy of the Merger Agreement is attached as Annex A to this Proxy
Statement and is incorporated herein by reference. Such summary is qualified in
its entirety by reference to the Merger Agreement.
The Merger
The Merger Agreement provides that as soon as practicable after
satisfaction or, to the extent permitted, waiver of all conditions to the
Merger, the Company and MergerSub will file a certificate of merger with the
Secretary of State of the State of Delaware and make all other filings or
recordings required by Delaware Law in connection with the Merger. The Merger
will become effective at such time as the certificate of merger is duly filed
with the Secretary of State of the State of Delaware or at such later time as
is specified in the certificate of merger by agreement of Buyer and the
Company. Pursuant to such certificate, MergerSub shall be merged at the
Effective Time with and into the Company, the separate existence of MergerSub
shall cease, and the Company shall be the surviving corporation and a wholly
owned subsidiary of Buyer. At the election of Buyer, the Merger may be
structured so that the Company shall be merged with and into MergerSub with the
result that MergerSub shall be the Surviving Corporation. From and after the
Effective Time, the Surviving Corporation will possess all the rights,
privileges, powers and franchises and be subject to all of the restrictions,
disabilities and duties of the Company and MergerSub, all as provided under
Delaware Law.
Merger Consideration
At the Effective Time, (i) each Share held by the Company as treasury
stock or owned by Buyer or any Subsidiary of Buyer immediately prior to the
Effective Time shall be canceled, and no payment shall be made with respect
thereto; (ii) each share of common stock of MergerSub outstanding immediately
prior to the Effective Time shall be converted into and become one share of
common stock of the Surviving Corporation with the same rights, powers and
privileges as the shares so converted and shall constitute the only outstanding
shares of capital stock of the Surviving Corporation; and (iii) each other
Share outstanding immediately prior to the Effective Time (except Shares as to
which appraisal rights have been validly exercised) shall be converted into the
right to receive $12.00 in cash, without interest (the "Merger Consideration").
Surrender and Payment
Prior to the Effective Time, Buyer shall appoint an agent (the "Transfer
Agent") for the purpose of exchanging certificates representing Shares for the
Merger Consideration, and the Company shall provide Buyer and the Transfer
Agent with a complete and accurate list of names and addresses for the
stockholders of record of the Company. At the Effective Time, Buyer will
deliver to the Transfer Agent the Merger Consideration to be paid in respect of
the Shares. For purposes of determining the Merger Consideration to be made
available, Buyer shall assume that no holder of Shares will perfect his right
to appraisal of his Shares. Promptly (and in any event within three business
days) after the Effective Time, Buyer will send, or will cause the Transfer
Agent to send, to each holder of Shares at the Effective Time a letter of
transmittal for use in such exchange (which will specify that the delivery
shall be effected, and risk of loss and title shall pass, only upon proper
delivery of the certificates representing Shares to the Transfer Agent).
Each holder of Shares that have been converted into a right to receive the
Merger Consideration, upon surrender to the Transfer Agent of a certificate or
certificates representing such Shares, together with a properly completed
letter of transmittal covering such Shares, will be entitled to receive the
Merger Consideration payable in respect of such Shares. Until so surrendered,
each such certificate shall, after the Effective Time, represent for all
purposes, only the right to receive such Merger Consideration. The Transfer
Agent or Buyer, as the case may be, shall be entitled to deduct and withhold
from the consideration otherwise payable pursuant to the Merger Agreement such
amounts as the Transfer Agent or Buyer are required to deduct and withhold
under the Code or any applicable provision of state, local or foreign tax law,
with respect to the making of any payment in respect of the Merger
Consideration under the Merger Agreement.
If any portion of the Merger Consideration is to be paid to a person other
than the registered holder of the Shares represented by the certificate or
certificates surrendered in exchange therefor, it shall be a condition to such
payment that the certificate or certificates so surrendered shall be properly
endorsed or otherwise be in proper form for transfer and that the person
requesting such payment shall pay to the Transfer Agent any transfer or other
taxes required as a result of such payment to a person other than the
registered holder of such Shares or establish to the satisfaction of the
Transfer Agent that such tax has been paid or is not payable.
After the Effective Time, there shall be no further registration of
transfers of Shares. If, after the Effective Time, certificates representing
Shares are presented to the Surviving Corporation, they shall be canceled and
exchanged for the consideration provided for, and in accordance with the
procedures set forth, in the Merger Agreement.
Any portion of the Merger Consideration made available to the Transfer
Agent that remains unclaimed by the holders of Shares three months after the
Effective Time shall be returned to Buyer, upon demand, and any such holder who
has not exchanged his Shares for the Merger Consideration in accordance with
this the procedures described in the Merger Agreement prior to that time shall
thereafter look only to Buyer for payment of the Merger Consideration in
respect of his Shares. Notwithstanding the foregoing, Buyer shall not be liable
to any holder of Shares for any amount paid to a public official pursuant to
applicable abandoned property laws. Any amounts remaining unclaimed by holders
of Shares two years after the Effective Time (or such earlier date immediately
prior to such time as such amounts would otherwise escheat to or become
property of any governmental entity) shall, to the extent permitted by
applicable law, become the property of Buyer free and clear of any claims or
interest of any Person previously entitled thereto.
Any portion of the Merger Consideration made available to the Transfer
Agent to pay for Shares for which appraisal rights have been perfected shall be
returned to Buyer, upon demand.
The Surviving Corporation
At the Effective Time, the certificate of incorporation of the Surviving
Corporation shall be amended and restated as set forth in Exhibit 1 of the
Merger Agreement attached as Annex A hereto, subject to further amendment in
accordance with applicable law. The bylaws of MergerSub in effect at the
Effective Time shall be the bylaws of the Surviving Corporation until amended
in accordance with applicable law. From and after the Effective Time, until
successors are duly elected or appointed and qualified in accordance with
applicable law, (a) the directors of MergerSub at the Effective Time shall be
the directors of the Surviving Corporation, and (b) the officers of the Company
at the Effective Time shall be the officers of the Surviving Corporation.
Representations and Warranties
The Merger Agreement contains customary representations and warranties of
the Company relating to, among other things, (a) organization, standing and
similar corporate matters of the Company and its subsidiaries; (b) consents and
approvals, no breaches or violations as a result of the Merger Agreement and
related transactions, and the authorization, execution, delivery, performance
and enforceability of the Merger Agreement; (c) the capital structure of the
Company and its subsidiaries; (d) documents filed by the Company with the SEC
and the accuracy of information contained therein; (e) the financial statements
of the Company; (f) the accuracy of information supplied by the Company in
connection with this Proxy Statement and the Schedule 13E-3; (g) the absence of
certain changes or events since June 30, 1998, including material adverse
changes with respect to the Company; (h) the absence of material undisclosed
liabilities and the absence of pending or threatened litigation which would
reasonably be expected to have a Material Adverse Effect; (i) filing of tax
returns and payment of taxes; (j) benefit plans and other matters relating to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
employment matters; (k) compliance with applicable laws; (l) brokers' fees and
expenses; (m) title to properties and encumbrances; (n) environmental matters;
and (o) matters with respect to cable systems, franchises and material
agreements.
The Merger Agreement also contains customary representations and
warranties of Buyer relating to, among other things, (a) organization, standing
and similar corporate matters of Buyer and MergerSub; (b) consents and
approvals, no breaches or violations as a result of the Merger Agreement and
related transactions, and the authorization, execution, delivery, performance
and enforceability of the Merger Agreement and related matters; (c) accuracy of
information supplied by Buyer and its subsidiaries in connection with this
Proxy Statement and the Schedule 13E-3; (d) brokers' fees and expenses; (e)
financing commitments in connection with the Merger; and (f) ownership of
Shares by Buyer.
Certain Pre-Closing Covenants
Pursuant to the Merger Agreement, the Company has agreed that prior to the
Effective Time, the Company and its Subsidiaries shall conduct their business
in the ordinary course consistent with past practice in all material respects
and shall use their best efforts to preserve intact their business
organizations and relationships with third parties and to keep available the
services of their present officers and employees in all material respects.
Until the Effective Time, and subject to certain exceptions, the Company will
not, and will not permit any subsidiary of the Company to: (a) adopt or propose
any change in its certificate of incorporation or bylaws; (b) merge or
consolidate with any other Person or acquire assets from any other Person in
excess of $375,000; (c) sell, lease, license or otherwise dispose of any
material assets or property except (i) pursuant to existing contracts or
commitments or (ii) not in excess of $375,000; (d) make any capital expenditure
in excess of $375,000; (e) enter into or amend in any material respect any
agreement which is material to the Company and the Company's subsidiaries taken
as a whole, or which involves payments of more than $375,000, or which
restricts the Company and its affiliates from engaging in any business or which
involves the purchase of programming by the Company; (f) take certain other
actions in connection with the Company and its subsidiaries; (g) commit to do
any of the foregoing; or (h) take or agree or commit to take any action that
would make any representation and warranty of the Company under the Merger
Agreement inaccurate in any respect at the Effective Time.
Until the Effective Time, the Company has agreed to give Buyer, its
counsel, financial advisors, auditors, and other authorized representatives
full access to the offices, properties, books and records of the Company and
its subsidiaries, will furnish to Buyer, its counsel, financial advisors,
auditors and other authorized representatives such financial and operating data
and other information as such persons may reasonably request and will instruct
the Company's employees, counsel, and financial advisors to cooperate with
Buyer in its investigation of the business of the Company and its subsidiaries;
provided that no such investigation shall affect any representation or warranty
given by the Company to Buyer under the Merger Agreement.
Indemnification and Insurance
Pursuant to the terms of the Merger Agreement, for a period of 6 years
following the Effective Time, Buyer will, and will cause the Surviving
Corporation to, (i) indemnify and hold harmless the present and former
officers, directors and employees of the Company in respect of acts or
omissions occurring prior to the Effective Time (including, without limitation,
in respect of acts or omissions in connection with the Merger Agreement and the
transactions contemplated thereby) to the fullest extent permitted under the
Company's Certificate of Incorporation and Bylaws and (ii) to the fullest
extent permitted under applicable law, advance to such persons expenses
incurred in defending any action or suit with respect to which indemnity may be
available under the Company's Certificate of Incorporation or Bylaws upon
receipt from each such person to whom expenses are advanced of an undertaking
reasonably satisfactory to Buyer to repay such advances if it is ultimately
determined that such person is not entitled to indemnification. Any
determination required to be made with respect to whether any of the foregoing
persons is entitled to indemnification or advancement of expenses under the
Merger Agreement shall be made by independent legal counsel selected mutually
by such person and Buyer.
For six years after the Effective Time, Buyer will use its best efforts to
provide officers' and directors' liability insurance and fiduciary liability
insurance in respect of acts or omissions occurring on or prior to the
Effective Time covering each such Person currently covered by the Company's
officers' and directors' liability insurance policy and fiduciary liability
insurance policy on terms with respect to coverage and amount no less favorable
in any material respect than those of such policies in effect on September 10,
1998; provided that Buyer shall not be obligated to pay annual premiums in
excess of $78,748 (which is approximately 200% of the current annual premiums
allocated to the Company as of the date of the Merger Agreement); and provided
further that if the premiums would exceed such amount in a given year, Buyer
shall use its best efforts to purchase coverage that in the reasonable opinion
of Buyer is the best available for such amount per year. Buyer may satisfy such
obligation by purchasing officers' and directors' liability and fiduciary
liability run-off coverage for such six-year period.
Best Efforts; Certain Filings
The Company and Buyer have agreed to use their best efforts to take, or
cause to be taken, all appropriate action, and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by the Merger
Agreement in the most expeditious manner practicable, including but not limited
to the satisfaction of all conditions to the Merger and seeking to remove
promptly any injunction or other legal barrier that may prevent or delay such
consummation.
The Company and Buyer agreed to promptly prepare and file with the SEC and
thereafter mail to the stockholders of the Company as promptly as practicable
the Schedule 13E-3 and this Proxy Statement.
Conditions to the Consummation of the Merger
The respective obligations of the Company and Cable Michigan to consummate
the Merger are subject to the satisfaction of the following conditions: (a) the
Merger Agreement shall have been adopted by the shareholders of the Company in
accordance with the DGCL; (b) no provision of any applicable law or regulation
and no judgment, injunction, order or decree shall prohibit the consummation of
the Merger; and (c) (i) no federal, state or foreign court, arbitrator or
governmental body, agency, or official shall have issued any order, and there
shall not have been adopted or promulgated any statute, rule or regulation,
prohibiting the consummation of the Merger, or, except for orders, statutes,
rules and regulations of general effect, limiting or restricting Buyer's
conduct or operation of the business of the Company after the Merger in a
manner that would have a Material Adverse Effect, and (ii) no proceeding
seeking to prohibit, alter, prevent or materially delay the Merger shall have
been instituted by any governmental agency or authority before any court,
arbitrator or governmental body, agency or official and be pending.
The obligations of Buyer and MergerSub to consummate the Merger are subject
to the satisfaction of the following further conditions: (a) (i) the Company
shall have performed in all material respects all of its obligations under the
Merger Agreement required to be performed by it at or prior to the Effective
Time and the representations and warranties of the Company contained in the
Merger Agreement shall be true (disregarding all exceptions therein for
materiality and Material Adverse Effect) at and as of the Effective Time as if
made at and as of such time (except for representations and warranties made as
of a specific date, which shall be true (disregarding all exceptions therein for
materiality and Material Adverse Effect) at and as of such date) with such
exceptions as would not, individually or in the aggregate, have a Material
Adverse Effect and (ii) Buyer shall have received a certificate signed by an
executive officer on behalf of the Company to the foregoing effect; (b) Buyer
shall have received all customary documents it may reasonably request relating
to the existence of the Company and the authority of the Company for the Merger
Agreement, all in form and substance reasonably satisfactory to Buyer; and (c)
120 days shall have elapsed after the date of the effective time of the Buyer
Merger shall have occurred, November 6, 1998. Buyer currently intends to waive
this last condition and, subject to the satisfaction or waiver of the other
applicable conditions, complete the Merger promptly after the Special Meeting.
The obligations of the Company to consummate the Merger are subject to the
satisfaction of the following further conditions: (a)(i) each of Buyer and
MergerSub shall have performed in all material respects all of its obligations
under the Merger Agreement required to be performed by it at or prior to the
Effective Time and the representations and warranties of Buyer and MergerSub
contained in the Merger Agreement shall be true (disregarding all exceptions
therein for materiality and Buyer MAE) at and as of the Effective Time as if
made at and as of such time (except for representations and warranties made as
of a specific date, which shall be true (disregarding all exceptions therein
for materiality and Buyer MAE) at and as of such date) with such exceptions as
would not, individually or in the aggregate, have a Buyer MAE, (ii) the Company
shall have received a certificate signed by an executive officer on behalf of
Buyer to the foregoing effect; (b) the Company shall have received all
customary documents that the Company shall reasonably request relating to the
existence of Buyer and MergerSub and the authority of Buyer and MergerSub to
enter into the Merger Agreement, all in form and substance reasonably
satisfactory to the Company; and (c) the fairness opinion delivered by CIBC
Oppenheimer shall not have been withdrawn or modified in any materially adverse
respect.
Termination
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time (notwithstanding any approval of the
Merger Agreement by the shareholders of the Company):
(a) by mutual written consent of the Company and Buyer;
(b) by either the Company or Buyer, if the Merger has not been
consummated by March 31, 1999; provided that no party that has materially
breached its obligations under the Merger Agreement shall be entitled to
terminate such agreement under this clause (b);
(c) by either the Company or Buyer (so long as such party has
complied in all material respects with its obligation to use its reasonable
best efforts to consummate and make effective the Merger), if there shall be
any law or regulation that makes consummation of the Merger illegal or if any
judgment, injunction, order or decree enjoining Buyer or the Company from
consummating the Merger is entered and such judgment, injunction, order or
decree shall become final and nonappealable;
(d) by the Company (provided that at the time Buyer would not be
entitled to terminate the Merger Agreement because the Company is in material
breach of one of its obligations under the Merger Agreement) if Buyer or
MergerSub is (i) in material breach of any of its obligations thereunder or
(ii) in breach of one or more of its representations and warranties thereunder
(disregarding any exceptions therein for materiality or Buyer MAE) with such
exceptions as would not, individually or in the aggregate, have a Buyer MAE,
and does not cure, or proceed in good faith to cure, such breach within ten
business days after the Company delivers written notice thereof; or
(e) by Buyer (provided that at the time the Company would not be
entitled to terminate the Merger Agreement because Buyer or MergerSub is in
material breach of one of its obligations under the Merger Agreement) if the
Company is (i) in material breach of any of its obligations thereunder or (ii)
in breach of one or more of its representations or warranties thereunder
(disregarding any exceptions therein for materiality or Material Adverse
Effect) with such exceptions as would not, individually or in the aggregate,
have a Material Adverse Effect, and does not cure, or proceed in good faith to
cure, such breach within ten business days after notice by Buyer thereof.
The party desiring to terminate the Merger Agreement pursuant to
paragraphs (b) through (e) above shall give written notice of such termination
to the other party.
If the Merger Agreement is terminated as described above, the Merger
Agreement shall become void and of no effect with no liability on the part of
any party thereto, except that the agreement that all costs and expenses
incurred in connection with the Merger Agreement shall be paid by the party
incurring such costs or expenses, shall survive the termination thereof.
The Company may not consent to or exercise any right to terminate the
Merger Agreement, unless such action is approved by the Special Committee.
Amendment and Waiver
Any provision of the Merger Agreement may be amended or waived prior to
the Effective Time if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by the Company, Buyer and MergerSub or in
the case of a waiver, by the party against whom the waiver is to be effective;
provided that after the adoption of the Merger Agreement by the shareholders of
the Company, no such amendment or waiver will, without the further approval of
such shareholders, alter or change (i) the amount or kind of consideration to
be received in exchange for any shares of capital stock of the Company, or (ii)
any of the terms or conditions of the Merger Agreement if such alteration or
change would adversely affect the holders of any shares of capital stock of the
Company.
The Company may not amend or waive any right under the Merger Agreement
unless such action is approved by the Special Committee.
Fees and Expenses
The Merger Agreement calls for all costs and expenses incurred in
connection with the Merger to be paid by the party incurring such cost or
expense.
The following is an estimate of fees and expenses to be incurred in
connection with the Merger:
<TABLE>
<S> <C>
Legal Fees and Expenses $ 250,000
Accountants' Fees and Expenses $ 85,000
Financing Costs and Fees $ 350,000
Financial Advisor to Special Committee $ 325,000
Legal Fees and Expenses of Special Committee $ 70,000
Special Committee Fees and Expenses $ 24,000
Printing $ 75,000
Filing Fees $ 4,380
Information/Transfer Agent $ 25,000
Mailing $ 7,500
Miscellaneous $ 10,000
Total $1,225,880
</TABLE>
The Company currently expects that approximately $22.0 million will be
required to pay the Merger Consideration to the Public Shareholders (assuming
no holders exercise appraisal rights). For a description of the sources of such
funds, see "The Merger--Merger Financing."
CERTAIN PROJECTIONS OF FUTURE OPERATING RESULTS
The Company does not as a matter of course make public forecasts as to its
future financial performance and condition. However, in connection with the
Merger, the Company furnished CIBC Oppenheimer with certain data relating to
projected future operating results on a standalone basis without giving effect
to a strategic transaction involving the Company. The projections set forth
below for fiscal years 1998 through 2003 were prepared by the Company in the
second quarter of 1998 for the purpose of providing information for
consideration by CIBC Oppenheimer. These projections were not prepared in
compliance with the published guidelines of the American Institute of Certified
Public Accountants or the Commission regarding projections or financial
forecasts and are included herein only because such information was provided to
CIBC Oppenheimer. These projections constitute forward-looking statements and
were based upon numerous assumptions which are inherently subject to
significant uncertainties and contingencies that are difficult or impossible to
predict and are beyond the Company's control, including, without limitation,
the addition of substantial revenues from new services, the acquisition of
certain assets by the Company and the absence of any adverse developments
regarding the operations of the business. The inclusion of such projections
should not be regarded as an indication that the Company or Buyer or any of
their affiliates considered them a reliable predictor of future events, and the
projections should not be relied on as such. Neither the Company nor Buyer nor
any of their affiliates assumes any responsibility for the validity,
reasonableness, accuracy or completeness of these projections and the Company
has made no representation to Buyer regarding such projections. For a list of
additional important factors that, in the view of the Company could cause
actual results to differ materially from those set forth in these projections,
see "Forward-Looking Statements".
<TABLE>
Mercom, Inc.
Forecasted Information (in thousands)
<CAPTION>
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Revenue....... $17,185 $18,178 $19,487 $20,890 $22,392 $24,006
EBITDA(1)........... 6,199 6,633 7,164 7,737 8,356 9,024
Operating Income.... 2,898 2,263 2,654 3,633 4,687 5,752
Net Income.......... 807 347 740 1,682 2,633 3,597
</TABLE>
- - - -------------------
(1) EBITDA is defined as income from operations before depreciation and
amortization. EBITDA should not be construed as a substitute for income
from operations, net earnings (loss) and cash flows from operating
activities determined in accordance with generally accepted accounting
principles.
Forecasts of future financial performance could differ materially from the
data set forth above if management were to prepare projections based upon
circumstances existing as of the date of this Proxy Statement. Neither the
Company nor Buyer intends or has any duty or obligation to publicly disclose
updates or revisions to any of the projections set forth above which are made
after the date hereof to reflect circumstances existing or developments
occurring after the preparation of such projections or to reflect the
occurrence of unanticipated events, including the Merger and Buyer's business
plan. The Company's independent auditors have not examined or compiled the
foregoing forward-looking statements or applied any procedures with respect to
such statements. Accordingly, such auditors have not expressed any opinion or
other form of assurance with respect to such statements and assumed no
responsibility for them.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SUBSCRIBER DATA)
The following discussion should be read in conjunction with the Company's
historical Consolidated Financial Statements and Notes thereto:
The Company is a cable television operator with three cable systems in
southern Michigan, which, as of September 30, 1998, served approximately 41,500
subscribers. Until July 1, 1997, the Company owned Mercom of Florida, which at
July 1, 1997 had approximately 1,900 subscribers. The Company sold Mercom of
Florida to Adelphia Communications Corporation on July 1, 1997 for $3,650,000 in
cash.
Nine Months Ended September 30, 1998 Compared With Nine Months Ended
September 30, 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 decrease represents a reduction of $.64 per average common share
for the nine month period. Included in net income for the 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 nine month period ended September 30, 1998, increased $495
or 4.0% over the comparable period 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 increase is primarily due to the increased basic
service revenue of approximately $654 for the nine month period. The following
two factors were responsible for the increase in basic service revenue. A basic
service rate increase in May 1998 contributed approximately $327 for the nine
month period 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 $327 for the nine month period. Also
contributing to the increase in sales in 1998 is approximately $103 in
advertising, pay-per-view and premium revenues for the nine month period.
Total costs and expenses for the nine month period ended September 30,
1998, increased by $492 or 6.3% when compared to the same period 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
nine month period was primarily the result of higher programming costs of
approximately $473, 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 $194 is primarily due to higher insurance,
shareholders and management fee expense, for the nine month period, exclusive
of Mercom of Florida.
Non-recurring charges of $349 were recorded for the nine month period
ended September 30, 1998. 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 $197 for the nine month
period 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 the sale of Mercom of Florida, Inc., for the nine month period
ended September 30, 1997 of approximately $2,600 resulted from the Company's
sale of its investment in Mercom of Florida.
For the nine month period ended September 30, 1998, income tax provision
increased by $150 as compared to the same period in 1997. 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.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996.
The Company's net income in 1997 increased $2,726 or $0.57 per average
Share. The Company had net income in 1997 of $4,198 or $0.88 per average Share
compared to a net income of $1,472 or $0.31 per average Share in 1996. The
increase from 1996 is primarily attributable to a gain of approximately $2,600
recorded from the sale of the investment of Mercom of Florida and an increase in
operating income before depreciation and amortization of $456.
The Company had operating income before depreciation and amortization of
$6,099 in 1997 compared to $5,643 in 1996. This represents an increase of $456
(8.1%) from 1996 to 1997. 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 1997 by $869 (5.6%) from the previous year. This
increase is primarily due to increased basic service revenue of approximately
$937. Approximately $716 of the increase is a result of the rate increase
implemented in February 1997. The remaining $221 of the basic service revenue
increase is due to approximately 744 additional average basic subscribers per
month in 1997 over the prior year. Contributing to the increase in 1997 was
approximately $129 in premium, advertising and miscellaneous revenue. These
increases are partially offset by a decrease in sales of $163 from 1996, due to
the sale of Mercom of Florida.
Programming, franchise and other variable costs increased by $463 (10.7%)
from 1996. 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 $142 (3.7%) in 1997.
Other expenses, including interest, decreased by $2,783 (247.4%). The
decrease is due primarily to a gain of approximately $2,600 from the sale of the
stock in Mercom of Florida.
Higher average cash balances in 1997 resulted in higher interest income of
$68.
Interest expense decreased by $171 (13.9%) in 1997. A decrease in the
average outstanding debt of approximately $2,798 was the primary reason for the
decrease in interest expense. Partially offsetting this reduction in debt, was
an increase in the annual weighted average effective interest rate from 6.5% in
1996 to 6.7% in 1997. 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.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
The Company's net income in 1996 increased $923 or $0.15 per average Share.
The Company recorded net income in 1996 of $1,472 or $0.31 per average Share
compared to a net income of $549 or $0.16 per average 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.
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.
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 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 Credit Agreement (Note 3). Immediately after the assumption of the
Company 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 Company 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.
Subject to certain limitations and restrictions, under the Avalon Credit
Facility, the Company has the ability to borrow additional funds from the Buyer
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.
Regulatory Issues
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 effect 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 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.
A significant provision of the 1992 Act required the FCC to establish rules to
ensure that rates for the basic services are reasonable for subscribers in areas
without effective competition as defined in the 1992 Act.
Telecommunications Act of 1996
In early 1996, Congress passed and the President signed 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 complaints have been filed with the FCC
regarding the Company's rates. 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.
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.
Year 2000 Information and Readiness Discussion
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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership in the Company by Company Management
The following table sets forth the beneficial ownership of Company Common
Stock as of December [ ], 1998, by each Company director, the executive officers
of the Company named in Annex D hereto (the "Named Executive Officers") and by
all persons, as a group, who are currently directors or 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 of
Name of Beneficial Owner Beneficially Owned Outstanding Shares
- - - ------------------------ ------------------ ------------------
<S> <C> <C>
David W. Unger, Director, Assistant Secretary -- --
Joel C. Cohen, Director, President,
Chief Executive Officer, Secretary -- --
Peter Polimino, Vice President -- --
Peter Luscombe, Vice President -- --
Mark Dineen, General Manager -- --
Jay M. Grossmann, Director, Vice President,
Assistant Secretary -- --
Peggy J. Koenig, Director, Vice President,
Assistant Secretary -- --
Harold J. Rose, Jr., Director -- --
George C. Stephenson, Director 5,000 *
Clifford L. Jones, Director -- --
All Directors and Executive Officers
as a Group (10 persons) 5,000 *
</TABLE>
- - - ----------
* Less than 1% of the outstanding shares.
Security Ownership in the Company by Certain Beneficial Owners
So far as is known to the Company, as of November [21], 1998, no persons,
except those listed below, owned beneficially more than five percent (5%) of
the outstanding Company Common Stock. With respect to the named persons, the
following information is based on Schedules 13D, 13G or Form 4 filed with the
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.
<TABLE>
<CAPTION>
Amount And
Nature of Percent of
Name and Address of Beneficial Owner Beneficial Ownership(1) Class
- - - ------------------------------------ ----------------------- ----------
<S> <C> <C>
Avalon Cable of Michigan, Inc. 2,964,250 61.92%
800 Third Avenue
Suite 3100
New York, New York 10022
Gabelli Funds, Inc., et al. (2)
One Corporate Center 520,735 10.88%
Rye, New York 10580
Lappin Capital Management, L.P. (3) 313,419 6.54%
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 or
relationship or with respect to which the indicated beneficial owner
otherwise has the power to vote, or direct the voting or the power to
dispose or direct the disposition.
(2) Based on information obtained from Amendment No. 1 to Schedule 13D filed
on September 22, 1998 with the SEC by Gabelli Funds, Inc., et al.
(3) Based on information obtained from Amendment No. 9 to Schedule 13D filed
on August 28, 1998 with the SEC by Lappin Capital Management, L.P.
Security Ownership in the Company by Cable Michigan Management
The following table sets forth the beneficial ownership of Company Common
Stock as of November 15, 1998, by each director and executive officer of Cable
Michigan and by all persons, as a group, who are currently directors or
executive officers of Cable Michigan. 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
Beneficially Percent of
Name of Beneficial Owner Owned Outstanding Shares
- - - ------------------------ ---------------- ------------------
<S> <C> <C>
David W. Unger, Director,
Assistant Secretary -- --
Joel C. Cohen, President, Chief Executive Officer,
Secretary -- --
Peter Polimino, Vice President -- --
Peter Luscombe, Vice President -- --
Mark Dineen, General Manager -- --
Jay M. Grossmann, Director, Vice President,
Assistant Secretary -- --
Peggy J. Koenig, Director, Vice President,
Assistant Secretary -- --
Royce Yudkoff, Director (1) -- --
All Directors and Executive Officers
as a Group ((8) persons) -- --
- - - -------------------
(1) Does not include shares owned through ownership in ABRY, Inc., AEI, ABRY III, Avalon
and Avalon Holdings.
</TABLE>
Other than through their interest in Cable Michigan, none of Avalon, ABRY
III, AEI and ABRY Inc. beneficially own Company Common Stock.
Except as disclosed above, none of the directors, officers and managers of
Avalon, ABRY III, AEI and ABRY Inc. beneficially own Company Common Stock.
REGULATORY CONSIDERATIONS
Antitrust
Under the HSR Act and the rules promulgated thereunder (the "Rules"),
certain merger transactions may not be consummated unless certain information
has been furnished to the Antitrust Division and the Federal Trade Commission
and certain waiting periods have expired. The Merger is not subject to the
filing requirements of the HSR Act and the Rules because of the controlling
interest in the Company by Cable Michigan and its affiliates prior to and after
the Merger. However, there can be no assurance that a challenge to the Merger
on antitrust grounds will not be made, or if such a challenge is made, what the
result will be.
Franchises
The Company must, in certain instances, notify or obtain consent from
applicable franchise authorities before a "change in control" of the Company.
The Merger does not result in a change of control because Buyer already owns
approximately 62% of the Company's Shares. Accordingly, no such notifications
have to be made and no such consents have to be obtained in connection with the
Merger. Notwithstanding the foregoing, Mercom's franchise agreements with 4
townships (representing approximately 10% of Mercom's subscribers) include
provisions which could be read to require the approval of those townships for
certain transactions, including the Merger. Mercom and Cable Michigan intend to
request approval of the Merger from those townships. The closing of the Merger
is not, however, conditioned upon receipt of these approvals.
BUYER AND MERGERSUB
Buyer, a Pennsylvania corporation, operates cable television systems in
the State of Michigan. As of September 30, 1998, Buyer served more than 215,000
subscribers (including Mercom's subscribers) in municipalities surrounding
Grand Rapids, Traverse City, Lapeer and Monroe in Michigan. Buyer's principal
executive offices are located at 800 Third Avenue, Suite 3100, New York,
New York 10022 and its telephone number is (212) 427-0600.
Buyer became a separate, publicly traded company on September 30, 1997,
when it was spun off from CTE. On November 6, 1998, pursuant to the Buyer
Merger Agreement, Buyer MergerSub was merged with and into Buyer, with Buyer as
the surviving corporation. In the Buyer Merger, Cable Michigan, Inc. changed
its name to Avalon Cable of Michigan, Inc. and became a wholly-owned subsidiary
of Avalon Holdings.
Immeditaley prior to the time of the Buyer Merger, LTTH owned approximately
48% of the outstanding shares of Cable Michigan Common Stock.
MergerSub, a Delaware corporation, was organized in connection with the
Merger and has not carried on any activities to date other than those incident
to its formation and the transactions contemplated by the Merger Agreement. All
of the outstanding capital stock of MergerSub is owned by Buyer. The principal
executive offices of MergerSub are located at 800 Third Avenue, Suite 3100,
New York, New York 10022 and their telephone number is (212) 421- 0600.
Information as to each executive officer and director of Buyer, the Company
and MergerSub is set forth in Annex D hereto.
AVALON HOLDINGS
Avalon Holdings is a holding company that was formed in June, 1998 for
purposes of the Buyer Merger. Avalon Holdings has not carried on any activities
to date other than those incident to its formation, the acquisition and
operation of Cable Michigan and related financing transactions. Avalon Holdings
is a wholly owned subsidiary of Avalon. Avalon was formed in 1997 by David
Unger, Joel Cohen and ABRY III to acquire, operate and develop cable television
systems in mid-sized suburban and exurban markets. In addition to providing
cable television services in Michigan through Cable Michigan, Avalon also
provides cable television services to approximately 20,700 basic subscribers in
western New England. ABRY III is the controlling member of Avalon. The general
partner of ABRY III is AEI. The general partner of AEI is ABRY Inc. Royce
Yudkoff, an individual resident of the state of Massachusetts, is the
controlling shareholder of ABRY Inc. The address of the principal office of
Avalon Holdings is 800 Third Avenue, Suite 3100, New York, New York 10022
and its telephone number is (212) 421-0600.
DISSENTING SHAREHOLDERS' RIGHTS
Holders of shares of Company Common Stock are entitled to appraisal rights
under Section 262 ("Section 262") of the DGCL, provided that they comply with
the conditions established by Section 262. Section 262 is reprinted in its
entirety as Annex D to this Proxy Statement. The following discussion does not
purport to be a complete statement of the law relating to appraisal rights and
is qualified in its entirety by reference to Annex D. This discussion and Annex
D should be reviewed carefully by any holder who wishes to exercise statutory
appraisal rights or who wishes to preserve the right to do so, as failure to
comply with the procedures set forth herein or therein may result in the loss
of appraisal rights. Stockholders of record who desire to exercise their
appraisal rights must: (i) hold shares of Company Common Stock on the date of
making a demand for appraisal; (ii) continuously hold such shares through the
Effective Time; (iii) deliver a properly executed written demand for appraisal
to the Company prior to the vote by the stockholders of the Company on the
Merger; (iv) not vote in favor of the Merger or consent thereto in writing; (v)
file any necessary petition in the Delaware Court of Chancery (the "Delaware
Court"), as more fully described below, within 120 days after the Effective
Time; and (vi) otherwise satisfy all of the conditions described more fully
below and in Annex D.
A record holder of shares of Company Common Stock who makes the demand
described below with respect to such shares, who continuously is the record
holder of such shares through the Effective Time, who otherwise complies with
the statutory requirements of Section 262 and who neither votes in favor of the
Merger nor consents thereto in writing will be entitled, if the Merger is
consummated, to receive payment of the fair value of his shares of Company
Common Stock as appraised by the Delaware Court. All references in Section 262
and in this summary of appraisal rights to a "stockholder" or "holders of
shares of Company Common Stock" are to the record holder or holders of shares
of Company Common Stock.
Under Section 262, not less than 20 days prior to the Special Meeting, the
Company is required to notify each stockholder eligible for appraisal rights of
the availability of such appraisal rights. This Proxy Statement constitutes
notice to holders of Company Common Stock that appraisal rights are available
to them. Stockholders of record who desire to exercise their appraisal rights
must satisfy all of the conditions set forth herein. A written demand for
appraisal of any shares of Company Common Stock must be filed with the Company
before the taking of the vote on the Merger. Such written demand must
reasonably inform the Company of the identity of the stockholder of record and
of such stockholder's intention to demand appraisal of the Company Common Stock
held by such stockholder. This written demand for appraisal of shares must be
in addition to and separate from any proxy or vote abstaining from or voting
against the Merger. Voting against, abstaining from voting on, failing to
return a proxy with respect to, or failing to vote on the Merger will not
constitute a demand for appraisal within Section 262.
Stockholders who desire to exercise appraisal rights must not vote in
favor of the Merger or consent thereto in writing. Voting in favor of the
Merger or delivering a proxy in connection with the Special Meeting (unless the
proxy votes against, or expressly abstains from the vote on, the approval of
the Merger), will constitute a waiver of the stockholder's right of appraisal
and will nullify any written demand for appraisal submitted by the stockholder.
A demand for appraisal must be executed by or on behalf of the stockholder
of record, fully and correctly, as such stockholder's name appears on the
certificate or certificates representing the shares of Company Common Stock. A
person having a beneficial interest in shares of Company Common Stock that are
held of record in the name of another person, such as a broker, fiduciary or
other nominee, must act promptly to cause the record holder to follow the steps
summarized herein properly and in a timely manner to perfect any appraisal
rights. If the shares of Company Common Stock are owned of record by a person
other than the beneficial owner, including a broker, fiduciary (such as a
trustee, guardian or custodian) or other nominee, such demand must be executed
by or for the record owner. If the shares of Company Common Stock are owned of
record by more than one person, as in a joint tenancy or tenancy in common,
such demand must be executed by or for all such joint owners. An authorized
agent, including an agent for two or more joint owners, may execute the demand
for appraisal for a stockholder of record; however, the agent must identify the
record owner and expressly disclose the fact that, in exercising the demand,
such person is acting as agent for the record owner. A record owner, such as a
broker, fiduciary or other nominee, who holds shares of Company Common Stock as
a nominee for others, may exercise appraisal rights with respect to the shares
held for all or less than all beneficial owners of shares as to which such
person is the record owner. In such case, the written demand must set forth the
number of shares covered by such demand. Where the number of shares is not
expressly stated, the demand will be presumed to cover all shares of Company
Common Stock outstanding in the name of such record owner. A stockholder who
elects to exercise appraisal rights should mail or deliver his or her written
demand to: Mercom, Inc., 800 Third Avenue, Suite 3100, New York, New York
10022, Attention: Corporate Secretary. The written demand for appraisal should
specify the stockholder's name and mailing address, the number of shares of
Company Common Stock owned, and that the stockholder is thereby demanding
appraisal of his or her shares. A proxy or vote against the Merger will not
constitute such a demand.
Within ten days after the Effective Time, the Surviving Corporation must
provide notice of the Effective Time to all stockholders who have complied with
Section 262. Within 120 days after the Effective Time, either the Surviving
Corporation or any stockholder who has complied with the required conditions of
Section 262 may file a petition in the Delaware Court, with a copy served on
the Surviving Corporation in the case of a petition filed by a stockholder,
demanding a determination of the fair value of the shares of all dissenting
stockholders. The Surviving Corporation does not currently intend to file an
appraisal petition and stockholders seeking to exercise appraisal rights should
not assume that the Surviving Corporation will file such a petition or that the
Surviving Corporation will initiate any negotiations with respect to the fair
value of such shares. Accordingly, stockholders who desire to have their shares
appraised should initiate any petitions necessary for the perfection of their
appraisal rights within the time periods and in the manner prescribed in
Section 262. Within 120 days after the Effective Time, any stockholder who has
theretofore complied with the applicable provisions of Section 262 will be
entitled, upon written request, to receive from the Surviving Corporation a
statement setting forth the aggregate number of shares of Company Common Stock
not voted in favor of the Merger and with respect to which demands for
appraisal were received by the Company and the number of holders of such
shares. Such statement must be mailed within 10 days after the written request
therefor has been received by the Surviving Corporation or within 10 days after
expiration of the time for delivery of demands for appraisal under Section 262,
whichever is later.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine which stockholders are entitled to
appraisal rights and will appraise the shares of Company Common Stock owned by
such stockholders, determining the fair value of such shares exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest, if any, to be paid upon the amount
determined to be the fair value. In determining fair value, the Delaware Court
is to take into account all relevant factors. In Weinberger v. UOP, Inc., the
Delaware Supreme Court discussed the factors that could be considered in
determining fair value in an appraisal proceeding, stating that "proof of value
by any techniques or methods which are generally considered acceptable in the
financial community and otherwise admissible in court" should be considered,
and that, "fair price obviously requires consideration of all relevant factors
involving the value of a company." The Delaware Supreme Court stated that in
making this determination of fair value the court must consider market value,
asset value, dividends, earnings prospects, the nature of the enterprise and
any other facts which are known or which can be ascertained as of the date of
the merger and which throw any light on future prospects of the merged
corporation. In Weinberger, the Delaware Supreme Court stated that "elements of
future value, including the nature of the enterprise, which are known or
susceptible of proof as of the date of the merger and not the product of
speculation, may be considered." Section 262, however, provides that fair value
is to be "exclusive of any element of value arising from the accomplishment or
expectation of the merger."
Stockholders considering seeking appraisal should recognize that the fair
value of their shares as determined under Section 262 could be more than, the
same as or less than the Merger Consideration to be received if they do not
seek appraisal of their shares. The cost of the appraisal proceeding may be
determined by the Delaware Court and taxed against the parties as the Delaware
Court deems equitable in the circumstances. Upon application of a dissenting
stockholder of the Company, the Delaware Court may order that all or a portion
of the expenses incurred by any dissenting stockholder in connection with the
appraisal proceeding, including without limitation, reasonable attorneys' fees
and the fees and expenses of experts, be charged pro rata against the value of
all shares of stock entitled to appraisal.
Any holder of shares of Company Common Stock who has duly demanded
appraisal in compliance with Section 262 will not, after the Effective Time, be
entitled to vote for any purpose any Shares subject to such demand or to
receive payment of dividends or other distributions on such Shares, except for
dividends or distributions payable to stockholders of record at a date prior to
the Effective Time.
At any time within 60 days after the Effective Time, any stockholder will
have the right to withdraw such demand for appraisal and to accept the terms
offered in the Merger; after this period, the stockholder may withdraw such
demand for appraisal only with the consent of the Surviving Corporation. If no
petition for appraisal is filed with the Delaware Court within 120 days after
the Effective Time, stockholders' rights to appraisal will cease, and all
holders of shares of Company Common Stock will be entitled to receive the
Merger Consideration. Inasmuch as the Surviving Corporation has no obligation
to file such a petition, and has no present intention to do so, any holder of
shares of Company Common Stock who desires such a petition to be filed is
advised to file it on a timely basis.
Failure to take any required step in connection with the exercise of
appraisal rights may result in termination of such rights. In view of the
complexity of these provisions of the DGCL, stockholders who are considering
exercising their rights under Section 262 should consult with their legal
advisors.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of the Company as of December 31,
1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995,
appearing in this Proxy Statement have been audited by PricewaterhouseCoopers
LLP, independent accountants, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
Audited Financial Statements
Report of Independent Accountants...........................................F-2
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995 .....................................................F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996................F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995......................................................F-5
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for the Years Ended December 31, 1997, 1996 and 1995.....................F-6
Notes to Consolidated Financial Statements..................................F-7
Unaudited Financial Statements
Condensed Consolidated Statements of Operations--Nine Months Ended
September 30, 1998 and 1997............................................F-14
Condensed Consolidated Balance Sheets--September 30, 1998 and
December 31, 1997.......................................................F-15
Condensed Consolidated Statements of Cash Flows--Nine Months Ended
September 30, 1998 and 1997.............................................F-16
Notes to Condensed Consolidated Financial Statements.......................F-17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Mercom, Inc.:
We have audited the accompanying consolidated balance sheets of Mercom,
Inc. and its subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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 its subsidiaries as of December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/S/ PricewaterhouseCoopers LLP
- - - ------------------------------------
Coopers & Lybrand L.L.P.
March 13, 1998
<TABLE>
MERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars In Thousands, Except Per Share Data)
<CAPTION>
For the Years Ended December 31,
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales......................................................... $16,439 $15,570 $13,939
------- ------- -------
Operating Expenses:
Programming, franchise and other variable costs............ 4,803 4,340 3,565
Operating, marketing and other fixed system costs.......... 4,020 3,878 3,455
Other general and administrative expenses.................. 1,517 1,709 1,728
Depreciation and amortization.............................. 2,894 3,018 3,022
------- ------- -------
Total operating expenses................................ 13,234 12,945 11,770
------- ------- -------
Operating income........................................ 3,205 2,625 2,169
------- ------- -------
Other (Income) Expenses:
Litigation costs........................................... -- (12) (188)
Interest income............................................ (195) (127) (83)
Interest expense........................................... 1,056 1,227 1,900
Loss (income) from asset disposal.......................... 13 37 (7)
Gain on sale of Mercom of Florida.......................... (2,571) -- --
Other expenses, net........................................ 39 -- --
------- ------- -------
Total other (income) expenses, net...................... (1,658) 1,125 1,622
------- ------- -------
Income before income taxes.............................. 4,863 1,500 547
------- ------- -------
Income Tax Expense (Benefit).................................. 665 28 (2)
------- ------- -------
Net income.............................................. $ 4,198 $ 1,472 $ 549
======= ======= =======
Basic and Diluted Earnings Per Average Common Share:
Net income.............................................. $ 0.88 $ 0.31 $ 0.16
======= ======= =======
Weighted Average Common Shares Outstanding (in thousands)..... 4,787 4,787 3,338
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
MERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
December 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash & Temporary Cash Investments............................... $ 4,829 $ 3,054
Accounts Receivable:
Trade, net of reserve for doubtful accounts of $49
in 1997 and $36 in 1996................................... 365 309
Other........................................................ 93 60
Prepaid Expenses and Other...................................... 134 101
Deferred Income Taxes........................................... 341 --
Property, Plant and Equipment:
Cable television distribution plant.......................... 39,730 39,309
Buildings and land........................................... 571 549
Furniture, fixtures and vehicles............................. 1,911 1,785
-------- --------
Total property, plant and equipment....................... 42,212 41,643
Accumulated depreciation..................................... 28,998 27,395
-------- --------
Net property, plant and equipment......................... 13,214 14,248
-------- --------
Intangible Assets, Net.......................................... 1,743 2,079
-------- --------
Total Assets.................................................... $ 20,719 $ 19,851
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable, trade...................................... $ 980 $ 828
Accounts payable, affiliate and related parties.............. 539 784
Other liabilities............................................ 1,694 1,578
Accrued litigation costs..................................... 1,450 2,150
Deferred income taxes........................................ 626 --
Debt:
Note payable, affiliate................................... 14,151 --
Term credit agreement..................................... -- 17,430
-------- --------
Total liabilities....................................... 19,440 22,770
-------- --------
Commitments and Contingencies
Shareholders' Equity (Deficit):
Preferred stock, $100 par value, 150,000 shares
authorized, none issued and outstanding at
December 31, 1997 and 1996................................
Common stock, $1 par value, 5,000,000 shares
authorized, 4,787,060, issued and outstanding at
December 31, 1997 and 1996................................ 4,787 4,787
Additional paid-in capital................................... 11,374 11,374
Accumulated deficit.......................................... (14,882) (19,080)
-------- --------
Total shareholders' equity (deficit)...................... 1,279 (2,919)
-------- --------
Total Liabilities & Shareholders' Equity (Deficit).............. $ 20,719 $ 19,851
======== ========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
MERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
<CAPTION>
For the Years Ended December 31,
--------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income................................................... $ 4,198 $ 1,472 $ 549
Depreciation................................................. 2,603 2,731 2,713
Amortization................................................. 291 287 309
Deferred income taxes........................................ 417 -- --
Loss (income) from asset disposal............................ 13 37 (7)
Net change in certain assets and liabilities:
Accounts receivable, trade and other, net................. (120) 8 74
Accounts payable, trade and other......................... (81) 198 582
Gain on sale of Mercom of Florida......................... (2,571) -- --
Other assets and liabilities.............................. (581) (630) (1,854)
-------- ------- -------
Net cash provided by operating activities............... 4,169 4,103 2,366
-------- ------- -------
Cash Flows From Investing Activities:
Expansion, improvements and other............................ (2,614) (1,585) (1,701)
Proceeds from sale of Mercom of Florida...................... 3,496 -- --
Proceeds from asset disposal................................. 3 3 12
-------- ------- -------
Net cash provided by (used in) investing activities..... 885 (1,582) (1,689)
-------- ------- -------
Cash Flows From Financing Activities:
Repayment of bank loans...................................... (17,430) (1,500) (6,996)
Note payable, affiliate...................................... 14,151 -- --
Net proceeds from the issuance of common stock............... -- -- 8,256
-------- ------- -------
Net cash (used in) provided by financing activities..... (3,279) (1,500) 1,260
-------- ------- -------
Net Increase in Cash & Temporary Cash Investments............... 1,775 1,021 1,937
Cash & Temporary Cash Investments, January 1.................... 3,054 2,033 96
-------- ------- -------
Cash & Temporary Cash Investments, December 31.................. $ 4,829 $ 3,054 $ 2,033
======== ======= =======
Supplemental Disclosures of Cash Flow Information Cash paid
during the year for:
Interest..................................................... $ 1,079 $ 1,247 $ 2,044
Taxes........................................................ $ 120 $ 29 $ --
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
MERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1997, 1996 and 1995
(Dollars In Thousands)
<CAPTION>
Common Stock
----------------------- Additional Total
Issued & Paid-In Accumulated Shareholders'
Outstanding Par Value Capital Deficit Equity (Deficit)
----------- --------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 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)
Net income -- -- -- 4,198 4,198
----- ------ ------- -------- --------
Balance at December 31, 1997 4,787 $4,787 $11,374 $(14,882) $ 1,279
===== ====== ======= ======== ========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars In Thousands, Except Per Share Data)
1. ORGANIZATION
The Company is a cable television operator which provides basic, premium
and pay-per-view cable programming services to subscribers in the Systems. The
Michigan systems are operated through CCV. On July 1, 1997, the Company sold its
investment in Mercom of Florida, which operates a cable system in Port St.
Lucie, Florida, approximately 90 miles north of Palm Beach.
CCV, through its wholly-owned subsidiaries, operates cable television
systems serving approximately 39,400 subscribers in Monroe County, Allegan
County, Coldwater and Sturgis areas of Michigan. CCV and its subsidiaries have
78 franchise agreements with expiration dates between 1998 and 2015.
Prior to September 30, 1997, the Company was operated as part of C-TEC. On
September 30, 1997, C-TEC distributed 100% of the outstanding shares of common
stock of its wholly owned subsidiaries, RCN and 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 the
Distribution Agreement. RCN consists primarily of C-TEC's bundled residential
voice, video and Internet access operations in the Boston to Washington, D.C.
corridor, its existing New York, New Jersey and Pennsylvania cable television
operations, a portion of its long distance operations and its international
investment in Megacable, S.A. de C.V. Cable Michigan consists of C-TEC's
Michigan cable operations, including its 62% ownership in the Company.
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 subsidiary, CCV. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Preparation of Financial Statements - 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.
Temporary cash investments are stated at cost, which approximates market.
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.
Accounting for Impairments - The Company follows 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 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 net future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the expected net 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.
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 $138, $113 and $123 in 1997, 1996
and 1995, respectively.
Income Taxes - The Company accounts for income taxes using Statement of
Financial Accounting Standards No. 109 - "Accounting for Income Taxes". The
statement requires the use of an asset and liability approach for financial
reporting for income taxes. The asset and liability approach requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between financial reporting basis and tax
basis of assets and liabilities. If it is more likely than not that some portion
or all of a deferred tax asset will not be realized, a valuation allowance is
recognized.
Earnings (Loss) Per Share - The Company has adopted Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). 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.
3. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
1997 1996
------ ------
Goodwill...................................... $1,577 $1,589
Franchise rights and costs.................... 1,632 1,768
Other......................................... 853 856
------ ------
Total...................................... 4,062 4,213
Less accumulated amortization................. 2,319 2,134
------ ------
Total...................................... $1,743 $2,079
====== ======
Amortization expense charged to operations in 1997, 1996 and 1995 was $291,
$287 and $309, respectively.
During 1997, due to the sale of its investment in Mercom of Florida,
intangible assets which had an original cost of $147 and associated accumulated
amortization of $75 were removed from the Company's balance sheet.
4. INCOME TAXES
The income tax provision (benefit) consists of the following:
1997 1996 1995
---- ---- ----
Current-
Federal....................................... $248 $28 $(2)
State......................................... -- -- --
---- --- ---
Total...................................... $248 $-- $(2)
==== === ===
Deferred-
Federal....................................... $417 $-- $--
State......................................... -- -- --
---- --- ---
Total...................................... $417 $-- $--
---- --- ---
Total provision (benefit) for income taxes....... $665 $28 $(2)
==== === ===
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at December 31, are as follows:
1997 1996
------- -------
Net operating loss carryforwards........... $ 1,588 $ 3,532
Alternative minimum tax credits............ 141 39
Reserves................................... 275 330
Other, net................................. 66 63
------- -------
Total deferred assets................... 2,070 3,964
------- -------
Property, plant and equipment.............. (2,233) (2,597)
Intangible assets.......................... (122) (105)
------- -------
Total deferred liabilities.............. (2,355) (2,702)
------- -------
Subtotal............................. (285) 1,262
Valuation allowance........................ -- (1,262)
------- -------
Total deferred taxes....................... $ (285) $ --
======= =======
In the opinion of management, based on the future turnaround of existing
temporary differences, primarily depreciation, and its expectations of future
operating results, the Company will more likely than not, be able to realize all
of its deferred tax assets.
Due to the sale of its investment in Mercom of Florida, the Company's
deferred tax liabilities decreased by $132.
The net change in the valuation allowance for deferred tax assets during
1997 was a decrease of $1,262, of which $72 related to Mercom of Florida.
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>
1997 1996 1995
------- ------ -----
<S> <C> <C> <C>
Income before provision (benefit) for income taxes..... $ 4,863 $1,500 $ 547
======= ====== =====
Federal tax provision.................................. $ 1,653 $ 510 $ 186
Reduction due to:
Goodwill............................................... 36 36 37
Decrease in valuation allowance........................ (1,190) (518) (256)
Adjustment to prior years amortization................ -- -- 28
Non-deductible expense................................. 147 -- --
Other, net............................................. 19 -- 3
------- ------ -----
Provision (benefit) for income taxes................... $ 665 $ 28 $ (2)
======= ====== =====
</TABLE>
The Company has the following federal net operating loss carryforwards
available:
Tax Net
Year Operating Losses Expiration Date
---- ---------------- ---------------
1991 $ 329 2006
1992 $1,628 2007
1995 $2,713 2010
In the current year, the Company was liable for Federal Alternative Minimum
Tax ("AMT"). At December 31, 1997 the cumulative minimum tax credits are $141.
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:
December 31,
-------------------
1997 1996
------- -------
Note Payable, Affiliate.......... $14,151 $ --
Term Credit Agreement............ -- 17,430
------- -------
Total Debt....................... $14,151 $17,430
======= =======
In November 1989, the Company entered into a term credit agreement with a
bank. In addition, the Company entered into a revolving credit facility in
August 1995 of $2,000 with an initial maturity of August 1996, which was amended
and extended to August 1997. In August 1997, the revolving credit agreement
expired. The Company had no borrowings under the revolving credit agreement in
1996 and 1997.
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 secured 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 investment and liquidity needs. At December 31,
1997, the Company was in compliance with all covenants associated with the Note
Payable.
The weighted average effective interest rates for all debt at December 31,
1997 and 1996, were 6.7% and 6.5%, respectively. Interest on the Note Payable is
paid based on LIBOR plus 1%.
6. COMMON STOCK
On August 10, 1995, the Company completed the issuance of 2,393,530 shares
of Company 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 Company Common Stock held. Right holders were able to
purchase, for a price of $3.60 per share, one share of Company 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.
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 $39 and $26 in 1997 and 1996,
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 $34 and $36 in 1997 and 1996, respectively.
8. COMMITMENTS AND CONTINGENCIES
a. Total rental expense, primarily office space and pole rental, was
$283, $248 and $250 for 1997, 1996 and 1995, respectively. At December 31, 1997,
rental commitments under noncancellable leases, excluding annual pole rental
commitments of approximately $181 that are expected to continue indefinitely,
are as follows:
1998................................... $ 91
1999................................... 78
2000................................... 78
2001................................... 23
2002................................... 13
Thereafter............................. 252
b. 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 1997 and 1996 included charges totaling approximately $17 and
$170, respectively, relating to cable rate regulation exposures.
c. The Company entered into the Management Agreement on January 1,
1997 pursuant to which Cable Michigan operates and manages the Company's cable
properties. The Management Agreement provides that the Company will pay Cable
Michigan: (a) an annual fee equal to the greater of: (i) $500 or (ii) a
percentage of the Company's annual revenues (ranging from 5% of $10,000 of
revenues, as defined, to 4% of revenues in excess of $20,000); 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 $5,000. See Note 9
(Affiliate and Related Party Transactions) to Audited Financial Statements.
9. AFFILIATE AND RELATED PARTY TRANSACTIONS
The Company entered into the CCS Management Agreement in 1992, pursuant to
which CCS would manage the Company's cable television systems' operations
through 1996. The Company was charged $1,398 and $1,204 for this management
service in 1996 and 1995, respectively. In 1995, the Company incurred interest
of $29 on outstanding management fee obligations owed to C-TEC. Effective
January 1, 1997, the Company entered into a management agreement with Cable
Michigan. The Company was charged $1,204 in 1997 based on the agreement approved
by the Board. RCN and its subsidiaries also supplied other services not covered
by the management agreements for approximately $27, $92 and $121 in 1997, 1996
and 1995, 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.
The Company sold approximately $81 and $2 of inventory to a C-TEC
subsidiary in 1996 and 1995, respectively.
The Company had accounts payable to RCN of $18 and $783 (primarily
management fees) at December 31, 1997 and 1996, respectively.
The Company had accounts payable to Cable Michigan of $521 (primarily
management fees) and $1 at December 31, 1997 and 1996, respectively.
On September 29, 1997, Cable Michigan assumed all of the bank's interest
in the Term Credit Agreement as discussed in Note 5.
10. 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 throughout Michigan.
11. 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.
The estimated fair value of the Company's financial instruments are as
follows at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and temporary cash investments........ $ 4,829 $ 4,829 $ 3,054 $ 3,054
Financial liabilities:
Floating rate long-term debt:
Note Payable, Affiliate................. $14,151 $14,151 $ -- $ --
Term Credit Agreement................... $ -- $ -- $17,430 $17,430
</TABLE>
<TABLE>
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
<CAPTION>
Nine Months Ended
September 30,
-------------------
1998 1997
------- -------
<S> <C> <C>
Sales......................................................... $12,894 $12,399
------- -------
Costs and expenses............................................ 8,254 7,762
Non-recurring charges*........................................ 349 --
Depreciation and amortization................................. 2,206 2,166
------- -------
Total operating expenses................................... 10,809 9,928
------- -------
Operating income........................................... 2,085 2,471
------- -------
Other (Income) Expenses:
Interest income............................................... (232) (131)
Other expense................................................. 194 54
Interest expense.............................................. 718 812
Gain on sale of Mercom of Florida............................. -- (2,571)
------- -------
Total other (income) expenses.............................. 680 (1,836)
------- -------
Income before income taxes................................. 1,405 4,307
Provision for income taxes.................................... 630 480
------- -------
Net income................................................. $ 775 $ 3,827
======= =======
Basic and diluted earnings per average common share........... $ 0.16 $ 0.80
Weighted Average Common Shares Outstanding (in thousands)..... 4,787 4,787
======= =======
</TABLE>
- - - -------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
* These charges pertain to Cable Michigan's proposal to acquire the
outstanding Shares of the Company that Cable Michigan does not already own. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Nine Months Ended September 30, 1998 Compared with Nine Months Ended
September 30, 1997."
<TABLE>
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands)
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS:
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 & Shareholders' Equity .......................... $ 22,084 $ 20,719
======== ========
- - - -------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
<TABLE>
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<CAPTION>
Nine Months
Ended September 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............................ -- 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 and temporary cash investments................... 1,286 959
Cash and temporary cash investments, January 1........................ 4,829 3,054
------- --------
Cash and 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
- - - -------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollars in Thousands, Except Per Share Data)
1. Responsibility for Interim Financial Statements
The condensed consolidated financial statements included herein have been
prepared by the Company without audit, pursuant to the rules and regulations of
the SEC. 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. On
September 30, 1997, C-TEC distributed 100% of the outstanding shares of common
stock of its wholly owned subsidiaries, RCN and 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. On June
3, 1998 the Buyer Merger Agreement was executed. The Buyer Merger became
effective on November 6, 1998. Since the effective time of the Buyer Merger,
Cable Michigan, which owns 62% of the Company, is a wholly owned subsidiary of
Avalon Holdings.
3. Debt
Debt consists of the following:
September 30, 1998 December 31, 1997
------------------ -----------------
Note Payable, Affiliate............ $14,151 $14,151
======= =======
In November 1989, the Company entered into the Company Credit Agreement.
The Company 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 acquired and assumed all of the
bank's interest in the Company Credit Agreement and the note issued thereunder.
As of such date, $14,151 of principal was outstanding. Immediately after the
purchase, the Company 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 Company 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, the Buyer Merger was consummated. Cable Michigan, as
the surviving corporation of the Buyer Merger, has the ability, subject to
certain limitations and restrictions under its debt agreements, 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 independent directors on the Board.
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. Buyer Merger Agreement
On November 6, 1998 the Buyer Merger was consummated.
In accordance with the terms of the Buyer Merger Agreement, each share of
common stock, par value $1.00 per share, of Cable Michigan outstanding prior to
the effective time of the Buyer 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.
On June 4, 1998, Cable Michigan made a proposal to the Board 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 the Special Committee to
evaluate the proposal.
On August 12, 1998, Amendment No. 2 was entered into, which 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.
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollars in Thousands, Except per Share Data)
On September 10, 1998, the Company, Cable Michigan and MergerSub entered
into the Merger Agreement. Pursuant to the Merger Agreement and subject to the
terms and conditions set forth therein, MergerSub will be merged with and into
the Company with the Company being the Surviving Corporation. At the Effective
Time, each outstanding share of Company Common Stock held by the Company 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
MergerSub 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 Company Common Stock will be converted into the right to receive $12.00
in cash, without interest. The consummation of the Merger is subject to certain
conditions, including the adoption of the Merger Agreement by the stockholders
of the Company. In the Merger Agreement, Cable Michigan agreed to vote in favor
of the adoption of the Merger Agreement. Cable Michigan owns approximately 62%
of the Company Common Stock. Accordingly, the adoption of the Merger Agreement
and the 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
Company Common Stock.
ANNEX A
AGREEMENT AND PLAN OF MERGER
dated as of
September 10, 1998
among
MERCOM, INC.,
CABLE MICHIGAN, INC.
and
MERCOM ACQUISITION, INC.
TABLE OF CONTENTS(1)
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Page
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ARTICLE 1
The Merger
Section 1.1. The Merger..........................................1
Section 1.2. Conversion of Shares................................2
Section 1.3. Surrender and Payment...............................2
Section 1.4. Dissenting Shares...................................4
ARTICLE 2
The Surviving Corporation
Section 2.1. Certificate of Incorporation........................5
Section 2.2. Bylaws..............................................5
Section 2.3. Directors and Officers..............................5
ARTICLE 3
Representations and Warranties of the Company
Section 3.1. Corporate Existence and Power.......................5
Section 3.2. Corporate Authorization; Approval of the
Board...............................................6
Section 3.3. Governmental Authorization..........................6
Section 3.4. Non-contravention...................................7
Section 3.5. Capitalization......................................7
Section 3.6. Subsidiaries........................................7
Section 3.7. SEC Filings.........................................8
Section 3.8. Financial Statements................................9
Section 3.9. Proxy Statement; Schedule 13E-3.....................9
Section 3.10. Absence of Certain Changes.........................10
Section 3.11. Litigation.........................................11
Section 3.12. No Undisclosed Material Liabilities................12
Section 3.13. Compliance with Laws...............................12
Section 3.14. Finders' Fees......................................12
Section 3.15. Taxes..............................................12
Section 3.16. Employee Benefits..................................13
Section 3.17. Environmental Matters..............................14
Section 3.18. Systems, Franchises and Material Agreements........15
Section 3.19. Title to Properties; Encumbrances..................17
ARTICLE 4
Representations and Warranties of Buyer
Section 4.1. Corporate Existence and Power......................17
Section 4.2. Corporate Authorization............................17
Section 4.3. Governmental Authorization.........................18
Section 4.4. Non-contravention..................................18
Section 4.5. Proxy Statement; Schedule 13E-3....................18
Section 4.6. Finders' Fees......................................19
Section 4.7. Financing..........................................19
Section 4.8. Ownership of Shares................................19
ARTICLE 5
Covenants of the Company
Section 5.1. Conduct of the Company.............................19
Section 5.2. Stockholder Meeting; Proxy Material................20
Section 5.3. Access to Information..............................20
ARTICLE 6
Covenants of Buyer
Section 6.1. Obligations of Merger Subsidiary...................21
Section 6.2. Voting of Shares...................................21
Section 6.3. Director and Officer Liability.....................21
Section 6.4. Absence of Actions Causing Breach..................22
ARTICLE 7
Covenants of Buyer and the Company
Section 7.1. Best Efforts; SEC Filings..........................22
Section 7.2. Public Announcements...............................22
Section 7.3. Further Assurances.................................23
Section 7.4. Notices of Certain Events..........................23
ARTICLE 8
Closing; Conditions to the Merger
Section 8.1. Closing............................................23
Section 8.2. Conditions to the Obligations of Each Party........23
Section 8.3. Conditions to the Obligations of Buyer and
Merger Subsidiary..................................24
Section 8.4. Conditions to the Obligations of the Company.......25
ARTICLE 9
Termination
Section 9.1. Termination........................................25
Section 9.2. Effect of Termination..............................26
ARTICLE 10
Miscellaneous
Section 10.1. Notices............................................27
Section 10.2. Survival...........................................28
Section 10.3. Amendments; No Waivers.............................28
Section 10.4. Expenses...........................................29
Section 10.5. Successors and Assigns.............................29
Section 10.6. Governing Law......................................29
Section 10.7. Counterparts; Effectiveness........................29
Section 10.8. Parties in Interest................................29
Section 10.9. No Personal Liability..............................29
Section 10.10. Jurisdiction.......................................29
Section 10.11. Interpretation.....................................30
Section 10.12. Specific Performance...............................30
Section 10.13. Entire Agreement; Schedules........................30
Section 10.14. Severability.......................................30
- - - ------------
(1) The Table of Contents is not a part of this Agreement.
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of September 10, 1998
among MERCOM, INC., a Delaware corporation (the "Company"), CABLE MICHIGAN,
INC., a Pennsylvania corporation ("Buyer"), and MERCOM ACQUISITION, INC., a
Delaware corporation and a wholly owned subsidiary of Buyer ("Merger
Subsidiary").
WHEREAS, Buyer owns approximately 61.92% of the outstanding
common stock of the Company;
WHEREAS, Buyer and the Company desire that Merger Subsidiary be
merged with and into the Company with the Company being the surviving
corporation and a wholly owned subsidiary of Buyer as contemplated hereby; and
WHEREAS, a special committee of the Board of Directors of the
Company composed solely of directors unaffiliated with Buyer (the "Special
Committee") has unanimously approved this Agreement and the transactions
contemplated hereby;
NOW, THEREFORE, in consideration of the mutual promises
contained herein, the parties hereto agree as follows:
ARTICLE 1
The Merger
Section 1.1. The Merger. (a) At the Effective Time (as
defined below), Merger Subsidiary shall be merged (the "Merger") with and
into the Company in accordance with the General Corporation Law of the
State of Delaware (the "Delaware Law") whereupon the separate existence of
Merger Subsidiary shall cease, and the Company shall be the surviving
corporation (the "Surviving Corporation"). At the election of Buyer, the
Merger may be structured so that the Company shall be merged with and into
Merger Subsidiary with the result that Merger Subsidiary shall be the
Surviving Corporation.
(b) As soon as practicable after the satisfaction or, to the extent
permitted hereunder, waiver of all conditions to the Merger, the Company and
Merger Subsidiary will file a certificate of merger with the Secretary of State
of the State of Delaware and make all other filings or recordings required by
Delaware Law in connection with the Merger. The Merger shall become effective
at such time as the certificate of merger is duly filed with the Secretary of
State of the State of Delaware or at such later time as is specified in the
certificate of merger by agreement of Buyer and the Company (the "Effective
Time").
(c) From and after the Effective Time, the Surviving Corporation
shall possess all the rights, privileges, powers and franchises and be subject
to all of the restrictions, disabilities and duties of the Company and Merger
Subsidiary, all as provided under Delaware Law.
Section 1.2. Conversion of Shares. At the Effective Time by
virtue of the Merger and without any other action on the part of the Company,
Merger Sub or the holder of any Shares (as defined below):
(a) each share of common stock, par value $1.00 per share,
of the Company (the "Shares") held by the Company as treasury
stock or owned by Buyer or any subsidiary of Buyer immediately
prior to the Effective Time shall be canceled, and no payment
shall be made with respect thereto;
(b) each share of common stock of Merger Subsidiary
outstanding immediately prior to the Effective Time shall be
converted into and become one share of common stock of the
Surviving Corporation with the same rights, powers and privileges
as the shares so converted and shall constitute the only
outstanding shares of capital stock of the Surviving Corporation;
and
(c) each Share outstanding immediately prior to the
Effective Time shall, except as otherwise provided in Section
1.2(a) or as provided in Section 1.4 below with respect to Shares
as to which appraisal rights have been exercised, be converted
into the right to receive $12.00 in cash, without interest (the
"Merger Consideration").
Section 1.3. Surrender and Payment. (a) Prior to the
Effective Time, Buyer shall appoint an agent (the "Transfer Agent") for the
purpose of exchanging certificates representing Shares for the Merger
Consideration, and the Company shall provide Buyer and the Transfer Agent with
a complete and accurate list of names and addresses for the stockholders of
record of the Company at the Effective Time. Buyer will deliver to the
Transfer Agent, at the Effective Time, the Merger Consideration to be paid in
respect of the Shares. For purposes of determining the Merger Consideration
to be made available, Buyer shall assume that no holder of Shares will perfect
his right to appraisal of his Shares. Promptly (and in any event within three
business days) after the Effective Time, Buyer will send, or will cause the
Transfer Agent to send, to each holder of Shares at the Effective Time a
letter of transmittal for use in such exchange (which shall specify that the
delivery shall be effected, and risk of loss and title shall pass, only upon
proper delivery of the certificates representing Shares to the Transfer Agent).
(b) Each holder of Shares that have been converted into a right to
receive the Merger Consideration, upon surrender to the Transfer Agent of a
certificate or certificates representing such Shares, together with a properly
completed letter of transmittal covering such Shares, will be entitled to
receive the Merger Consideration payable in respect of such Shares. Until so
surrendered, each such certificate shall, after the Effective Time, represent
for all purposes, only the right to receive such Merger Consideration. The
Transfer Agent or Buyer, as the case may be, shall be entitled to deduct and
withhold from the consideration otherwise payable pursuant to this Agreement
such amounts as the Transfer Agent or Buyer are required to deduct and
withhold under the Internal Revenue Code of 1986, as amended (the "Code"), or
any applicable provision of state, local or foreign tax law, with respect to
the making of any payment in respect of the Merger Consideration hereunder.
To the extent such amounts are so withheld, such amounts shall be treated for
all purposes of this Agreement as having been paid to the Person with respect
to whom such deduction and withholding was made by the Transfer Agent or
Buyer. No such deduction or withholding shall be made if the relevant Person
shall provide documentation reasonably satisfactory to the Transfer Agent and
Buyer establishing an exemption from withholding, and Buyer shall take
customary actions to obtain such documentation prior to such deduction or
withholding.
(c) If any portion of the Merger Consideration is to be paid to a
Person other than the registered holder of the Shares represented by the
certificate or certificates surrendered in exchange therefor, it shall be a
condition to such payment that the certificate or certificates so surrendered
shall be properly endorsed or otherwise be in proper form for transfer and that
the Person requesting such payment shall pay to the Transfer Agent any
transfer or other taxes required as a result of such payment to a Person other
than the registered holder of such Shares or establish to the satisfaction of
the Transfer Agent that such tax has been paid or is not payable. For purposes
of this Agreement, "Person" means an individual, a corporation, a limited
liability company, a partnership, an association, a trust or any other entity
or organization, including a government or political subdivision or any agency
or instrumentality thereof.
(d) After the Effective Time, there shall be no further
registration of transfers of Shares. If, after the Effective Time,
certificates representing Shares are presented to the Surviving Corporation,
they shall be canceled and exchanged for the consideration provided for, and
in accordance with the procedures set forth, in this Article 1.
(e) Any portion of the Merger Consideration made available to the
Transfer Agent pursuant to Section 1.3(a) that remains unclaimed by the
holders of Shares three months after the Effective Time shall be returned to
Buyer, upon demand, and any such holder who has not exchanged his Shares for
the Merger Consideration in accordance with this Section prior to that time
shall thereafter look only to Buyer for payment of the Merger Consideration in
respect of his Shares. Notwithstanding the foregoing, Buyer shall not be liable
to any holder of Shares for any amount paid to a public official pursuant to
applicable abandoned property laws. Any amounts remaining unclaimed by holders
of Shares two years after the Effective Time (or such earlier date immediately
prior to such time as such amounts would otherwise escheat to or become
property of any governmental entity) shall, to the extent permitted by
applicable law, become the property of Buyer free and clear of any claims or
interest of any Person previously entitled thereto.
(f) Any portion of the Merger Consideration made available to the
Transfer Agent pursuant to Section 1.3(a) to pay for Shares for which
appraisal rights have been perfected shall be returned to Buyer, upon demand.
Section 1.4. Dissenting Shares. Notwithstanding Section 1.2,
Shares outstanding immediately prior to the Effective Time and held by a
holder who has not voted in favor of the Merger or consented thereto in
writing and who has demanded appraisal for such Shares in accordance with
Delaware Law shall not be converted into a right to receive the Merger
Consideration, unless such holder fails to perfect or withdraws or otherwise
loses his right to appraisal. If after the Effective Time such holder fails to
perfect or withdraws or loses his right to appraisal, such Shares shall be
treated as if they had been converted as of the Effective Time into a right to
receive the Merger Consideration. The Company shall give Buyer prompt notice
of any demands received by the Company for appraisal of Shares, and Buyer
shall have the right to participate in all negotiations and proceedings with
respect to such demands. The Company shall not, except with the prior written
consent of Buyer, make any payment with respect to, or settle or offer to
settle, any such demands.
ARTICLE 2
The Surviving Corporation
Section 2.1. Certificate of Incorporation. At the
Effective Time, the certificate of incorporation of the Surviving
Corporation shall be amended and restated as set forth in Annex A attached
hereto.
Section 2.2. Bylaws. The bylaws of Merger Subsidiary in
effect at the Effective Time shall be the bylaws of the Surviving Corporation
until amended in accordance with applicable law.
Section 2.3. Directors and Officers. From and after the
Effective Time, until successors are duly elected or appointed and qualified in
accordance with applicable law, (a) the directors of Merger Subsidiary at the
Effective Time shall be the directors of the Surviving Corporation, and (b) the
officers of the Company at the Effective Time shall be the officers of the
Surviving Corporation.
ARTICLE 3
Representations and Warranties of the Company
The Company represents and warrants to Buyer that:
Section 3.1. Corporate Existence and Power. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware, and has all corporate powers and all material
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted. The Company is duly qualified to do business
as a foreign corporation and is in good standing in each jurisdiction where
the character of the property owned or leased by it or the nature of its
activities makes such qualification necessary, except for those jurisdictions
where the failure to be so qualified would not, individually or in the
aggregate, have a Material Adverse Effect. As used herein, the term "Material
Adverse Effect" means a material adverse effect on the business, assets,
operations, condition (financial or otherwise), results of operations or the
conduct of the business of the Company and the Company Subsidiaries taken as a
whole. For purposes of this Agreement, a "Subsidiary," as to any Person,
means any corporation or other entity of which securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are directly or
indirectly owned by such Person and "Company Subsidiary" means any Subsidiary
of the Company.
Section 3.2. Corporate Authorization; Approval of the Board.
The execution, delivery and performance by the Company of this Agreement and
the consummation by the Company of the transactions contemplated hereby are
within the Company's corporate powers and, except for any required approval
by the Company's stockholders in connection with the consummation of the
Merger, have been duly authorized by all necessary corporate action of the
Company. This Agreement constitutes a valid and binding agreement of the
Company enforceable against the Company in accordance with its terms, except
(x) as the same may be limited by applicable bankruptcy, insolvency,
moratorium or similar laws of general application relating to or affecting
creditors' rights, and (y) for the limitations imposed by general principles of
equity. The foregoing exceptions (x) and (y) are hereinafter referred to as
the "Enforceability Exceptions." The Board of Directors of the Company has,
by resolutions duly adopted at a meeting duly called and held, unanimously
approved this Agreement, the Merger and the other transactions contemplated
hereby on the material terms and conditions set forth herein. The Special
Committee has, by resolutions duly adopted at a meeting duly called and held,
unanimously approved this Agreement, the Merger and the other transactions
contemplated hereby on the material terms and conditions set forth herein.
The Special Committee has received the opinion as of the date of this
Agreement of CIBC Oppenheimer Corp. ("Oppenheimer"), as financial advisor to
the Special Committee, that the consideration to be received by the Company's
stockholders (other than Buyer and its Subsidiaries) in the Merger is fair to
such stockholders from a financial point of view.
Section 3.3. Governmental Authorization. The execution,
delivery and performance by the Company of this Agreement and the consummation
of the Merger by the Company require no material action by or in respect of, or
filing with, any governmental body, agency, official or authority other than
(a) the filing of a certificate of merger in accordance with Delaware Law; (b)
compliance with any applicable requirements of the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder (the
"Exchange Act"); (c) for notices to, or consents or waivers from, the relevant
Franchising Authorities (as defined below) pursuant to certain Franchises of
the Company and its Subsidiaries, and (d) where the failure to take such action
or make such filing would not have, and would not reasonably be expected to
have, a Material Adverse Effect or materially interfere with or delay the
transactions contemplated hereby. For purposes hereof, "Franchising
Authority" has the meaning that term is given by Section 602(10) of the Cable
Communications Policy Act of 1984 (47 U.S.C. Section 522(10)). For purposes
of this Agreement, "Franchise" means a written "franchise" within the meaning
of Section 602(9) of the Cable Communications Policy Act of 1984 (47 U.S.C.
Section 522(9)).
Section 3.4. Non-contravention. The execution, delivery and
performance by the Company of this Agreement and the consummation by the
Company of the transactions contemplated hereby do not and will not (a)
contravene or conflict with the certificate of incorporation or bylaws of the
Company, (b) assuming compliance with the matters referred to in clauses (a),
(b) and (c) of Section 3.3, contravene or conflict in any material respect with
any provision of any law, regulation, judgment, injunction, order or decree
binding upon or applicable to the Company or any Company Subsidiary, (c)
except as set forth on Schedule 3.4 and with such other exceptions as would
not individually or in the aggregate have a Material Adverse Effect, constitute
a default under or give rise to a right of termination, cancellation or
acceleration of any right or obligation of the Company or any Company
Subsidiary or to a loss of any benefit to which the Company or any Company
Subsidiary is entitled under any provision of any agreement, contract or other
instrument binding upon the Company or any Company Subsidiary or any license,
franchise, permit or other similar authorization held by the Company or any
Company Subsidiary, or (d) with such exceptions as would not individually or
in the aggregate have a Material Adverse Effect, result in the creation or
imposition of any Lien on any asset of the Company or any Company Subsidiary.
For purposes of this Agreement, "Lien" means, with respect to any asset, any
mortgage, lien, pledge, charge, security interest or encumbrance of any kind
in respect of such asset.
Section 3.5. Capitalization. The authorized capital stock of
the Company consists of 5,000,000 shares of common stock, par value $1.00 per
share (defined above as "Shares"), and 150,000 shares of preferred stock, par
value $100.00 per share. There are outstanding 4,787,060 Shares and no shares
of preferred stock. All outstanding Shares have been duly authorized and
validly issued and are fully paid and nonassessable. Except as set forth in
the second preceding sentences there are outstanding (a) no shares of capital
stock or other voting securities of the Company, (b) no securities of the
Company convertible into or exchangeable for shares of capital stock or voting
securities of the Company, (c) no options or other rights to acquire from the
Company, and no obligation of the Company to issue, any capital stock, voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of the Company and (d) no stock appreciation rights or
similar rights with respect to any securities of the Company (the items in
clauses 3.5(a), 3.5(b), 3.5(c) and 3.5(d) being referred to collectively as the
"Company Securities"). There are no outstanding obligations of the Company or
any Company Subsidiary to repurchase, redeem or otherwise acquire any Company
Securities.
Section 3.6. Subsidiaries. (a) Each Company Subsidiary is a
corporation duly incorporated, validly existing and in good standing under the
laws of its jurisdiction of incorporation, has all corporate powers and all
material governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted and is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
where the character of the property owned or leased by it or the nature of its
activities makes such qualification necessary, except for those jurisdictions
where failure to be so qualified would not, individually or in the aggregate,
have a Material Adverse Effect. All Company Subsidiaries and their respective
jurisdictions of incorporation are identified on Schedule 3.6(a).
(b) All of the outstanding capital stock of, or other ownership
interests in, each Company Subsidiary, is owned by the Company, directly or
indirectly, free and clear of any Lien and free of any other limitation or
restriction (including any restriction on the right to vote, sell or otherwise
dispose of such capital stock or other ownership interests). There are no
outstanding (i) securities of the Company or any Company Subsidiary
convertible into or exchangeable for shares of capital stock or other voting
securities or ownership interests in any Company Subsidiary, (ii) options or
other rights to acquire from the Company or any Company Subsidiary, and no
other obligation of the Company or any Company Subsidiary to issue, any
capital stock, voting securities or other ownership interests in, or any
securities convertible into or exchangeable for any capital stock, voting
securities or ownership interests in, any Company Subsidiary or (iii) stock
appreciation rights or similar rights with respect to any securities of any
Company Subsidiary (the items in clauses 3.6(b)(i), 3.6(b)(ii) and 3.6(b)(iii)
being referred to collectively as the "Company Subsidiary Securities"). There
are no outstanding obligations of the Company or any Company Subsidiary to
repurchase, redeem or otherwise acquire any outstanding Company Subsidiary
Securities.
Section 3.7. SEC Filings. (a) The Company has made available
to Buyer (i) the annual reports on Form 10-K for its fiscal years ended
December 31, 1997 (as amended through May 6, 1998), 1996 and 1995, (ii) its
quarterly reports on Form 10-Q for its fiscal quarters ended March 31, and
June 30, 1998, (iii) its proxy or information statements relating to meetings
of, or actions taken without a meeting by, the stockholders of the Company held
since December 31, 1995, and (iv) all of its other reports, statements,
schedules and registration statements filed with the Securities and Exchange
Commission (the "SEC") since December 31, 1995. As used herein, the term
"Form 10-K" means the Company's annual report on Form 10-K for the fiscal year
ended December 31, 1997 (as amended through May 6, 1998), and the term "Form
10-Q" means the Company's quarterly report on Form 10-Q for the fiscal quarter
ended June 30, 1998.
(b) As of its filing date (or in the case of the Form 10-K, as of
May 6, 1998), each such report or statement filed pursuant to the Exchange Act
complied in all material respects with the applicable requirements of the
Exchange Act and did not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading.
(c) Each such registration statement, as amended or supplemented,
if applicable, filed pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), as of the date such statement or amendment became
effective, complied in all material respects with the applicable requirements
of the Securities Act and did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
Section 3.8. Financial Statements. The audited consolidated
financial statements and unaudited consolidated interim financial statements
of the Company included in its annual reports on Form 10-K and the quarterly
reports on Form 10-Q referred to in Section 3.7 fairly present, in all material
respects and in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis (except as may be indicated in the
notes thereto), the consolidated financial position of the Company and its
consolidated subsidiaries as of the dates thereof and their consolidated
results of operations and changes in financial position for the periods then
ended (subject to normal year-end adjustments in the case of any unaudited
interim financial statements).
Section 3.9. Proxy Statement; Schedule 13E-3. The proxy
statement of the Company (the "Company Proxy Statement") to be mailed to the
shareholders of the Company in connection with the meeting of such
shareholders to vote on the approval and adoption of this Agreement (the
"Company Shareholder Meeting"), and any amendments or supplements to such
proxy statement will, when filed with the SEC, comply as to form in all
material respects with the applicable requirements of the Exchange Act. At
the time the Company Proxy Statement or any amendment or supplement thereto is
first mailed to stockholders of the Company and at the time such stockholders
vote on adoption of this Agreement, the information supplied by the Company
for inclusion or incorporation by reference in the Company Proxy Statement or
in the Rule 13e-3 Transaction Statement on Schedule 13E-3 to be filed with the
SEC in connection with the Merger (the "Schedule 13E-3"), as either such
document may be supplemented or amended, if applicable, will not contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.
Section 3.10. Absence of Certain Changes. Except as set forth
on Schedule 3.10 or as otherwise permitted by this Agreement, since June 30,
1998, the Company and Subsidiaries have in all material respects conducted
their business in the ordinary course consistent with past practice and there
has not been:
(a) any event or occurrence which has had or reasonably
would be expected to have a Material Adverse Effect (other than
those arising from general economic or industry-wide events or
occurrences);
(b) any declaration, setting aside or payment of any
dividend or other distribution with respect to any shares of
capital stock of the Company, or any repurchase, redemption or
other acquisition by the Company or any Company Subsidiary of any
outstanding shares of capital stock or other securities of, or
other ownership interests in, the Company or any Company
Subsidiary;
(c) any amendment of any material term of any outstanding
security of the Company or any Company Subsidiary;
(d) any incurrence, assumption or guarantee by the Company
or any Company Subsidiary of any indebtedness for borrowed money
with a principal amount in excess of $190,000 (other than
refinancings of existing borrowings in the ordinary course of
business under existing facilities and other than borrowings in
the ordinary course of business from Buyer);
(e) any creation or assumption by the Company or any
Company Subsidiary of any Lien (other than Permitted Liens (as
defined below)) on any material asset;
(f) any transaction or commitment made, or any contract or
agreement entered into, by the Company or any Company Subsidiary
relating to its assets or business (including the acquisition or
disposition of any assets) or any relinquishment by the Company
or any Company Subsidiary of any contract or other right, in
either case, involving more than $375,000, other than those
contemplated by this Agreement and additions of subscribers to
existing programming agreements;
(g) any making of any loan, advance or capital
contributions to or investment in any Person other than advances
to employees in the ordinary course of business consistent with
past practice and loans, advances or capital contributions to or
investments in wholly owned Subsidiaries made in the ordinary
course of business consistent with past practices;
(h) any material change in any method of accounting or
accounting practice by the Company or any Company Subsidiary,
except for any such change required by reason of a concurrent
change in generally accepted accounting principles;
(i) any (A) grant of any severance or termination pay to
any director, officer or employee of the Company or any of the
Company Subsidiaries, (B) entering into of any employment,
deferred compensation or other similar agreement (or any
amendment to any such existing agreement) with any director,
officer or employee of the Company or any of the Company
Subsidiaries, (C) increase in benefits payable under any existing
severance or termination pay policies or (D) increase in
compensation, bonus or other benefits payable to directors or
officers (who are not employees) of the Company or any of the
Company Subsidiaries, or, other than in the ordinary course of
business consistent with past practice, to employees (including
officers who are employees) of the Company or any of the Company
Subsidiaries; or
(j) any damage, destruction or other casualty loss (to the
extent not covered by insurance) affecting the business or assets
of the Company or any Company Subsidiary in excess of $375,000;
For purposes of this Agreement, "Permitted Liens" means (i) materialmen's,
materialmen's, mechanics', carriers', workmen's, warehousemen's, repairmen's,
and other like Liens arising in the ordinary course of business for payments
which are not material in amount, and deposits to obtain the release of such
Liens; (ii) Liens for current taxes not yet due and payable or which are being
contested in good faith by appropriate proceedings and for which appropriate
reserves have been established and (iii) other Liens or minor imperfections of
title that, taken in the aggregate, do not materially impair the conduct of
the Company's and the Company Subsidiaries' business or the use of any
material assets.
Section 3.11. Litigation. Except as set forth in Schedule
3.11, there is no action, suit, investigation or proceeding pending against,
or to the knowledge of the Company threatened against, the Company or any
Company Subsidiary or any of their respective properties before any court or
arbitrator or any governmental body, agency or official which would reasonably
be expected to have a Material Adverse Effect.
Section 3.12. No Undisclosed Material Liabilities. Neither the
Company nor any of the Company Subsidiaries has any indebtedness, liability
or obligation of any type, whether or not required by GAAP to be reflected on
a balance sheet and whether or not due, except (i) liabilities reflected or
reserved against in the balance sheet set forth in the Form 10-Q, or otherwise
disclosed in the Form 10-K or the Form 10-Q, (ii) liabilities incurred in the
ordinary course of business since June 30, 1998, (iii) for other liabilities
which do not and will not have, and would not reasonably be expected to have, a
Material Adverse Effect and (iv) as set forth on any Schedule hereto or any
contract or agreement set forth thereon (other than for breach thereof).
Section 3.13. Compliance with Laws. Except as set forth on
Schedule 3.13, the Company and the Company Subsidiaries hold all licenses,
franchises, certificates, consents, permits, qualifications and authorizations
from all governmental authorities necessary for the lawful conduct of their
businesses, except where the failure to hold any of the foregoing would not
have, and would not reasonably be expected to have, a Material Adverse Effect.
To the Company's knowledge, neither the Company nor any of its Subsidiaries
has violated, or is in violation of, any such licenses, franchises,
certificates, consents, permits, qualifications or authorizations or any
applicable statutes, laws, ordinances, rules and regulations (including,
without limitation, any of the foregoing related to occupational safety,
storage, disposal, discharge into the environment of hazardous wastes,
environmental protection, conservation, unfair competition, labor practices or
corrupt practices) of any governmental authorities, except where such
violations do not have, and would not reasonably be expected to have, a
Material Adverse Effect.
Section 3.14. Finders' Fees. Except for Oppenheimer, the
terms of whose engagement are set forth in the engagement letter provided to
Buyer, there is no investment banker, broker, finder or other intermediary
which has been retained by or is authorized to act on behalf, of the Company
or any Company Subsidiary who might be entitled to any fee or commission from
Buyer or any of its affiliates upon consummation of the transactions
contemplated by this Agreement.
Section 3.15. Taxes. Except as set forth on Schedule 3.15 and
except as to any items that would not, individually or in the aggregate, have a
Material Adverse Effect: (a) the Company and each of the Company Subsidiaries
has (i) timely paid all taxes of any nature whatsoever (together with any
related penalties and interest) (any of the foregoing, a "Tax") required to be
paid by it and (ii) timely filed all federal, state, local and foreign income
and other Tax returns or reports (including declarations of estimated Tax)
required to be filed by it and all such returns have been completed in
accordance with applicable law and are true and correct; (b) there are no
claims or assessments pending against the Company or any of the Company
Subsidiaries for any alleged deficiency in Tax, and the Company does not know
of any threatened Tax claims or assessments against the Company or any of the
Company Subsidiaries; (c) the Company and each of the Company Subsidiaries has
established adequate accruals for Taxes and for any liability for deferred
Taxes in accordance with GAAP; (d) there are no Liens for Taxes (other than
for current Taxes not yet due and payable) on the assets of the Company or any
of the Company's Subsidiaries; and (e) from December 31, 1997, there have not
been any Tax elections, any settlements or compromises of any income Tax
liabilities or any changes in Tax attributes (except that net operating losses
are being used to offset current taxable income).
Section 3.16. Employee Benefits. Except as set forth on
Schedule 3.16:
(a) The Company does not maintain, contribute to or have any
material liability (whether direct or indirect, including, without limitation,
as a result of an indemnification obligation) under, or with respect to, and no
ERISA Affiliate has any liability which has or will create any material
obligation by, or result in any material liability to, Buyer with respect to or
under, any Employee Benefit Plan. No material liability (whether direct or
indirect, including, without limitation, as a result of an indemnification
obligation) with respect to any Employee Benefit Plan has been or is
reasonably expected to be incurred by the Company or any ERISA Affiliate under
or pursuant to Title I or Title IV of ERISA or the penalty, excise tax or
joint and several liability provisions of the Code relating to employees,
employee compensation or employee benefit plans that could, following the
Effective Time, become or remain a material liability of Buyer or of any
Employee Benefit Plan established or contributed to by Buyer, and no event,
transaction or condition has occurred or exists that could result in any such
liability to their operations or, following the Effective Time, Buyer's.
(b) Neither the execution and delivery by the Company of this
Agreement nor the consummation of the transactions contemplated by this
Agreement will result in the acceleration or creation of any rights of any
person to benefits under any Employee Benefit Plan (including, without
limitation, the acceleration of the accrual or vesting under any Employee
Benefit Plan or the acceleration or creation under any severance, parachute or
change of control agreement) which could result in a material liability to
Buyer.
(c) To the knowledge of the Company, there is no action, order,
writ, injunction, judgment or decree outstanding or claim, suit, litigation,
proceeding arbitration, governmental audit or investigation relating to or
seeking material benefits under any Employee Benefit Plan that is pending or
threatened or anticipated against the Company, any ERISA Affiliate or any
Employee Benefit Plan, other than claims for benefits in the ordinary course.
(d) Except as set forth in the Form 10-K or the Form 10-Q, no
provision of any Employee Benefit Plan or any contract (whether or not
written), nor any transaction, condition or other event exists or has occurred
that would require Buyer to provide any material compensation, payments or
benefits (including, without limitation, severance payments) to or on behalf of
any former or current employee of the Company or any ERISA Affiliate.
(e) As used herein, the term "Employee Benefit Plan" means any
pension, retirement, profit-sharing, deferred compensation, bonus, incentive,
performance, stock option, phantom stock, stock purchase, restricted stock,
premium conversion, medical, hospitalization, vision, dental or other health,
life, disability, severance, termination or other employee benefit plan,
program, arrangement, agreement or policy, whether written or unwritten, to
which the Company or any Company Subsidiary contributes, is obligated to
contribute to, is a party to or is otherwise bound, or with respect to which
the Company or any Company Subsidiary may have any liabilities. As used
herein, the term "ERISA Affiliate" means (i) a member of any "controlled
group" (as defined in Section 414(b) of the Code) of which the Company is a
member, (ii) a trade or business, whether or not incorporated, under common
control (within the meaning of Section 414(c) of the Code) with the Company,
or (iii) a member of any affiliated service group (within the meaning of
Section 414(m) of the Code) of which the Company is a member.
Section 3.17. Environmental Matters. There are no material
Environmental Liabilities (as defined below) of the Company or any of the
Company Subsidiaries. The Company and the Company Subsidiaries are in
compliance and have been in compliance, in all material respects, with all
Environmental Laws. There has been no report regarding any material
environmental assessment, investigation, study, audit, test, review or other
analysis conducted of which the Company has knowledge in relation to the
current or prior business of the Company or the Company Subsidiaries or any
property or facility now or previously owned by the Company or the Company
Subsidiaries which has not been delivered to Buyer. For purposes of this
Agreement, "Environmental Liabilities" means any and all liabilities of the
named entity, which (i) arise under or relate to matters covered by
Environmental Laws and (ii) relate to actions occurring or conditions existing
on or prior to the Effective Time, and includes but is not limited to fines,
penalties, and costs of correcting any compliance deficiencies, and obligations
for site cleanup or investigation or cleanup resulting from the disposal,
release or threatened release of hazardous substances, pollutants,
contaminants, or wastes. "Environmental Laws" means any federal, state, and
local laws, judicial decisions, regulations, rules, judgments, orders,
decrees, permits, licenses, agreements and governmental restrictions, relating
to human health, the environment or to emissions, discharges or releases of
pollutants, contaminants or other hazardous substances or wastes into the
environment, including without limitation ambient air, surface water, ground
water or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants or other hazardous substances or wastes or the
clean-up or other remediation thereof.
Section 3.18. Systems, Franchises and Material Agreements.
(a) As of June 30, 1998, the cable television systems owned by the Company and
the Company Subsidiaries (the "Systems") (i) had approximately 41,504 Basic
Subscribers, (ii) passed approximately 65,886 residential dwelling units and
(iii) included approximately 211 underground plant miles and approximately
1,133 aerial plant miles. For purposes hereof, "Basic Subscriber" means a
customer of the Company or any of the Company Subsidiaries who as of the
relevant date satisfies all of the following requirements:
(i) such customer is connected to and receiving Basic
Service from the Company or any of the Company Subsidiaries;
(ii) such customer is being charged for the services
received at the rate that the Company or the relevant Company
Subsidiary generally charges to its customers in that location;
(iii) such customer has paid to the applicable provider the
applicable rate for all services received for one month (or more)
of service prior to the relevant date;
(iv) such customer does not have any outstanding bill or
any service charges more than sixty (60) days delinquent from the
due date therefore in excess of $10.00; and
(v) provided that a hotel, motel or other multiple dwelling
unit customer which pays less per dwelling unit than the rates
charged in the relevant area by the applicable provider for
detached single family homes shall be considered to be that
number of Basic Subscribers which is equal to revenues from Basic
Service generated by such hotel, motel or other customer for the
month ending on the relevant date (or if such date is not the end
of a month, the month ending immediately prior to such date)
(without regard to non-recurring revenues from ancillary services
such as installation fees) divided by the full rate charged to
detached single family homes for such service in the relevant
area by the applicable provider.
For purposes hereof, "Basic Service" means, for any given Franchise (as
defined below) area the cable television service tier or tiers provided by
the Company or the relevant Company Subsidiary in such Franchise area which
include the retransmission of local off air television broadcast signals.
(b) Except for (i) those contracts listed on Schedule 3.18(b) (the
"Material Agreements"), and (ii) the Company Franchises (as defined below),
neither the Company nor any of the Company Subsidiaries is a party to or is
bound by a contract, commitment or agreement which is material to the Company
and the Company Subsidiaries taken as a whole or which involves payments of
more than $375,000 in the aggregate or which restricts the Company and its
affiliates from engaging in any business or which involves the purchase of
programming by the Company. Schedule 3.18(b) sets forth a list, complete in
all material respects, of the Franchises of the Company or any of the Company
Subsidiaries (the "Company Franchises"). Each Company Franchise and each
Material Agreement is in all material respects the validly existing, legally
enforceable obligation of the Company or one of the Company Subsidiaries, as
the case may be, and, to the knowledge of the Company, of the other parties
thereto, subject to the Enforceability Exceptions. The Company and the
Company Subsidiaries are validly and lawfully operating in all material
respects under the Company Franchises and the Material Agreements to which
they are a party. The Company and the Company Subsidiaries have duly complied
in all material respects with all of the terms and conditions of each of the
Company Franchises and Material Agreement to which they are a party. Except
as set forth on Schedule 3.18(b), each System operates pursuant to a
Franchise.
(c) Except as set forth on Schedule 3.18(c) and subject to such
other exceptions as would not have a Material Adverse Effect, no Person
(including any governmental authority) has any right to acquire any interest
in any System or any assets of the Company or any of the Company Subsidiaries
(including any right of first refusal or similar right) upon an assignment or
transfer of control of a Company Franchise, other than rights of condemnation
or eminent domain afforded by law.
(d) Neither the Company nor any of the Company Subsidiaries has
made or is bound by any material written commitments to any state, municipal,
local or other governmental commission, agency or body with respect to the
operation and construction of the Systems which are not fully reflected in a
Company Franchise or a Material Agreement.
Section 3.19. Title to Properties; Encumbrances. Except as
set forth on Schedule 3.19, the Company and each of the Company Subsidiaries
has good and marketable title to (or in the case of leased assets, valid and
existing leasehold interests in) the material assets set forth on the balance
sheet included in the Form 10-Q (other than those disposed of in the ordinary
course of business since the June 30, 1998), free and clear of all Liens other
than Permitted Liens. Except as set forth on Schedule 3.19, the Company and
each of the Company Subsidiaries owns or has the lawful right to use all
assets, properties, operating rights, easements, contracts, leases, and other
instruments necessary to operate its business as presently conducted in all
material respects. Schedule 3.19 sets forth a list of all real property which
is owned or leased by the Company or any of the Company Subsidiaries. Except
as set forth in Schedule 3.19 and with such other exceptions as would not have
a Material Adverse Effect, all buildings, improvements, central receiving
apparatus, distribution equipment, cables, converters, origination equipment
and other operating assets of the Company and the Company Subsidiaries are in
good working order and condition, normal wear and tear excepted.
ARTICLE 4
Representations and Warranties of Buyer
Buyer represents and warrants to the Company that:
Section 4.1. Corporate Existence and Power. Each of Buyer and
Merger Subsidiary is a corporation duly incorporated, validly existing and in
good standing under the laws of its jurisdiction of incorporation and has all
corporate powers required to carry on its business as now conducted. Since
the date of its incorporation, Merger Subsidiary has not engaged in any
activities other than in connection with or as contemplated by this Agreement
or in connection with arranging any financing required to consummate the
transactions contemplated hereby. Buyer has heretofore delivered to the
Company true and complete copies of Buyer's and Merger Subsidiary's
certificate or articles of incorporation and bylaws as in effect on the date
hereof.
Section 4.2. Corporate Authorization. The execution, delivery
and performance by Buyer and Merger Subsidiary of this Agreement and the
consummation by Buyer and Merger Subsidiary of the transactions contemplated
hereby are within the corporate powers of Buyer and Merger Subsidiary and have
been duly authorized by all necessary corporate action of Buyer and Merger
Subsidiary. This Agreement constitutes a valid and binding agreement of each
of Buyer and Merger Subsidiary enforceable against it in accordance with its
terms, subject to the Enforceability Exceptions.
Section 4.3. Governmental Authorization. The execution,
delivery and performance by Buyer and Merger Subsidiary of this Agreement and
the consummation by Buyer and Merger Subsidiary of the transactions
contemplated by this Agreement require no material action by or in respect of,
or filing with, any governmental body, agency, official or authority other than
(a) the filing of a certificate of merger in accordance with Delaware Law, (b)
compliance with any applicable requirements of the Exchange Act; and (c) where
the failure to obtain such consents, approvals, authorizations or permits, or
to make such filings or notifications, would not have, and would not
reasonably be expected to have, a Buyer MAE or materially interfere with or
delay the transactions contemplated hereby. As used herein, the term "Buyer
MAE" means a material adverse effect on the business, assets, operations,
condition (financial or otherwise), results of operations or the conduct of the
business of Buyer and its Subsidiaries taken as a whole.
Section 4.4. Non-contravention. The execution, delivery and
performance by Buyer and Merger Subsidiary of this Agreement and the
consummation by Buyer and Merger Subsidiary of the transactions contemplated
hereby do not and will not (a) contravene or conflict with the certificate or
articles of incorporation or bylaws of Buyer or Merger Subsidiary, (b)
assuming compliance with the matters referred to in Section 4.3, contravene or
conflict in any material respect with any provision of law, regulation,
judgment, order or decree binding upon Buyer or any Subsidiary of Buyer, or
(c) except as set forth in Schedule 4.4, and with such exceptions as would not
individually or in the aggregate have a Buyer MAE, constitute a default under
or give rise to any right of termination, cancellation or acceleration of any
right or obligation of Buyer or any Subsidiary of Buyer or to a loss of any
benefit to which Buyer or any Subsidiary of Buyer is entitled under any
agreement, contract or other instrument binding upon Buyer or any Subsidiary
of Buyer.
Section 4.5. Proxy Statement; Schedule 13E-3. At the time the
Company Proxy Statement or any amendment or supplement thereto is first mailed
to stockholders of the Company and at the time such stockholders vote on
adoption of this Agreement, the information supplied by Buyer for inclusion or
incorporation by reference in the Company Proxy Statement or the Schedule
13E-3, as either such document may be amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading.
Section 4.6. Finders' Fees. There is no investment banker,
broker, finder or other intermediary which has been retained by or is
authorized to act on behalf, of Buyer or any Buyer Subsidiary (other than the
Company or any Company Subsidiary as set forth in Section 3.15) who might be
entitled to any fee or commission from the Company or any of its affiliates
upon consummation of the transactions contemplated by this Agreement.
Section 4.7. Financing. Buyer has, or will have prior to the
Effective Time, sufficient funds available to pay the Merger Consideration in
respect of all of the Shares (other than Shares owned by Buyer or any
Subsidiary of Buyer) and to pay all related fees and expenses pursuant to the
Merger and this Agreement.
Section 4.8. Ownership of Shares. Buyer is the record and
beneficial owner of 2,964,250 Shares.
ARTICLE 5
Covenants of the Company
The Company agrees that:
Section 5.1. Conduct of the Company. Except as set forth in
Schedule 5.1 or as otherwise contemplated herein, from the date hereof until
the Effective Time, the Company and the Company Subsidiaries shall conduct
their business in the ordinary course consistent with past practice in all
material respects and shall use their best efforts to preserve intact their
business organizations and relationships with third parties and to keep
available the services of their present officers and employees in all material
respects. Without limiting the generality of the foregoing, from the date
hereof until the Effective Time and except as set forth in Schedule 5.1:
(a) the Company will not and will not permit any Company
Subsidiary adopt or propose any change in its certificate of
incorporation or bylaws;
(b) the Company will not, and will not permit any Company
Subsidiary to, merge or consolidate with any other Person or
acquire assets from any other Person in excess of $375,000;
(c) the Company will not, and will not permit any Company
Subsidiary to, sell, lease, license or otherwise dispose of any
material assets or property except (i) pursuant to existing
contracts or commitments disclosed herein or (ii) not in excess
of $375,000;
(d) the Company will not, and will not permit any Company
Subsidiary to, make any capital expenditure in excess of
$375,000;
(e) the Company will not, and will not permit any Company
Subsidiary to, enter into or amend in any material respect any
agreement that would be required to be disclosed on Schedule
3.18;
(f) the Company will not, and will not permit any Company
Subsidiary to, take any action described in subsections (b)
through (i) of Section 3.10;
(g) the Company will not, and will not permit any Company
Subsidiary to, agree or commit to do any of the foregoing; or
(h) the Company will not, and will not permit any Company
Subsidiary to take or agree or commit to take any action that
would make any representation and warranty of the Company
hereunder inaccurate in any respect at the Effective Time.
Section 5.2. Stockholder Meeting; Proxy Material. The Company
shall cause the Company Stockholder Meeting to be duly called and held as soon
as reasonably practicable for the purpose of voting on the approval and
adoption of this Agreement and the Merger. The Directors of the Company
shall, subject to their fiduciary duties as advised by counsel, recommend
approval and adoption of this Agreement and the Merger by the Company's
stockholders and include such recommendation in the Company Proxy Statement.
In connection with such meeting, the Company (a) will use its best efforts to
obtain the necessary approvals by its stockholders of this Agreement and the
transactions contemplated hereby and (b) will otherwise comply with all legal
requirements applicable to such meeting.
Section 5.3. Access to Information. From the date hereof
until the Effective Time, the Company will give Buyer, its counsel, financial
advisors, auditors and other authorized representatives full access to the
offices, properties, books and records of the Company and the Company
Subsidiaries, will furnish to Buyer, its counsel, financial advisors, auditors
and other authorized representatives such financial and operating data and
other information as such Persons may reasonably request and will instruct the
Company's employees, counsel and financial advisors to cooperate with Buyer
in its investigation of the business of the Company and the Company
Subsidiaries; provided that no investigation pursuant to this Section shall
affect any representation or warranty given by the Company to Buyer hereunder.
ARTICLE 6
Covenants of Buyer
Buyer agrees that:
Section 6.1. Obligations of Merger Subsidiary. Buyer will
take all action necessary to cause Merger Subsidiary to perform its
obligations under this Agreement.
Section 6.2. Voting of Shares. Buyer agrees to vote all Shares
beneficially owned by it in favor of adoption of this Agreement and the Merger
at the Company Stockholder Meeting.
Section 6.3. Director and Officer Liability. For six years
after the Effective Time, Buyer will, and will cause the Surviving Corporation
to, (i) indemnify and hold harmless the present and former officers, directors
and employees of the Company in respect of acts or omissions occurring prior to
the Effective Time (including, without limitation, in respect of acts or
omissions in connection with this Agreement and the transactions contemplated
hereby) to the fullest extent permitted under the Company's Certificate of
Incorporation and Bylaws and (ii) to the fullest extent permitted under
applicable law, advance to such Persons expenses incurred in defending any
action or suit with respect to which indemnity may be available under the
Company's Certificate of Incorporation or Bylaws upon receipt from each such
Person to whom expenses are advanced of an undertaking reasonably satisfactory
to Buyer to repay such advances if it is ultimately determined that such
Person is not entitled to indemnification. In the event any claim or claims
are asserted or made within such six year period, all rights to
indemnification in respect of any such claim or claims shall continue until
disposition of any and all such claims. Any determination required to be made
with respect to whether any of the foregoing Persons is entitled to
indemnification or advancement of expenses as set forth above shall be made
by independent legal counsel selected mutually by such Person and Buyer. For
six years after the Effective Time, Buyer will use its best efforts to provide
officers' and directors' liability insurance and fiduciary liability insurance
in respect of acts or omissions occurring on or prior to the Effective Time
covering each such Person currently covered by the Company's officers' and
directors' liability insurance policy and fiduciary liability insurance policy
on terms with respect to coverage and amount no less favorable in any material
respect than those of such policies in effect on the date hereof; provided
that in satisfying its obligation under this Section, Buyer shall not be
obligated to pay annual premiums in excess of $76,740 (which is approximately
200% of the current annual premiums allocated to the Company as of the date
hereof); provided further that if the premiums would exceed such amount in a
given year, Buyer shall use its best efforts to purchase coverage that in the
reasonable opinion of Buyer is the best available for such amount per year.
Buyer may satisfy such obligation by purchasing officers' and directors'
liability and fiduciary liability run-off coverage for such six-year period.
Section 6.4. Absence of Actions Causing Breach. Buyer agrees
that it will not knowingly cause the Company or any Company Subsidiary to take
any action that would cause the Company to breach any of its representations,
warranties, agreements or covenants under this Agreement.
ARTICLE 7
Covenants of Buyer and the Company
The parties hereto agree that:
Section 7.1. Best Efforts; SEC Filings. Each of the parties
hereto agrees to use its best efforts to take, or cause to be taken, all
appropriate action, and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and
make effective the transactions contemplated by this Agreement in the most
expeditious manner practicable, including but not limited to the satisfaction
of all conditions to the Merger and seeking to remove promptly any injunction
or other legal barrier that may prevent or delay such consummation. Each of
the parties shall promptly notify the other whenever a consent is obtained and
shall keep the other informed as to the progress in obtaining such consents.
The Company and Buyer will promptly prepare and file with the SEC, and
thereafter promptly mail to the stockholders of the Company as promptly as
practicable the Company Proxy Statement and all other proxy materials for the
Company Stockholder Meeting. The Schedule 13E-3, and any amendments or
supplements thereto, will, when filed with the SEC, comply as to form in all
material respects with the applicable requirements of the Exchange Act. The
Company Proxy Statement will include therein the information required to be
provided to the Company's shareholders by Rule 13e-3(e) under the Exchange
Act.
Section 7.2. Public Announcements. Buyer and the Company will
consult with each other before issuing any press release or making any public
statement with respect to this Agreement and the transactions contemplated
hereby and, except as may be required by applicable law or any listing
agreement with any national quotation system, will not issue any such press
release or make any such public statement prior to such consultation.
Section 7.3. Further Assurances. At and after the Effective
Time, the officers and directors of the Surviving Corporation will be
authorized to execute and deliver, in the name and on behalf of the Company or
Merger Subsidiary, any deeds, bills of sale, assignments or assurances and to
take and do, in the name and on behalf of the Company or Merger Subsidiary, any
other actions and things to vest, perfect or confirm of record or otherwise in
the Surviving Corporation any and all right, title and interest in, to and
under any of the rights, properties or assets of the Company acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with,
the Merger.
Section 7.4. Notices of Certain Events. The parties shall
promptly notify each other of:
(a) any notice or other communication from any Person
alleging that the consent of such Person is or may be required in
connection with the transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental
or regulatory agency or authority in connection with the
transactions contemplated by this Agreement; and
(c) the occurrence, or threatened occurrence, of any fact or
circumstance that would cause or constitute, or would be
reasonably likely to cause or constitute, a material breach of
any of its representations and warranties set forth herein.
ARTICLE 8
Closing; Conditions to the Merger
Section 8.1. Closing. The closing of the transactions
contemplated hereby shall take place at the offices of counsel to Buyer in New
York, New York, or at such other location as the parties may agree in writing.
Section 8.2. Conditions to the Obligations of Each Party. The
obligations of the Company, Buyer and Merger Subsidiary to consummate the
Merger are subject to the satisfaction of the following conditions:
(a) this Agreement and the Merger shall have been adopted by
the stockholders of the Company in accordance with such Law;
(b) no provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the
consummation of the Merger; and
(c) (i) no federal, state or foreign court, arbitrator or
governmental body, agency, or official shall have issued any
order, and there shall not have been adopted or promulgated any
statute, rule or regulation, prohibiting the consummation of the
Merger, or, except for orders, statutes, rules and regulations of
general effect, limiting or restricting Buyer's conduct or
operation of the business of the Company after the Merger in a
manner that would have a Material Adverse Effect, and (ii) no
proceeding seeking to prohibit, alter, prevent or materially
delay the Merger shall have been instituted by any governmental
agency or authority before any court, arbitrator or governmental
body, agency or official and be pending.
Section 8.3. Conditions to the Obligations of Buyer and Merger
Subsidiary. The obligations of Buyer and Merger Subsidiary to consummate the
Merger are subject to the satisfaction of the following further conditions:
(a) (i) the Company shall have performed in all material
respects all of its obligations hereunder required to be
performed by it at or prior to the Effective Time and the
representations and warranties of the Company contained in this
Agreement shall be true (disregarding all exceptions therein for
materiality and Material Adverse Effect) at and as of the
Effective Time as if made at and as of such time (except for
representations and warranties made as of a specific date, which
shall be true (disregarding all exceptions therein for
materiality and Material Adverse Effect) at and as of such date)
with such exceptions as would not, individually or in the
aggregate, have a Material Adverse Effect and (ii) Buyer shall
have received a certificate signed by an executive officer on
behalf of the Company to the foregoing effect;
(b) Buyer shall have received all customary documents it
may reasonably request relating to the existence of the Company
and the authority of the Company for this Agreement, all in form
and substance reasonably satisfactory to Buyer; and
(c) 120 calendar days shall have elapsed after the effective
time of the merger of Avalon Cable of Michigan Inc. ("Avalon
Cable") into Buyer shall have occurred in accordance with the
Agreement and Plan of Merger dated as of June 3, 1998, amended
and restated on July 15, 1998, and further amended on August 11,
1998 (as amended from time to time, the "Buyer Merger
Agreement"), among Buyer, Avalon Cable of Michigan Holdings Inc.
and Avalon Cable.
Section 8.4. Conditions to the Obligations of the Company. The
obligations of the Company to consummate the Merger are subject to the
satisfaction of the following further conditions:
(a) (i) each of Buyer and Merger Subsidiary shall have
performed in all material respects all of its obligations
hereunder required to be performed by it at or prior to the
Effective Time and the representations and warranties of Buyer
and Merger Subsidiary contained in this Agreement shall be true
(disregarding all exceptions therein for materiality and Buyer
MAE) at and as of the Effective Time as if made at and as of such
time (except for representations and warranties made as of a
specific date, which shall be true (disregarding all exceptions
therein for materiality and Buyer MAE) at and as of such date)
with such exceptions as would not, individually or in the
aggregate, have a Buyer MAE and (ii) the Company shall have
received a certificate signed by an executive officer on behalf
of Buyer to the foregoing effect;
(b) the Company shall have received all customary
documents it may reasonably request relating to the existence of
Buyer or Merger Subsidiary and the authority of Buyer or Merger
Subsidiary for this Agreement, all in form and substance
reasonably satisfactory to the Company; and
(c) the fairness opinion, dated as of the date hereof,
delivered by Oppenheimer shall not have been withdrawn or
modified in any materially adverse respect.
ARTICLE 9
Termination
Section 9.1. Termination. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time
(notwithstanding any approval of this Agreement by the stockholders of the
Company):
(a) by mutual written consent of the Company and Buyer;
(b) by either the Company or Buyer, if the Merger has not
been consummated by March 31, 1999; provided that no party that
has materially breached its obligations hereunder shall be
entitled to terminate this Agreement under this subsection;
(c) by Buyer, if the Buyer Merger Agreement is terminated;
(d) by either the Company or Buyer (so long as such party
has complied in all material respects with its obligations under
Section 7.1), if there shall be any law or regulation that makes
consummation of the Merger illegal or if any judgment,
injunction, order or decree enjoining Buyer or the Company from
consummating the Merger is entered and such judgment, injunction,
order or decree shall become final and nonappealable;
(e) by the Company (provided that at the time Buyer would
not be entitled to terminate this Agreement under Section 9.1(f)
disregarding the notice provision therein) if Buyer or Merger
Subsidiary is (i) in material breach of any of its obligations
hereunder or (ii) in breach of one or more of its representations
and warranties hereunder (disregarding any exceptions therein for
materiality or Buyer MAE) with such exceptions as would not
individually or in the aggregate have a Buyer MAE, and does not
cure, or proceed in good faith to cure, such breach within ten
business days after the Company delivers written notice thereof;
or
(f) by Buyer (provided that at the time the Company would
not be entitled to terminate this Agreement under Section 9.1(e)
disregarding the notice provisions thereof) if the Company is (i)
in material breach of any of its obligations hereunder or (ii) in
breach of one or more of its representations or warranties
hereunder (disregarding any exceptions therein for materiality or
Material Adverse Effect) with such exceptions as would not
individually or in the aggregate have a Material Adverse Effect,
and does not cure, or proceed in good faith to cure, such breach
within ten business days after notice by Buyer thereof.
The party desiring to terminate this Agreement pursuant to
clauses 9.1(b) 9.1(c), 9.1(d), 9.1(e) or 9.1(f) shall give written notice
of such termination to the other party in accordance with Section 10.1.
Section 9.2. Effect of Termination. If this Agreement is
terminated pursuant to Section 9.1, this Agreement shall become void and of no
effect with no liability on the part of any party hereto, except that the
agreements contained in Section 10.4 shall survive the termination hereof.
ARTICLE 10
Miscellaneous
Section 10.1. Notices. All notices, requests and other
communications to any party hereunder shall be in writing (including telecopy
or similar writing) and shall be given,
if to Buyer or Merger Subsidiary, to:
Cable Michigan, Inc.
105 Carnegie Center
Princeton, New Jersey 08540
Telecopy: 609-734-3830
Attention: General Counsel
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Telecopy: 212-450-4800
Attention: William L. Taylor
if to the Company, to:
Mercom, Inc.
105 Carnegie Center
Princeton, New Jersey 08540
Telecopy: 609-734-3830
Attention: General Counsel
with a copy to:
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, NY 10022
Telecopy: 212-308-4519
Attention: Charles I. Weissman
or such other address or telecopy number as such party may hereafter specify
for the purpose by notice to the other parties hereto. Each such notice,
request or other communication shall be effective (a) if given by telecopy,
when such telecopy is transmitted to the telecopy number specified in this
Section and the appropriate telecopy confirmation is received or (b) if given
by any other means, when delivered at the address specified in this Section.
Section 10.2. Survival. The representations and warranties
contained herein and in any certificate or other writing delivered pursuant
hereto shall not survive the Effective Time or the termination of this
Agreement. The parties agree (i) that the Company shall have no liability
whatsoever for any breach of the representations and warranties set forth in
Article 3 and (ii) that such representations and warranties are provided only
for the purpose of the condition set forth in Section 8.3(a) and the
termination provision set forth in Section 9.01(f). All covenants and
agreements contained herein which by their terms are to be performed in whole
or in part after the Effective Time shall survive the Effective Time and be
enforceable in accordance with their terms.
Section 10.3. Amendments; No Waivers. (a) Any provision of
this Agreement may be amended or waived prior to the Effective Time if, and
only if, such amendment or waiver is in writing and signed, in the case of an
amendment, by the Company, Buyer and Merger Subsidiary or in the case of a
waiver, by the party against whom the waiver is to be effective; provided that
after the adoption of this Agreement by the stockholders of the Company, no
such amendment or waiver shall, without the further approval of such
stockholders, alter or change (i) the amount or kind of consideration to be
received in exchange for any shares of capital stock of the Company or (ii)
any of the terms or conditions of this Agreement if such alteration or change
would adversely affect the holders of any shares of capital stock of the
Company.
(b) No failure or delay by any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights
or remedies provided by law.
(c) The Company shall not amend or waive any right under this
Agreement, or consent to or exercise any right to terminate this Agreement,
unless such action is approved by the Special Committee.
Section 10.4. Expenses. All costs and expenses incurred in
connection with this Agreement shall be paid by the party incurring such cost
or expense.
Section 10.5. Successors and Assigns. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, provided that no party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the consent of the other parties hereto except that the
rights and obligations of Merger Subsidiary may be assigned to any affiliates
of Buyer and each of Buyer and Merger Subsidiary may pledge their rights
hereunder to any person or entity providing financing to Buyer or Merger
Subsidiary.
Section 10.6. Governing Law. This Agreement shall be
construed in accordance with and governed by the law of the State of Delaware.
Section 10.7. Counterparts; Effectiveness. This Agreement 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. This Agreement shall become effective when each party hereto shall
have received counterparts hereof signed by all of the other parties hereto.
Section 10.8. Parties in Interest. This Agreement shall be
binding upon and inure solely to the benefit of each party hereto, and nothing
in this Agreement, express or implied, is intended to confer upon any other
person any rights or remedies of any nature whatsoever under or by reason of
this Agreement, except for Sections 6.3 and 10.9 (which are also intended to be
for the benefit of the persons provided for therein and may also be enforced by
such persons).
Section 10.9. No Personal Liability. Neither this Agreement
nor any certificate delivered hereunder shall create or be deemed to create or
permit any personal liability or obligation on the part of any direct or
indirect shareholder of any party hereto (except the Buyer to the extent set
forth herein) or any officer, director, employee, agent, representative or
investor of any party hereto.
Section 10.10. Jurisdiction. Any suit, action or proceeding
seeking to enforce any provision of, or based on any matter arising out of or
in connection with, this Agreement or the transactions contemplated by this
Agreement shall be brought in any federal court in the State of Delaware or
any Delaware state court sitting in Wilmington, and each of the parties hereto
hereby consents to the exclusive jurisdiction of such courts (and of the
appropriate appellate courts therefrom) in any such suit, action or proceeding
and waives any objection to venue laid therein. Process in any such suit,
action or proceeding may be served on any party anywhere in the world, whether
within or without the State of Delaware. Without limiting the generality of
the foregoing, each party hereto agrees that service of process upon such
party at the address referred to in Section 10.1, together with written notice
of such service to such party, shall be deemed effective service of process
upon such party.
Section 10.11. Interpretation. When a reference is made in
this Agreement to a Section or Schedule, such reference shall be to a Section
of or a Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used
in this Agreement they shall be deemed to be followed by the words "without
limitation". The phrases "the date of this Agreement", "the date hereof", and
terms of similar import, unless the context otherwise requires, shall be deemed
to refer to September 10, 1998.
Section 10.12. Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this
Agreement was not performed in accordance with the terms hereof and that the
parties shall be entitled to an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and provisions of this
Agreement in any federal court located in the State of Delaware or any
Delaware state court sitting in Wilmington, in addition to any other remedy to
which they are entitled at law or in equity.
Section 10.13. Entire Agreement; Schedules. This Agreement
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersedes all prior written and oral and all
contemporaneous oral agreements and understandings with respect to the subject
matter hereof. Each party acknowledges and agrees that no other party hereto
makes any representations or warranties, whether express or implied, other
than the express representations and warranties contained herein or in the
certificates to be delivered at the Effective Time. The fact that any item of
information is disclosed in any Schedule to this Agreement shall not be
construed to mean that such information is required to be disclosed by this
Agreement. Such information and the dollar thresholds set forth herein shall
not be used as a basis for interpreting the terms "material" or "Material
Adverse Effect" or other similar terms in this Agreement. A matter set forth
in one section of the Schedules need not be set forth in any other section or
Schedule so long as its relevance to the latter section or Schedule is
reasonably clear.
Section 10.14. Severability. If any term or other provision
of this Agreement is determined to be invalid, illegal or incapable of being
enforced by any rule of law, or public policy, all other conditions and
provisions of this Agreement shall nevertheless remain in full force and
effect so long as the economic or legal substance of the transactions
contemplated herein is not affected in any manner materially adverse to any
party hereto. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.
MERCOM, INC.
By: /s/ Mark Haverkate
---------------------------------
Name: Mark Haverkate
Title: President and
Chief Executive Officer
CABLE MICHIGAN, INC.
By: /s/ David C. McCourt
---------------------------------
Name: David C. McCourt
Title: Chairman, Chief
Executive Officer
MERCOM ACQUISITION, INC.
By: /s/ David C. McCourt
---------------------------------
Name: David C. McCourt
Title: Chairman, Chief
Executive Officer
Annex A
CERTIFICATE
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
MERCOM, INC.
* * * *
Adopted in accordance with the provivions
of Section 242 and Section 245 of the General Corporation Law
of the State of Delaware
* * * *
The undersigned on behalf of Mercom, Inc., a corporation duly organized
and existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation"), DOES HEREBY CERTIFY as follows:
FIRST: The Corporation filed Its origina(Certificate of Incorporation
with the Delaware Secretary of State on _________________ (the "Certificate")
under the name of _____________________.
[SECOND: The Corporation on ____________________ changed its name to
Mercom, Inc.]
THIRD: The Board of Directors of the Corporation, pursuant to unanimous
written consent, adopted resolutions authorizing the Corporation to amend,
integrate and restate the Corporation's Certificate in its entirety to read as
set forth in Exhibit A attached hereto and made a part hereof (the "Restated-
Certificate").
FOURTH: In accordance with Section 228, Section 242 and Section 245 of
the General Corporation Law of the State of Delaware, the Restated Certificate
was duly approved and adopted pursuant to a written consent signed by the
holders of at least a majority of the issued and outstanding shares of stock
entitled to vote thereon of the Corporation, [Written notice has been given to
the stockholders who have not consented in writing.)
IN WITNESS WHEREOF, the undersigned on behalf of the Corporation for
the purpose of amending and restating the Restated Certificate of Incorporation
of the Corporation pursuant to the General Corporation Law of the State of
Delaware, under penalties of perjury does hereby declare and certify that this
is the act and deed of the Corporation and the facts stated herein are true,
and accordingly has hereunto signed this Certificate of Restated Certificate of
Incorporation this __ day of __________, 1998.
Mercom, Inc.,
a Delaware corporation
By:
-------------------------------
Name:
--------------------------
Title:
-------------------------
Exhibit A
RESTATED CERTIFICATE OF INCORPORATION
OF
MERCOM, INC.
ARTICLE ONE
The name of the corporation is Mercom, Inc.
ARTICLE TWO
The address of the corporation's regIstered office In the State of
Delaware Is 9 East Loockerman Street, In the City of Dover, County of Kent,
19901. The name of its registered agent at such address i's National Registered
Agents, Inc.
ARTICLE THREE
The nature of the business or purposes to be conducted or promoted is
to engage In any lawful act or activity for whlch corporations may be organized
under the General Corporation Law of the State of Delaware.
ARTICLE FOUR
The total number of shares of stock which the corporation has authority
to issue is one thousand (1,000) shares of Common Stock, par value one cent
($0.01) per share.
ARTICLE FIVE
The corporation is to have perpetual existence.
ARTICLE SIX
In furtherance and not in limitation of the powers conferred by
statute, the board of directors of the corporation is expressly authorized to
make, alter or repeal the bylaws of the corporation.
ARTICLE SEVEN
Meetings of stockholders maybe held within orwithout the State of
Delaware, as the by-laws of the corporation may provide.. The books of the
corporation may be kept outside the State of Delaware at such place or places as
may be designated from time to time by the board of directors or in the by-laws
of the corporation, Election of directors need not be by written ballot unless
the by-laws of the corporation so provide.
ARTICLE EIGHT
To the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended, a director of
this corporation shall not be liable to the corporation or its stockholders for
monetary damages for a breach of fiduciary duty as a director. Any repeal or
modification of this ARTICLE EIGHT shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification.
ARTICLE NINE
The corporation expressly elects not to be governed by 203 of the
General Corporation Law of the State of Delaware.
ARTICLE TEN
The corporation reserves the right to amend, alter, change or repeal
any provision contained in this certificate of incorporation in the manner now
or hereafter prescribed herein and by the laws of the State of Delaware, and
all rlghts conferred upon stockholders herein are granted subject to this
reservation.
ANNEX B
CIBC Oppenheimer CIBC OPPENHEIMER CORP.
A CIBC WORLD MARKETS COMPANY 425 Lexington Avenue
New York, NY 10017
Tel: 212-885-4400
Fax: 212-885-4998
September 10, 1998
The Special Committee of
the Board of Directors
The Board of Directors
Mercom, Inc.
105 Carnegie Center
Princeton, NJ 08540-6215
Dear Members of the Special Committee and Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of shares of Common Stock, par value $1.00 per share (the
"Mercom Common Stock"), of Mercom, Inc. ("Mercom" or the "Company") other than
Cable Michigan, Inc. ("Cable Michigan") of the consideration to be received by
such holders (the "Unaffiliated Holders") pursuant to the Agreement and Plan
of Merger (the "Merger") by and among the Company, Cable Michigan and Mercom
Acquisition, Inc. ("MAI"), dated as of September 10, 1998 (the "Merger
Agreement"). Pursuant to the Merger Agreement, among other things, MAI shall be
merged into the Company (the "Merger") and holders of each outstanding share of
Mercom Common Stock (other than shares of Mercom Common Stock owned by the
Company as treasury stock or by Cable Michigan or any wholly owned subsidiary
of Cable Michigan and shares as to which dissenters' rights have been validly
exercised) shall receive as consideration $12.00 in cash, without interest,
(the "Consideration") for each share of Mercom Common Stock.
In connection with the rendering of this opinion, we have:
(i) reviewed the terms and conditions of the Merger Agreement and the
financial terms of the Merger, all as set forth in the Merger
Agreement;
(ii) analyzed certain historical business and financial information
relating to the Company;
(iii) reviewed certain financial forecasts and other data provided to us
by the Company, relating to the businesses of the Company,
including the most recent business plans for the Company, prepared
by senior management of Mercom responsible for day to day
management of the Company pursuant to a management agreement dated
January 1, 1997, in the form furnished to us;
(iv) conducted discussions with members of the senior management of the
Company and Cable Michigan with respect to the historical
operations, businesses and prospects of the Company, the strategic
objectives of the Company and possible benefits which might be
realized following the Merger;
(v) reviewed public information with respect to certain other
companies in lines of businesses we believe to be generally
comparable in whole or in part to the businesses of the Company
and Cable Michigan and reviewed the financial terms of certain
other acquisitions involving companies in lines of businesses we
believe to be generally comparable in whole or in part to
businesses of the Company and Cable Michigan that have recently
been effected;
(vi) analyzed the offer price for the acquisition of each share of
common stock of Cable Michigan by Avalon Cable of Michigan, Inc.,
on a stand-alone basis (excluding the value of Mercom Common Stock
held by Cable Michigan or its wholly owned subsidiaries);
(vii) reviewed the historical stock prices and trading volumes of the
Mercom Common Stock and the common stock of other companies which
we believe to be generally comparable with the Company and Cable
Michigan; and
(viii) conducted such other financial studies, analyses and
investigations as we deemed appropriate.
We have relied upon the accuracy and completeness of the foregoing financial
and other information and have not assumed responsibility for independent
verification of such information or conducted any independent valuation or
appraisal of any of the assets of the Company, nor have we been furnished with
any such appraisals. With respect to financial forecasts, we have assumed that
they have been reasonably prepared on a basis reflecting the best currently
available estimates and judgments of management of the Company and Cable
Michigan as to the future financial performance of the Company. We assume no
responsibility for, and express no view as to, such forecasts or the
assumptions on which they are based.
Our opinion necessarily is based upon market, economic and other conditions as
they exist on, and can be evaluated as of, the date of this letter. In
rendering our opinion, we have assumed that the Merger will be consummated
substantially on the terms described in the Merger Agreement, without any
waiver of any material terms or conditions by any party thereto. It should be
understood that, although subsequent developments may affect this opinion, we
do not have any obligation to update, revise or reaffirm this opinion to
reflect such developments.
This Fairness Opinion is for the exclusive use of the Special Committee of the
Board of Directors (the "Special Committee") and the Board of Directors of the
Company (the "Board of Directors") and we have advised the Special Committee
and the Board of Directors that no other person, entity or affiliates of the
Company may rely upon this letter to support any claim against us arising
under applicable law. Should any such claim be brought against us, resolution
of the question of the availability of such a defense would be resolved by a
court of competent jurisdiction and such resolution would have no effect on
the rights and responsibilities of the Special Committee and the Board of
Directors under applicable state law. Furthermore, the availability cf such a
defense to us would have no effect on the rights and responsibilities of either
us or the Special Committee and the Board of Directors under the federal
securities laws.
Our engagement and the opinion expressed herein are for the benefit of the
Special Committee and the Board of Directors, and our opinion is rendered in
connection with its consideration of the Merger. This opinion does not
address the business decision of the Special Committee and the Board of
Directors to engage in the Merger. No opinion is expressed herein, nor should
one be implied as to the fair market value of Mercom Common Stock. This
opinion is not intended to and does not constitute a recommendation to any
holder of Mercom Common Stock as to whether such holder should vote to approve
the Merger Agreement and the transactions contemplated thereby. It is
understood that, except for inclusion of this letter in its entirety in a
proxy statement from the Company to holders of Mercom Common Stock relating to
the Merger and other Securities and Exchange Commission filings by the Company
relating to the Merger, this letter may not be disclosed or otherwise referred
to or used for any other purpose without our prior written consent, except as
may otherwise be required by law or by a court of competent jurisdiction.
Based on and subject to the foregoing, we are of the opinion that, as of the
date hereof, the Consideration to be received by the Unaffiliated Holders
pursuant to the Merger is fair to such holders from a financial point of view.
Very truly yours,
/s/ CIBC Oppenheimer
ANNEX C
RIGHTS OF DISSENTING STOCKHOLDERS UNDER THE DGCL
In view of the complexity of these provisions of the DGCL, any stockholder
who is considering exercising appraisal rights should consult his or her legal
advisor.
Statutory Appraisal Procedures. The following is a brief summary of the
statutory procedures to be followed by a holder of Shares at the Effective Time
who does not wish to accept the per Share cash consideration pursuant to the
Merger (a "Remaining Stockholder") in order to dissent from the Merger and
perfect appraisal rights under the DGCL. THIS SUMMARY IS NOT INTENDED TO BE
COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SECTION 262 OF THE
DGCL, THE TEXT OF WHICH IS SET FORTH IN THIS ANNEX C HERETO. ANY REMAINING
STOCKHOLDER CONSIDERING DEMANDING APPRAISAL IS ADVISED TO CONSULT LEGAL COUNSEL.
APPRAISAL RIGHTS WILL NOT BE AVAILABLE UNLESS AND UNTIL THE MERGER (OR A SIMILAR
BUSINESS COMBINATION) IS CONSUMMATED.
Remaining stockholders of record who desire to exercise their appraisal
rights must fully satisfy all of the following conditions. A written demand for
appraisal of Shares must be delivered to the Secretary of the Company (x) before
the taking of the vote on the approval and adoption of the Merger Agreement at
the Special Meeting. This written demand for appraisal of Shares must be in
addition to and separate from any proxy or vote abstaining from or against the
approval and adoption of the Merger Agreement, and neither voting against,
abstaining from voting, nor failing to vote on the Merger Agreement will
constitute a demand for appraisal within the meaning of Section 262 of the DGCL.
In the case of a "long-form" merger, any stockholder seeking appraisal rights
must hold the Shares for which appraisal is sought on the date of the making of
the demand, continuously hold such Shares through the Effective Time and
otherwise comply with the provisions of Section 262 of the DGCL.
A demand for appraisal must be executed by or for the stockholder of
record, fully and correctly, as such stockholder's name appears on the stock
certificates. If Shares are owned of record in a fiduciary capacity, such as by
a trustee, guardian or custodian, such demand must be executed by the fiduciary.
If Shares are owned of record by more than one person, as in a joint tenancy or
tenancy in common, such demand must be executed by all joint owners. An
authorized agent, including an agent for two or more joint owners, may execute
the demand for appraisal for a stockholder of record; however, the agent must
identify the record owner and expressly disclose the fact that in exercising the
demand, he is acting as agent for the record owner.
A record owner, such as a broker, who holds Shares as a nominee for
others, may exercise appraisal rights with respect to the Shares held for all or
less than all beneficial owners of Shares as to which the holder is the record
owner. In such case the written demand must set forth the number of Shares
covered by such demand. Where the number of Shares is not expressly stated, the
demand will be presumed to cover all Shares outstanding in the name of such
record owner. Beneficial owners who are not record owners and who intend to
exercise appraisal rights should instruct the record owner to comply strictly
with the statutory requirements with respect to the exercise of appraisal rights
before the date of the Special Meeting.
Stockholders who elect to exercise appraisal rights must mail or deliver
their written demands to: Secretary, Mercom, Inc., 800 Third Avenue, Suite 3100,
New York, New York 10022. The written demand for appraisal should specify the
stockholder's name and mailing address, the number of Shares covered by the
demand and that the stockholder is thereby demanding appraisal of such Shares.
The Company must, within ten days after the Effective Time, provide notice of
the Effective Time to all stockholders who have complied with Section 262 of the
DGCL and have not voted for approval and adoption of the Merger Agreement.
Stockholders electing to exercise their appraisal rights under Section 262
must not vote for the approval and adoption of the Merger Agreement or consent
thereto in writing. Voting in favor of the approval and adoption of the Merger
Agreement, or delivering a proxy in connection with the Special Meeting (unless
the proxy votes against, or expressly abstains from the vote on, the approval
and adoption of the Merger Agreement), will constitute a waiver of the
stockholder's right of appraisal and will nullify any written demand for
appraisal submitted by the stockholder.
Within 120 days after the Effective Time, either the Company or any
stockholder who has complied with the required conditions of Section 262 and who
is otherwise entitled to appraisal rights may file a petition in the Delaware
Court of Chancery demanding a determination of the fair value of the Shares of
the dissenting stockholders. If a petition for an appraisal is timely filed,
after a hearing on such petition, the Delaware Court of Chancery will determine
which stockholders are entitled to appraisal rights and thereafter will appraise
the Shares owned by such stockholders, determining the fair value of such
Shares, exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest to be paid, if
any, upon the amount determined to be the fair value.
The cost of the appraisal proceeding may be determined by the Delaware
Court of Chancery and taxed upon the parties as the Delaware Court of Chancery
deems equitable in the circumstances. Upon application of a dissenting
stockholder, the Delaware Court of Chancery may order that all or a portion of
the expenses incurred by any dissenting stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable attorneys' fees
and the fees and expenses of experts, be charged pro rata against the value of
all Shares entitled to appraisal. In the absence of such determination or
assessment, each party bears its own expenses.
Any stockholder who has duly demanded appraisal in compliance with Section
262 of the DGCL will not, after the Effective Time, be entitled to vote for any
purpose the Shares subject to such demand or to receive payment of dividends or
other distributions on such Shares, except for dividends or other distributions
payable to stockholders of record at a date prior to the Effective Time.
At any time within 60 days after the Effective Time, any former holder of
Shares shall have the right to withdraw his or her demand for appraisal and to
accept the per Share cash consideration pursuant to the Merger.
After this period, such holder may withdraw his or her demand for
appraisal only with the consent of the Surviving Corporation. If no petition for
appraisal is filed with the Delaware Court of Chancery within 120 days after the
Effective Time, stockholders' rights to appraisal shall cease and all
stockholders shall be entitled to receive the per Share cash consideration
pursuant to the Merger.
Failure to take any required step in connection with the exercise of
appraisal rights may result in the termination or waiver of such rights.
APPRAISAL RIGHTS CANNOT BE EXERCISED AT THIS TIME. THE INFORMATION SET
FORTH ABOVE IS FOR INFORMATIONAL PURPOSES ONLY WITH RESPECT TO ALTERNATIVES
AVAILABLE TO STOCKHOLDERS IF THE MERGER (OR ANY SIMILAR BUSINESS COMBINATION) IS
CONSUMMATED. STOCKHOLDERS WHO WILL BE ENTITLED TO APPRAISAL RIGHTS IN CONNECTION
WITH THE MERGER WILL RECEIVE ADDITIONAL INFORMATION CONCERNING APPRAISAL RIGHTS
AND THE PROCEDURES TO BE FOLLOWED IN CONNECTION THEREWITH BEFORE SUCH
STOCKHOLDERS HAVE TO TAKE ANY ACTION RELATING THERETO. STOCKHOLDERS WHO SELL
SHARES IN THE OFFER WILL NOT BE ENTITLED TO EXERCISE APPRAISAL RIGHTS WITH
RESPECT THERETO BUT, RATHER, WILL RECEIVE THE PRICE PAID IN THE OFFER THEREFOR.
General Corporation Law of the State of Delaware
262. Appraisal Rights
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Sections 252, 254, 257, 258, 263 or 264 of this
title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date
fixed to determine the stockholders entitled to receive notice of and to
vote at the meeting of stockholders to act upon the agreement of merger
or consolidation, were either (i) listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or (ii) held of record by more than 2,000 holders; and
further provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a merger if the
merger did not require for its approval the vote of the stockholders of
the surviving corporation as provided in subsection (f) of Section 251 of
this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant
to Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware
corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares.
Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of his shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of
such merger or consolidation, the surviving or resulting corporation
shall notify each stockholder of each constituent corporation who has
complied with this subsection and has not voted in favor of or consented
to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that appraisal
rights are available for any or all shares of such class or series of
stock of such constituent corporation, and shall include in such notice a
copy of this section; provided that, if the notice is given on or after
the effective date of the merger or consolidation, such notice shall be
given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after
the effective date of the merger or consolidation, shall, also notify
such stockholders of the effective date of the merger or consolidation.
Any stockholder entitled to appraisal rights may, within 20 days after
the date of mailing of such notice, demand in writing from the surviving
or resulting corporation the appraisal of such holder's shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such holder's shares. If such notice did not
notify stockholders of the effective date of the merger or consolidation,
either (i) each such constituent corporation shall send a second notice
before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the effective date
of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or
within 10 days after such effective date; provided, however, that if such
second notice is sent more than 20 days following the sending of the
first notice, such second notice need only be sent to each stockholder
who is entitled to appraisal rights and who has demanded appraisal of
such holder's shares in accordance with this subsection. An affidavit of
the secretary or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that such notice has
been given shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the stockholders
entitled to receive either notice, each constituent corporation may fix,
in advance, a record date that shall be not more than 10 days prior to
the date the notice is given, provided, that if the notice is given on or
after the effective date of the merger or consolidation, the record date
shall be such effective date. If no record date is fixed and the notice
is given prior to the effective date, the record date shall be the close
of business on the day next preceding the day on which the notice is
given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided insubsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
ANNEX D
MANAGEMENT OF
CABLE MICHIGAN, THE COMPANY, AND MERGERSUB
Set forth below are the name, business address and age of each person who
is a director and/or an executive officer of Cable Michigan, the Company,
MergerSub as of December 1, 1998 and (i) the present principal occupation or
employment of each such person and the name, principal business and address of
the corporation or other organization in which such occupation or employment of
each such person is conducted and (ii) the material occupations, positions,
offices and employment and the name, principal business and address of any
corporation or other organization in which any material occupation, position,
office or employment of each such person was held during the last five years.
Each person listed below is a citizen of the United States.
DIRECTORS OF AVALON CABLE OF MICHIGAN, INC.
<TABLE>
Name Age Address Office Held Principal Occupations
<S> <C> <C> <C> <C>
David W. Unger 42 800 Third Avenue, Chairman of the David W. Unger is the Chairman of the Board
Suite 3100 Board and Assist- and Assistant Secretary of Avalon, Cable
New York, New York 10022 ant Secretary Michigan and Mercom and co-founded Avalon in
since 1998 1997. Since 1995, Mr. Unger has invested in,
operated and sold communications businesses.
Prior to 1995, Mr. Unger worked for
Communications Equity Associates,
Teleprompter Corp., TKR Cable Co. and as an
investment banker. In addition to his duties
to Avalon, Mr. Unger serves as Vice
President of Audio Communications Network
LLC ("ACN"), a provider of commercial
background and foreground music. ABRY is the
principal investor in ACN. Mr. Unger is a
director of the Company and ACN.
Joel C. Cohen 53 800 Third Avenue President, Chief Joel C. Cohen is the President, Chief
Suite 3100 Executive Officer, Executive Officer and Secretary of Avalon,
New York, New York 10022 Director and Cable Michigan, Mercom. He is also a Manager
Secretary since 1998 of Avalon. Mr. Cohen co-founded Avalon in
1997. From 1996 to 1997, Mr. Cohen served as
the Chief Financial Officer of Patient
Education Media, Inc. ("PEMI") and as a
consultant to various cable companies. From
1995 to 1996 Mr. Cohen served as a director
and as both Chief Operating Officer and
Chief Financial Officer for Harron
Communications Corp., a cable and broadcast
television operator with more than 200,000
cable subscribers. Prior to 1992, Mr. Cohen
was Senior Vice President of United Artists
Entertainment Company and President of its
international division. Mr. Cohen also
served in various executive positions at
Group W Cable and Teleprompter Corp. Mr.
Cohen is a director of the Company.
As stated above, Mr. Cohen served as the
Chief Financial Officer of PEMI from June
1996 through December 1997. Prior to June
1996, PEMI did not employ a Chief Financial
Officer. PEMI was formed in 1994 to create
and market patient educational videos and
other products under the trademark TIME-LIFE
MEDICAL. PEMI ceased producing education
video tapes in September 1996 and ceased all
operations on December 20, 1996. Thereafter,
PEMI proceeded to liquidate the majority of
its assets. On March 14, 1997, PEMI filed a
petition under Chapter 11 of the United
States Bankruptcy Code. In January 1998, Mr.
Cohen was appointed by the Bankruptcy Court
for the Southern District of New York to act
as disbursing agent in relation to the
liquidation of PEMI.
Jay M. Grossman 39 18 Newbury Street Vice President and Jay M. Grossman is a Vice President and
Boston, Massachusetts 02116 Assistant Assistant Secretary of Cable Michigan,
Secretary, Director Mercom and Avalon. He is also Manager of
since 1998 Avalon and a partner in ABRY. Prior to
joining ABRY in 1996, Mr. Grossman was
managing director and co-head of Prudential
Securities' media and entertainment
investment banking group. From 1986 to 1994,
Mr. Grossman served in various positions,
ultimately as a senior vice president, in
the corporate finance department of Kidder,
Peabody & Co. Incorporated. Mr. Grossman is
a director (or the equivalent) of various
companies including Nexstar Broadcasting
Group, LLC, Network Music Holdings LLC,
Connoisseur Communications Partners, L.P.,
DirecTel International, LLC and the Company.
Peggy J. Koenig 41 18 Newbury Street Vice President and Peggy J. Koenig is a Vice President and
Boston, Massachusetts 02116 Assistant Assistant Secretary of Cable Michigan,
Secretary, Director Avalon and Mercom. She is also Manager of
since 1998 Avalon and a partner in ABRY. Ms. Koenig
joined ABRY in 1993. From 1988 to 1992, Ms.
Koenig was a Vice President, partner and
member of the Board of Directors of
Sillerman Communications Management
Corporation, a merchant bank, which made
investments principally in the radio
industry. Ms. Koenig was the Director of
Finance from 1986 to 1988 for Magera
Management, an independent motion picture
financing company. She is presently a
director (or the equivalent) of Connoisseur
Communications Partners, L.P., Pinnacle
Holdings Inc., Network Music Holdings LLC
and the Company.
Royce Yudkoff 43 18 Newbury Street Director since 1998 Royce Yudkoff is a Manager of Avalon and
Boston, Massachusetts 02116 President and Managing Partner of ABRY.
Prior to joining ABRY, Mr. Yudkoff was
affiliated with Bain & Company, an
international management consulting firm. At
Bain, where he was a partner from 1985
through 1988, he shared significant
responsibility for the firm's media
practice. Mr. Yudkoff is presently a
director (or the equivalent) of various
companies including Quorum Broadcast
Holdings Inc., Nexstar Broadcasting Group,
LLC, Metrocall and Pinnacle Holdings, Inc.
</TABLE>
EXECUTIVE OFFICERS OF AVALON CABLE OF MICHIGAN, INC.
<TABLE>
Name Age Address Office Held Principal Occupations
<S> <C> <C> <C> <C>
Joel C. Cohen 53 800 Third Avenue Director, Please see "Directors of Avalon Cable of
Suite 3100 President, Chief Michigan, Inc."
New York, New York 10022 Executive Officer,
Secretary
Peter Polimino 41 800 Third Avenue Vice President, Peter Polimino is the Vice President of
Suite 3100 Finance Finance of experience in cable, broadcast
New York, New York 10022 and network Cable Michigan, Mercom, and
Avalon. Mr. Polimino is television and
radio. Prior to joining a financial
professional with over 18 years of Avalon in
November 1998, Mr. Polimino was Vice
President, Finance of the Sales Division of
Fox/Liberty Networks during 1998. From 1980
to 1998, Mr. Polimino held various financial
positions at Westinghouse Broadcasting,
including Teleprompter Manhattan Cable,
Huntington TV Cable, Group W Television,
KDKA TV/Radio, WINS Radio, WNEW Radio and
The CBS Television Network.
Peter Luscombe 41 800 Third Avenue Vice President, Peter Luscombe is the Vice President of
Suite 3100 Engineering Engineering of Cable Michigan, Mercom and
New York, New York 10022 Avalon. Prior to joining Avalon in August
1998, Mr. Luscombe was Executive Director of
Engineering for the 3.1 million subscriber
Atlantic Division of Telecommunications,
Inc. ("TCI"). His responsibilities included
engineering strategy and technical
operations for a variety of cable systems,
including both smaller traditional systems
and larger, more technologically aggressive
cable systems with cable modem and
compressed digital video operations. From
1982 through 1997, Mr. Luscombe was Vice
President of Engineering for TKR Cable
Company, an 800,000 subscriber MSO. Mr.
Luscombe has been a director of the National
Society of Cable Telecommunications
Engineers ("SCTE") and a member of the
technical advisory committee of the Cable
Television Laboratories, Inc. Mr. Luscombe
maintains an active membership in the SCTE.
Mark Dineen 34 800 Third Avenue General Manager of Mark Dineen is the General Manager of
Suite 3100 Michigan Operations Avalon's Michigan operations. He is Vice
New York, New York 10022 President of Cable Michigan's Michigan
Cluster and Vice President of Mercom. Mr.
Dineen joined Avalon upon the consummation
of the Buyer Merger and will oversee
Avalon's operations in Michigan. Mr. Dineen
has been employed by Cable Michigan in
various corporate and field positions,
including as Corporate Director of
Marketing, since 1992. From 1987 to 1992,
Mr. Dineen held marketing and sales
management positions with Bresnan
Communications and Harron Communications in
their Michigan cable systems.
Jay M. Grossman 39 18 Newbury Street Director, Vice Please see "Directors of Avalon Cable of
Boston, Massachusetts 02116 President and Michigan, Inc."
Assistant Secretary
Peggy J. Koenig 41 18 Newbury Street Director, Vice Please see "Directors of Avalon Cable of
Boston, Massachusetts 02116 President and Michigan, Inc."
Assistant Secretary
</TABLE>
DIRECTORS OF MERCOM, INC.
<TABLE>
Name Age Address Office Held Principal Occupations
<S> <C> <C> <C> <C>
David W. Unger 42 800 Third Avenue Chairman of the Board Please see "Directors of Avalon Cable of
Suite 3100 and Assistant Michigan, Inc."
New York, New York 10022 Secretary since 1998
Joel C. Cohen 53 800 Third Avenue President, Chief Please see "Directors of Avalon Cable of
Suite 3100 Executive Officer, Michigan, Inc."
New York, New York 10022 Secretary and
Director since 1998
Jay M. Grossman 39 18 Newbury Street Vice President and Please see "Directors of Avalon Cable of
Boston, Massachusetts 02116 Assistant Secretary, Michigan, Inc."
Director since 1998
Peggy J. Koenig 41 18 Newbury Street Vice President and Please see "Directors of Avalon Cable of
Boston, Massachusetts 02116 Assistant Secretary, Michigan, Inc."
Director since 1998
Clifford L. Jones 70 548 Dogwood Drive Director since 1991 President, Capital Region Economic
Messiah Village Development Corporation from September
Mechanicsburg, Pennsylvania 1992 to February 1994. He also served as
17055 President, Pennsylvania Chamber of
Business & Industry from 1983 to 1991.
Mr. Jones is a Director of Pennsylvania
Power & Light, Delta Development Group,
Inc. and Benatec Associates.
Harold J. Rose, Jr. 62 P.O. Box 89 Director since 1991 Chairman of the Board of Pennsylvania
Dallas, Pennsylvania 18612 Millers Mutual Insurance Company and
Director of American Millers Insurance
Company. He previously was a partner of
RK Associates, a real estate management
consulting firm. In 1990, Mr. Rose
retired from Merchants Bancorp. Inc.
where he served as Chairman of the Board
of both Merchants Bank, N.A. and
Merchants Bank North, both subsidiaries
of Merchants Bancorp. Inc.
George C. Stephenson 52 1285 Ave. of the Americas Director since 1991 Managing Director of PaineWebber, Inc.
13th Floor since January 1987.
New York, New York 10019
</TABLE>
EXECUTIVE OFFICERS OF MERCOM, INC.
<TABLE>
Name Age Address Office Held Principal Occupations
<S> <C> <C> <C> <C>
Joel C. Cohen 53 800 Third Avenue President, Chief Please see "Directors of Avalon Cable of
Suite 3100 Executive Officer, Michigan, Inc."
New York, New York 10022 Secretary
Peter Polimino 41 800 Third Avenue Vice President, Please see "Directors of Avalon Cable of
Suite 3100 Finance Michigan, Inc."
New York, New York 10022
Peter Luscombe 41 800 Third Avenue Vice President, Please see "Directors of Avalon Cable of
Suite 3100 Engineering Michigan, Inc."
New York, New York 10022
Mark Dineen 34 800 Third Avenue General Manager Please see "Directors of Avalon Cable of
Suite 3100 Michigan Operations Michigan, Inc."
New York, New York 10022
Jay M. Grossman 39 18 Newbury Street Vice President and Please see "Directors of Avalon Cable of
Boston, Massachusetts 02116 Assistant Secretary Michigan, Inc."
David W. Unger 42 800 Third Avenue Chairman of the Please see "Directors of Avalon Cable of
Suite 3100 Board and Assistant Michigan, Inc."
New York, New York 10022 Secretary since 1998
Peggy J. Koenig 41 18 Newbury Street Vice President and Please see "Directors of Avalon Cable of
Boston, Massachusetts 02116 Assistant Secretary Michigan, Inc."
</TABLE>
DIRECTORS OF MERCOM ACQUISITION, INC.
<TABLE>
<S> <C> <C> <C> <C>
Name Age Address Office Held Principal Occupations
Joel C. Cohen 53 800 Third Avenue Director Please see "Directors of Avalon Cable of
Suite 3100 Michigan, Inc."
New York, New York 10022
</TABLE>
EXECUTIVE OFFICERS OF MERCOM ACQUISITION, INC.
<TABLE>
<S> <C> <C> <C> <C>
Name Age Address Office Held Principal Occupations
Joel C. Cohen 53 800 Third Avenue President, Chief Please see "Directors of Avalon Cable of
Suite 3100 Executive Officer, Michigan, Inc."
New York, New York 10022 Secretary
Peter Polimino 41 800 Third Avenue Vice President, Please see "Directors of Avalon Cable of
Suite 3100 Finance Michigan, Inc."
New York, New York 10022
Peter Luscombe 41 800 Third Avenue Vice President, Please see "Directors of Avalon Cable of
Suite 3100 Engineering Michigan, Inc."
New York, New York 10022
Mark Dineen 34 800 Third Avenue General Manager Please see "Directors of Avalon Cable of
Suite 3100 Michigan Operations Michigan, Inc."
New York, New York 10022
Jay M. Grossman 39 18 Newbury Street Vice President and Please see "Directors of Avalon Cable of
Boston, Massachusetts 02116 Assistant Secretary Michigan, Inc."
David W. Unger 42 800 Third Avenue Chairman of the Please see "Directors of Avalon Cable of
Suite 3100 Board and Assistant Michigan, Inc."
New York, New York 10022 Secretary since 1998
Peggy J. Koenig 41 18 Newbury Street Vice President and Please see "Directors of Avalon Cable of
Boston, Massachusetts 02116 Assistant Secretary Michigan, Inc."
</TABLE>
