<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
AMENDMENT NO. 1
TO
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(E) OF THE SECURITIES EXCHANGE ACT OF 1934)
MERCOM, INC.
(NAME OF THE ISSUER)
AVALON CABLE OF MICHIGAN, INC.
AVALON CABLE OF MICHIGAN HOLDINGS, INC.
AVALON CABLE HOLDINGS, LLC
MERCOM ACQUISITION, INC.
MERCOM, INC.
(NAME OF THE PERSONS FILING STATEMENT)
COMMON STOCK $1.00 PAR VALUE PER SHARE
(TITLE OF CLASS OF SECURITIES)
589350109
(CUSIP NUMBER OF CLASS OF SECURITIES)
-----------------------
JOEL C. COHEN
SECRETARY
AVALON CABLE OF MICHIGAN, INC.
800 THIRD AVENUE, SUITE 3100
NEW YORK, NEW YORK 10022
TELEPHONE: (212) 421-0600
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE
NOTICES AND COMMUNICATIONS ON BEHALF OF PERSONS FILING STATEMENT)
-----------------------
COPY TO:
JILL SUGAR FACTOR, ESQ. WILLIAM L. TAYLOR, ESQ.
KIRKLAND & ELLIS DAVIS POLK & WARDWELL
200 EAST RANDOLPH DRIVE 450 LEXINGTON AVENUE
CHICAGO, ILLINOIS 60601 NEW YORK, NEW YORK 10017
TELEPHONE: (312) 861-2000 TELEPHONE: (212) 450-4000
CHARLES WEISSMAN, ESQ.
SWIDLER BERLIN SHEREFF FRIEDMAN LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
TELEPHONE: (212) 891-9500
This statement is filed in connection with (check the appropriate box):
[X] (a) The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
[ ] (b) The filing of a registration statement under the Securities Act
of 1933.
[ ] (c) A tender offer.
[ ] (d) None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies. [X]
CALCULATION OF FILING FEE:
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Transaction Valuation* Amount of Filing Fee**
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$21,873,720 $4,380
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- -------------------
* For purposes of calculating the fee only. The amount assumes the purchase
of 1,822,810 shares of Common Stock, par value $1.00 per share, of Mercom,
Inc. at $12.00 net in cash per share for shares not owned by the persons
filing this statement.
** The amount of the filing fee calculated in accordance with Regulation
240.0-11 of the Securities Exchange Act of 1934 equals 1/50th of 1% of the
value of the shares to be purchased.
[X] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
Amount Previously Paid: Filing Parties:
$4,380 Avalon Cable of Michigan, Inc.
Mercom Acquisition, Inc.
Mercom, Inc.
Form or Registration No.: Date Filed:
Schedule 13E-3 December 11, 1998
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<PAGE>
INTRODUCTION
This Rule 13E-3 Transaction Statement (the "Schedule 13E-3") relates to an
Agreement and Plan of Merger, dated as of September 10, 1998 (as amended, the
"Merger Agreement"), among Mercom, Inc., a Delaware corporation ("Mercom" or the
"Company"), Avalon Cable of Michigan, Inc., a Pennsylvania corporation (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 the Company will merge with and into the Buyer (the "Merger"). A copy of
the Merger Agreement is filed as Annex A to the Proxy Statement on Schedule 14A
(the "Proxy Statement") filed by the Company with the Securities and Exchange
Commission (the "Commission") on the date hereof. This Schedule 13E-3 is being
filed by Cable Michigan, Mercom and MergerSub.
The following responses and cross-references are being supplied pursuant to
General Instruction F to Schedule 13E-3 and show the locations in the Proxy
Statement (including all annexes and appendices thereto) of the information
required to be included in response to the items of this Schedule 13E-3. The
information set forth in the Proxy Statement, including all exhibits thereto, is
hereby expressly incorporated herein by reference and the responses to each item
of this Schedule 13E-3 are qualified in their entirety by reference to the
information contained in the Proxy Statement and the exhibits thereto.
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) Mercom is the issuer of the securities subject to this Schedule 13E-3.
The information set forth in the section entitled "Summary --The Company" is
incorporated herein by reference.
(b) The information set forth in the sections entitled "Introduction,"
"Price of the Company Common Stock" and "The Special Meeting --Record Date;
Stock Entitled to Vote; Quorum" is incorporated herein by reference.
(c)-(d) The information set forth in the section entitled "Price of the
Company Common Stock" is incorporated herein by reference.
(e) Not applicable.
(f) The information set forth in the section entitled "Special
Factors--Background of the Merger" is incorporated herein by reference.
ITEM 2. IDENTITY AND BACKGROUND.
(a)-(d) and (g) This Statement is being filed by Cable Michigan, the
Company, MergerSub, which was formed for the purpose of the Merger, Avalon Cable
of Michigan Holdings, Inc. ("Avalon Holdings"), which owns all of the
outstanding shares of Cable Michigan, and Avalon Cable Holdings, LLC ("Avalon
LLC"), which owns all of the outstanding shares of Avalon Holdings. See "Buyer
and MergerSub". The information set forth in the sections entitled "Summary
- --The Buyer," "--The Company," "--MergerSub," and Annex D to the Proxy Statement
is incorporated herein by reference.
(e)-(f) None of Cable Michigan, MergerSub, Avalon Holdings, Avalon LLC the
Company, or to the best knowledge of the officers and directors of Cable
Michigan and the Company, any of the persons listed in the section entitled
"Management of Cable Michigan, the Company and MergerSub" attached as Annex D to
the Proxy Statement has, during the last five years, been convicted in a
criminal proceeding (excluding traffic violations and similar misdemeanors) or
been a party to a civil proceeding that resulted in a judgment, decree or final
order finding any violation of U.S. or state securities laws or enjoining
further violations of, or prohibiting activities to, any such law.
2
<PAGE>
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a)(1) The information set forth in the sections entitled "Special Factors
- --Certain Transactions," " --Background of the Merger" and "--Certain Effects of
the Transaction" is incorporated herein by reference.
(2) The information set forth in the sections entitled "Special Factors
- --Background of the Merger" is incorporated herein by reference.
(b) The information set forth in the sections entitled "Special Factors
- --Background of the Merger," "--Plans For the Company After the Merger," and
"--Certain Effects of the Transaction," is incorporated herein by reference.
ITEM 4. TERMS OF THE TRANSACTION.
(a)-(b) The information set forth in the sections entitled "Certain
Provisions of the Merger Agreement," "The Merger" and "Special Factors --Certain
Effects of the Transaction," " --Background of the Merger" and " --Plans for the
Company After the Merger" is incorporated herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a)-(g) The information set forth in the sections entitled "Special Factors
- --Certain Effects of the Transaction," "--Plans for the Company After the
Merger," "The Merger," "Certain Provisions of the Merger Agreement" and "Price
of the Company Common Stock" is incorporated herein by reference.
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a)-(d) The information set forth in the sections entitled "The Merger
- --Merger Financing," and "Certain Provisions of the Merger Agreement --Fees and
Expenses" is incorporated herein by reference.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a)-(c) The information set forth in the sections entitled "Introduction,"
"Special Factors--Purpose and Structure of the Merger; Reasons of Buyer for the
Merger" and "--Plans For the Company After the Merger" is incorporated herein by
reference.
(d) The information set forth in the sections entitled "The Merger
- --Effective Time of the Merger" "--Certain Federal Income Tax Consequences" and
"Certain Provisions of the Merger Agreement --The Merger" and "Special Factors
- --Certain Effects of the Transaction" is incorporated herein by reference.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) The information set forth in the sections entitled "Special
Factors--Recommendation of the Special Committee and the Board of Directors",
"--Purpose and Structure of the Merger; Reasons of Buyer for the Merger" and
"-Reasons of the Company for the Merger; Fairness of the Merger" is incorporated
herein by reference.
(b) The information set forth in the sections entitled "Special
Factors--Background of the Merger," "--Reasons of the Company for the Merger;
Fairness of the Merger" and "--Opinion of Financial Advisor to the Special
Committee" is incorporated herein by reference.
(c) The information set forth in the section entitled "The Special
Meeting--Required Votes" is incorporated herein by reference.
(d) The information set forth in the sections entitled "Special
Factors--Opinion of Financial Advisor to the Special Committee" and
"--Background of the Merger" is incorporated herein by reference.
3
<PAGE>
(e) The information set forth in the sections entitled "Introduction" and
Special Factors--Recommendation of the Special Committee and the Board of
Directors" is incorporated herein by reference.
(f) Not applicable.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a) The information set forth in the sections entitled "Special
Factors--Background of the Merger," and "--Opinion of Financial Advisor to the
Special Committee" is incorporated herein by reference.
(b)(1) The information set forth in the section entitled "Special
Factors--Background of the Merger" is incorporated herein by reference.
(b)(2) The information set forth in the sections entitled "Special
Factors--Background of the Merger," and "--Opinion of Financial Advisor to the
Special Committee" is incorporated herein by reference.
(b)(3)-(5) The information set forth in the sections entitled "Special
Factors--Background of the Merger" and "--Opinion of Financial Advisor to
Special Committee" is incorporated herein by reference.
(b)(6) The information set forth in the section entitled "Special
Factors--Opinion of Financial Advisor to the Special Committee" is incorporated
herein by reference.
(c) The information set forth in the section entitled "Available
Information" is incorporated herein by reference.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) The information set forth in the sections entitled "Security Ownership
of Certain Beneficial Owners and Management," "The Merger--Interests of Certain
Persons in the Merger," and Annex D to the Proxy Statement is incorporated
herein by reference.
(b) The information set forth in the sections entitled "Security Ownership
of Certain Beneficial Owners and Management" is incorporated herein by
reference.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE
ISSUER'S SECURITIES.
The information set forth in the sections entitled "Special
Factors--Background of the Merger" and "Certain Provisions of The Merger
Agreement--Surrender and Payment" is incorporated herein by reference.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD
TO THE TRANSACTION.
(a) The information set forth in the sections entitled "The Merger
- --Interests of Certain Persons in The Merger," "The Special Meeting--Matters to
be Considered" and "--Required Votes" is incorporated herein by reference.
(b) The information set forth in the sections entitled "Special
Factors--Recommendation of the Special Committee and the Board of Directors"
- --Background of the Merger" and "--Reasons of the Company for the Merger;
Fairness of the Merger" is incorporated herein by reference.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) The information set forth in the sections entitled "Dissenting
Shareholders' Rights," "The Special Meeting--Appraisal Rights" and "Annex
C--Rights of Dissenting Stockholders Under Delaware General Corporation Law" is
incorporated herein by reference.
4
<PAGE>
(b) Not applicable.
(c) Not applicable.
ITEM 14. CONSOLIDATED FINANCIAL STATEMENTS.
(a) (1) The information set forth in the section entitled "Consolidated
Financial Statements of the Company" is incorporated herein by reference.
(2) The information set forth in the section entitled "Consolidated
Financial Statements of the Company" is incorporated herein by reference.
(3) The information set forth in the section entitled "Consolidated
Financial Statements of the Company" is incorporated herein by reference.
(4) The information set forth in the section entitled "Consolidated
Financial Statements of the Company" is incorporated herein by reference. The
book value per share of common stock, par value $ 1.00 per share of the Company
as of December 31, 1997 and September 30, 1998 was $0.27 and $0.43,
respectively.
(b) (1)-(3) Not applicable
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) The information set forth in the sections entitled "Special
Factors--Background of the Merger" and "The Special Meeting--Solicitation of
Proxies" is incorporated herein by reference.
(b) The information set forth in the sections entitled "Special
Factors--Background of the Merger," "--Opinion of Financial Advisor to the
Special Committee," "The Special Meeting--Solicitation of Proxies," "Certain
Provisions of the Merger Agreement--Fees and Expenses," "--Indemnification and
Insurance," "Independent Accountants," and Annex B is incorporated herein by
reference.
ITEM 16. ADDITIONAL INFORMATION.
Additional Information is set forth in the Preliminary Proxy Statement
which is incorporated herein by reference in its entirety.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
The Exhibit Index attached to this Transaction Statement is incorporated
herein by reference.
5
<PAGE>
SIGNATURE
AFTER DUE INQUIRY AND TO THE BEST OF ITS KNOWLEDGE AND BELIEF, EACH OF THE
UNDERSIGNED CERTIFIES THAT THE INFORMATION SET FORTH IN THIS STATEMENT IS TRUE,
COMPLETE AND CORRECT.
Dated: February 4, 1999 AVALON CABLE OF MICHIGAN, INC.
By: /s/ Joel C. Cohen
----------------------------
Name: Joel C. Cohen
Title: President
MERCOM ACQUISITION, INC.
By: /s/ Joel C. Cohen
----------------------------
Name: Joel C. Cohen
Title: President
MERCOM, INC.
By: /s/ Joel C. Cohen
----------------------------
Name: Joel C. Cohen
Title: President
AVALON CABLE OF MICHIGAN HOLDINGS, INC.
By: /s/ Joel C. Cohen
----------------------------
Name: Joel C. Cohen
Title: President
AVALON CABLE HOLDINGS, LLC
By: /s/ Joel C. Cohen
----------------------------
Name: Joel C. Cohen
Title: President
6
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
--------- -----------
17(a)(1) Guarantee and Collateral Agreement, dated as of November 6, 1998
made by Avalon LLC, Avalon Cable LLC, Avalon Cable of New
England Holdings, Inc., Avalon Cable Holdings Finance, Inc.,
Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of
Michigan, Inc. in favor of Lehman Commercial Paper Inc.
(previously filed with the Commission by Avalon Cable of
Michigan, Inc., Avalon Cable of Michigan Holdings, Inc., Avalon
Cable Holdings, LLC, ABRY Broadcast Partners III, L.P., ABRY
Equity Investors, L.P., ABRY Holdings III, Inc. and Royce
Yudkoff as Exhibit 99.9 to Amendment No.4 filed on November 12,
1998, to its Schedule 13D relating to Mercom, Inc., and
incorporated herein by reference).
17(a)(2) Senior Credit Agreement, dated as of November 6, 1998, among
Avalon Cable of New England LLC, Avalon Cable of Michigan, Inc.,
Avalon Cable Finance, Inc., Avalon Cable of Michigan LLC, Lehman
Brothers Inc., Fleet Bank of Massachusetts, N.A. , Union Bank of
California, N.A. and Lehman Commercial Paper Inc. (previously
filed with the Commission by Avalon Cable of Michigan, Inc.,
Avalon Cable of Michigan Holdings, Inc., Avalon Cable Holdings,
LLC, ABRY Broadcast Partners III, L.P., ABRY Equity Investors,
L.P., ABRY Holdings III, Inc. and Royce Yudkoff as Exhibit 99.8
to Amendment No.4 filed on November 12, 1998, to its Schedule
13D relating to Mercom, Inc., and incorporated herein by
reference).
17(b)(1) Fairness Opinion of CIBC Oppenheimer Corp. (incorporated herein
by reference to Annex B to the Preliminary Proxy Statement filed
as Exhibit 17(d)(1) hereto).
17(b)(2) Presentation to the Board of Directors of Mercom, Inc., by CIBC
Oppenheimer Corp., dated September 10, 1998.
17(c)(1) Agreement and Plan of Merger, dated as of September 10, 1998, as
amended, among the Company, Cable Michigan, Inc., and Mercom
Acquisition, Inc. (incorporated herein by reference to Annex A
to the Preliminary Proxy Statement filed as Exhibit 17(d)(1)
hereto).
17(d)(1) Preliminary Proxy Statement (filed herewith).
17(e) Section 262 of the Delaware General Corporation Law
(incorporated herein by reference to Annex C to the Preliminary
Proxy Statement filed as Exhibit 17(d)(1) hereto).
17(f) Not applicable.
7
<PAGE>
EXHIBIT 17(b)(2)
CONFIDENTIAL
- --------------------------------------------------------------------------------
Presentation to the Board of Directors
of
Mercom, Inc.
CIBC Oppenheimer
September 10, 1998
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<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
PRESENTATION TO THE BOARD OF DIRECTORS
OF
MERCOM, INC.
The following pages contain material that was provided to the Board of Directors
of Mercom, Inc. ("Mercom" or the "Company") by CIBC Oppenheimer Corp. ("CIBC")
to evaluate the fairness of the consideration to be paid by Cable Michigan, Inc.
("Cable Michigan") for holders of the Company's common stock (the "Common
Stock"). The accompanying material was compiled or prepared on a confidential
basis solely for use by the Board of Directors and not with a view toward public
disclosure under state and federal securities laws. The information contained in
this material was obtained from the Company, Cable Michigan and other sources,
and CIBC has relied upon such information without independent verification
thereof. Any estimates and projections for Mercom contained herein have been
prepared by Mercom and Cable Michigan management or are based upon such
estimates and projections, and involve numerous and significant subjective
determinations. Furthermore, the projections contained herein may or may not be
achieved and differences between projected results and those actually achieved
may be material. No representation or warranty, expressed or implied, is made as
to the accuracy or completeness of such information and nothing contained herein
is, or shall be relied upon as, a promise or representation, whether as to the
past or the future. Because this material was prepared for use in the context of
a presentation to the Board of Directors, the material was not prepared to
comply with the disclosure standards set forth under state and federal
securities laws and, to the extent the material may be used by readers not as
familiar with the business and affairs of the Company as the Board of Directors,
neither the Company nor CIBC nor any of their respective legal or financial
advisors or accountants takes any responsibility for the completeness of any of
the material when used by persons other than the Board of Directors of the
Company in any other context.
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CIBC Oppenheimer
<PAGE>
CONFIDENTIAL
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MERCOM, INC.
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Table of Contents
Section Page
I. Executive Summary 1
II. Transaction Structure and Terms 2
III. Profile of Mercom, Inc. 3
IV. Valuation Summary 12
V. Review of Valuation Methodologies 13
VI. Valuation Based on Comparable Publicly Traded Companies 15
VII. Valuation Based on Comparable Recent Cable M&A Transactions 18
VIII. Value Based on Purchase Price of Cable Michigan by Avalon Cable 19
IX. Valuation Based on Premiums Paid for Minority Interests 24
X. Valuation Based on Discounted Cash Flow Analysis 25
XI. Conclusions 29
Appendix
A. Comparable Publicly Traded Company Analysis
B. Recent Comparable Cable M&A Transactions Analysis
C. Discounted Cash Flow Analysis
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CIBC Oppenheimer
<PAGE>
CONFIDENTIAL
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EXECUTIVE SUMMARY
- --------------------------------------------------------------------------------
o CIBC Oppenheimer Corp. ("CIBC") has been asked by an independent committee
of the Board of Directors of Mercom, Inc. ("Mercom" or the "Company") to
provide a fairness opinion with respect to the proposed purchase of the
common stock of the Company (the "Common Stock") by Cable Michigan, Inc.
("Cable Michigan").
o Cable Michigan currently owns 61.92% of the fully diluted common equity of
Mercom and has proposed to buy out the minority shareholders who own the
remaining 38.08%.
o The proposed purchase price is $12.00 in cash (the "Common Stock Offer")
per share for the Common Stock. The total enterprise value implied by the
Common Stock Offer, including assumption of the Company's existing debt
and cash as of June 30, 1998, is $65.8 million, or 9.9x Run-Rate EBITDA of
$6.6 million and 10.8x LTM EBITDA of $6.1 million.
o CIBC has analyzed the proposed transaction and has concluded it is fair
from a financial point of view, subject to the merger agreement being
finalized and the terms of the transaction not changing materially, to the
minority holders of the Common Stock.
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CIBC Oppenheimer
Page 1
<PAGE>
CONFIDENTIAL
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TRANSACTION STRUCTURE AND TERMS
- --------------------------------------------------------------------------------
Key Transaction Considerations
o Cable Michigan has proposed to acquire the 38.08% of the fully diluted
common stock of the Company that it does not currently own.
o Cable Michigan is willing to acquire the Common Stock for a $12.00 per
share purchase price.
o The transaction has been structured as a cash tender offer to expedite
closing.
o Assuming the proposed acquisition of the Company's Common Stock is
consummated, Cable Michigan will have access to the full cash flow of the
Company.
o The completion of the transaction is subject to financing, as Cable
Michigan is itself being acquired by Avalon Cable.
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CIBC Oppenheimer
Page 2
<PAGE>
CONFIDENTIAL
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PROFILE OF MERCOM, INC.
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Company Description
o Mercom is a cable television operator with three cable systems in southern
Michigan. The systems are operated through Mercom's wholly-owned
subsidiary, Communications and Cablevision, Inc. As of December 31, 1997,
Mercom's systems had 39,360 subscribers.
o The Mercom systems provide cable service to Monroe County, Allegan County
and the Coldwater and Sturgis areas in Michigan.
o Prior to September 30, 1997, Mercom was operated as part of C-TEC
Corporation ("C-TEC"). On September 30, 1997, C-TEC distributed 100% of the
outstanding shares of common stock of its wholly owned subsidiaries, RCN
Corporation and Cable Michigan, to holders of record of C-TEC's common
stock as of the close of business on September 19, 1997.
o Cable Michigan consists of C-TEC's Michigan cable operations, including its
61.92% ownership in Mercom.
o On July 1, 1997, Mercom sold its investment in Mercom of Florida, Inc.,
which operated a cable system in Port St. Lucie, Florida, approximately 90
miles north of Palm Beach.
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CIBC Oppenheimer
Page 3
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
PROFILE OF MERCOM, INC.
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Company Description (cont'd)
o The following chart indicates the development of the Company by
summarizing, as of December 31 of each of the last five years, its relevant
subscriber statistics:
[CHART]
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CIBC Oppenheimer
Page 4
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
PROFILE OF MERCOM, INC.
- --------------------------------------------------------------------------------
Company Description (cont'd)
o The following charts highlight the historical operating results of the
Company since 1992:
[CHART]
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CIBC Oppenheimer
Page 5
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
PROFILE OF MERCOM, INC.
- --------------------------------------------------------------------------------
Company Description (cont'd)
o The following charts highlight the projected operating results of the
Company through 2003:
[CHART]
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 6
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
PROFILE OF MERCOM, INC.
- --------------------------------------------------------------------------------
Historical and Projected Key Operating Results and Credit Statistics
<TABLE>
($ in thousands) Historical Projected for Years Ending December 31, (1)
----------------- -----------------------------------------------------------------------------
FINANCIAL DATA: 1996 1997 1998 1999 2000 2001 2002 2003
- --------------- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Subscribers 40,012 39,360 40,147 40,950 41,769 42,605 43,457 44,326
Growth 3.0% -1.6% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Net Revenue $15,570 $16,439 $17,185 $18,178 $19,487 $20,890 $22,392 $24,006
Growth 11.7% 5.6% 4.5% 5.8% 7.2% 7.2% 7.2% 7.2%
EBITDA $5,642 $6,099 $6,199 $6,633 $7,164 $7,737 $8,356 $9,024
Margin 36.2% 37.1% 36.1% 36.5% 36.8% 37.0% 37.3% 37.6%
Capital Expenditures $1,821 $2,614 $8,393 $4,959 $4,341 $2,750 $1,811 $1,857
Total Interest Expense 1,227 1,056 1,004 1,219 1,186 975 566 180
Total Debt 17,430 14,151 14,729 15,304 13,762 9,644 4,496 -
Cash 3,054 4,829 1,000 1,000 1,000 1,000 1,000 2,048
C0VERAGE AND LEVERAGE RATIOS:
- -----------------------------
EBITDA/Total Interest 4.6x 5.8x 6.2x 5.4x 6.0x 7.9x 14.8x 50.2x
Expense
(EBITDA-CAPEX)/Total 3.lx 3.3x NM 1.4x 2.4x 5.1x 11.6x 39.9x
Interest Expense
Total Debt/EBITDA 3.lx 2.3x 2.4x 2.3x 1.9x 1.2x 0.5x -
</TABLE>
- ----------
(1) As provided by the Company's management.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 7
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
PROFILE OF MERCOM, INC.
- --------------------------------------------------------------------------------
Shareholder Summary -- Common Stock
Number of %
Holder Shares Ownership
- --------- -------------- --------------
Directors and Officers
George C. Stephenson 5,000 0.10%
Raymond B. Ostroski 4,000 0.08%
Clifford L. Jones 300 0.01%
------------ ----------
Total Directors and Officers 9,300 0.19%
Public Holders
Cable Michigan, Inc. 2,964,250 61.92%
Lappin Capital Management, L.P.(1) 478,419 9.99%
Gamco Investors, Inc. 73,800 1.54%
Others 1,261,291 26.35%
------------ ----------
Total Public Holders 4,777,760 99.81%
------------ ----------
Total 4,787,060 100.00%
============ ==========
- ----------
(1) The shares are held in three portfolios.
Source: Latest Proxy dated 5/4/98 and 13D dated 6/15/98.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 8
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
PROFILE OF MERCOM, INC.
- --------------------------------------------------------------------------------
Public Market Overview
- ----------------------
($ in millions, except per share data)
Public Market Valuation:
- ------------------------
Shares of Common Stock
Outstanding (000's) 4,787 52 Week High @ 5/12/98 $11.75
Purchase price per Share
(MEEO - NASDAQ) $12.00 52 Week Low @ 9/3/97 $7.00
Market Value $57.4
Plus: Total Debt 14.2
Less: Cash 5.8
---------
Total Enterprise Value (TEV) $65.8
=========
Run Rate 2Q 1998 Financial Data: Market Trading Multiples:
- -------------------------------- -------------------------
Sales $17.5 TEV / Run Rate Sales 3.7x
EBITDA(1) 6.6 TEV / Run Rate EBITDA 9.9X
EBIT 3.7 TEV / Run Rate EBIT 17.8x
Subscribers 39,360 TEV/ Subscriber $1,673
- ----------
(1) Excludes non-recurring charges of $0.3 million.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 9
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
PROFILE OF MERCOM, INC.
- --------------------------------------------------------------------------------
Relative Historical Stock Price Performance
Mercom Trading Performance vs. the S&P 500
[CHART]
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 10
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
PROFILE OF MERCOM, INC.
- --------------------------------------------------------------------------------
History of Transaction
o Cable Michigan began buying Mercom shares in the open market in 1989.
o Cable Michigan assumed the $14 million Morgan Guaranty loan outstanding
to Mercom and entered into a credit agreement with Mercom.
o In 1991, Cable Michigan entered into a management agreement with
Mercom. At that time, Cable Michigan owned 38% of Mercom. Under the
agreement, Cable Michigan agreed to conduct, operate and manage the
cable television systems and business operations of Mercom. In addition
to managing its operations, Cable Michigan supplied programming and
billing services to Mercom.
o In 1995, Cable Michigan acquired additional shares of Mercom in
conjunction with a rights offering, resulting in its current ownership
of 61.92%.
o On May 12, 1997, C-Tech announced an offer to acquire 38.08% of the
Company for a stock swap in with Cable Michigan, but suspended this
offer after receiving IRS approval on June 18 for a tax-free
restructuring of its own businesses.
o On June 4, 1998, Cable Michigan announced that it reached a definitive
agreement to sell the Company to Avalon Cable, an affiliate of ABRY
Partners, for $40.50 per share in a cash-for-stock deal.
o Under the purchase agreement, Cable Michigan is permitted to acquire
the minority interest (38.08%) in Mercom. On June 4, 1998, Avalon
Cable authorized Cable Michigan to make an $11.00 per share proposal
to Mercom. On August 12, 1998, Avalon Cable authorized Cable Michigan
to increase the price to $12.00 per share.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 11
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
VALUATION SUMMARY
- --------------------------------------------------------------------------------
o Using various valuation methodologies, CIBC has arrived at the
following valuation ranges for the Company's Common Stock:
<TABLE>
Methodology Low High Average
- --------------------------------------------------------- ------ ------ -------
<S> <C> <C> <C>
Comparable Publicly Traded Companies $10.08 $12.52 $11.30
Comparable Recent Cable M&A Transactions
Deals l/l/98 to Date 10.75 15.34 13.05
Deals 4/l/97 to Date 9.82 14.10 11.96
Deals less than $75 Million (4/l/97 to Date) 9.58 12.95 11.27
Based on Purchase Price of Cable Michigan by Avalon Cable 11.59 12.62 12.11
Premiums Paid for Minority Interests 11.62 12.76 12.19
Discounted Cash Flow 11.28 12.98 12.13
Valuation Range $11.25-$13.00
</TABLE>
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 12
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
REVIEW OF VALUATION METHODOLOGIES
- --------------------------------------------------------------------------------
o CIBC has applied a number of techniques to analyze the fairness of the
proposed transaction from a financial point of view to the holders of
the Common Stock. The following is a brief discussion of each
methodology:
Analysis of Comparable Publicly-Traded Companies
- ------------------------------------------------
CIBC performed a comparison analysis of the trading values, multiples of market
capitalization and total enterprise value, margins and growth rates of certain
publicly traded companies deemed comparable to Mercom. Since the companies used
in this analysis are significantly bigger than Mercom, CIBC has discounted the
values derived from this analysis in the range of 25% to 35% to compensate for
the size differential.
Analysis of Comparable Recent Cable M&A Transactions
- ----------------------------------------------------
CIBC conducted a review of cable transactions since 1997 to provide a reference
point as to the enterprise valuation multiples and per subscriber values
appropriate for Mercom. CEBC used a range of 25% to 35% discount to transactions
with total consideration greater than $75 million. CIBC paid particular
attention to those transactions with total consideration less than $75 million.
No discount was applied to transactions with total consideration less than $75
million.
Analysis Based on Purchase Price of Cable Michigan by Avalon Cable
- ------------------------------------------------------------------
CIBC performed an analysis of the acquisition of Cable Michigan by Avalon Cable.
Cable Michigan was valued on a stand-alone basis after subtracting the value of
Cable Michigan's Mercom shares at a valuation derived from the proposed $12.00
per share acquisition price. A range of 15% to 25% discount to Cable Michigan's
derived acquisition multiple was then applied to calculate the appropriate
acquisition multiples for Mercom.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 13
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
REVIEW OF VALUATION METHODOLOGIES
- --------------------------------------------------------------------------------
Analysis of Premiums Paid for Minority Interests
- ------------------------------------------------
CIBC has analyzed transactions in which acquirors with control purchased the
shares of minority stockholders such as the transaction proposed by Cable
Michigan for the 38.08% of Mercom's shares that it does not already own. CIBC
then applied the range of premiums determined from this analysis to Mercom's
stock price one day, one week and one month prior to the date that Cable
Michigan announced its acquisition of Mercom to determine a range of appropriate
values for the Common Stock.
Discounted Cash Flow Analysis
- -----------------------------
The discounted cash flow ("DCF") analysis derives the theoretical enterprise
value of Mercom by discounting its projected cash flows and projected terminal
value. For a terminal value, CIBC has utilized multiples of earnings before
interest, taxes, depreciation and amortization ("EBITDA") ranging from 9.5x to
11.5x in this analysis, based upon the consideration of publicly-traded
companies and valuations derived from selected control transactions for
comparable companies. CIBC has used discount rates from 10% to 13% for Mercom.
CIBC believes that these discount rates are appropriate given the projected
financial performance of Mercom relative to historical performance and the
"market" cost of capital for comparable cable companies.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 14
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
VALUATION BASED ON COMPARABLE PUBLICLY TRADED COMPANIES
- --------------------------------------------------------------------------------
Valuation Summary
o The following table highlights the value per share of Mercom based on
median trading multiples calculated on a run-rate, LTM as of June 30,
1998 and subscriber basis as of December 31, 1997. See Appendix A for
the analysis of comparable publicly traded companies.
<TABLE>
Total Enterprise Value to:
-----------------------------------------------------------------------------------------
Run-Rate Sales(1) Run-Rate EBITDA(1) LTM Sales LTM EBITDA Subscribers
($ in thousands, except per share data) ------------------- ----------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Financial Data (Period ending 6/30/98) $17,548 $6,648 $16,650 $6,109 39,360(2)
Median Multiples 5.25x 12.03x 5.65x 12.66x $ 2,279
------- ------- ------- ------- -------
Implied Mercom Total Enterprise Value $92,137 $79,956 $94,013 $77,316 $89,715
Less: Total Debt as of 6/30/98 $14,151 $14,151 $14,151 $14,151 $14,151
Plus: Cash as of 6/30198 5,766 5,766 5,766 5,766 5,766
------- ------- ------- ------- -------
Implied Equity Value $83,752 $71,571 $85,628 $68,931 $81,330
Number of Shares Outstanding (000's) 4,787 4,787 4,787 4,787 4,787
Equity Value Per Share $17.50 $14.95 $17.89 $14.40 $16.99
Small Company Discount - Range 25%-35% 25%-35% 25%-35% 25%-35% 25%-35%
Small Company Discount - Midpoint 30% 30% 30% 30% 30%
Adjusted Value Per Share $12.25 $10.47 $12.52 $10.08 $11.89
</TABLE>
- ----------
(1) Quarter ended 6/30/98 multiplied by four.
(2) As of December 31, 1997.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 15
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
VALUATION BASED ON COMPARABLE PUBLICLY TRADED COMPANIES
- --------------------------------------------------------------------------------
Discount Analysis
o CIBC applied a discount in the range of 25% to 35% to the values of
comparable publicly traded cable companies to arrive at its Mercom
valuation because:
- -- Since April 1, 1997 to date, all M&A 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 per subscriber.
- -- In recent months, values of large publicly traded cable companies
have risen significantly (cable index up by approximately 50% between
January 1, 1998 to date) due to a desire by telecommunications
companies and investors to buy cable properties as a vehicle to gain
access to homes. According to CIBC estimates, smaller cable companies
have not benefited proportionally from this trend and, as such, should
be discounted compared to large publicly traded cable companies.
- -- Large cable operators (i.e., greater than $9 billion total enterprise
value) trade at an average of 13.5x run rate EBITDA. Medium cable
operators ($1 billion to $9 billion) trade at an average of 10.9x run
rate EBITDA, or a 20% discount. There are no small public operators
that are not subject to sale agreements; however, extrapolating the
foregoing would result in an estimate of range of 8x to 9x run rate
EBITDA (approximately a 25% to 35% discount to the total group).
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 16
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
VALUATION BASED ON COMPARABLE PUBLICLY TRADED COMPANIES
- --------------------------------------------------------------------------------
Discount Analysis
o The following table indicates additional operating and profitability
characteristics that warrant a discount to multiples used to calculate
the value of Mercom compared with the average of the cable companies
used in CIBC's comparable company analysis in Appendix A.
Table of Index Companies Average vs. Mercom
<TABLE>
($ in thousands) Index Companies Average Mercom
Subscribers 3,582,542 39,360
Operating Statistics:
<S> <C> <C>
Revenue (FY1997) $1,620,547 $16,439
Revenue growth (FY1997) 19.8% 5.6%
EBITDA (FY1997) $626,865 $3,139
EBITDA margin (FY1997) 42.7% 37.1%
EBITDA (LTM1998) $612,038 $6,109
EBITDA margin (LTM1998) 42.1% 36.7%
EBITDA (2Q1998) $246,326 $1,662
EBITDA margin (2Q1998) 53.3% 37.9%
EBITDA (RR 2Q1998) $715,002 $6,648
</TABLE>
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 17
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
VALUATION BASED ON RECENT COMPARABLE CABLE M&A TRANSACTIONS
- --------------------------------------------------------------------------------
Valuation Summary
o The following table highlights the value per share of Mercom based on
median multiples calculated on an LTM EBITDA and per subscriber basis
for selected comparable cable transactions from January 1, 1998 to
date, from April 1, 1997 to date and those with purchase prices below
$75 million (from April 1, 1997 to date). See Appendix B for an
analysis of these selected transactions.
<TABLE>
($ in thousands, All deals from 1/1/98 to Date All Deals from 4/1/97 to Date Selected Deals below $75MM Pur. Price
except per share and Total enterprise Value to: Total enterprise Value to: Total enterprise Value to:
subscriber data) ----------------------------- ----------------------------- --------------------------------------
LTM EBITDA Subscribers LTM EBITDA Subscribers LTM EBITDA Subscribers
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Data (Period ending
6/30/98) $6,109 39,360 (1) $6,109 39,360 (1) $6,109 39,360 (1)
Weighted Average Median Multiples 13.41x $2,878 12.36x $2,662 8.88x $1,788
Implied Mercom Total ------- -------- ------- -------- -------- --------
Enterprise Value $81,922 $113,278 $75,507 $104,776 $54,248 $70,376
Less: Total Debt as of 6/30/98 $14,151 $14,151 $14,151 $14,151 $14,151 $14,151
Plus: Cash as of 6/30/98 5,766 5,766 5,766 5,766 5,766 5,766
------- -------- ------- -------- -------- --------
Implied Equity Value $73,537 $104,893 $67,122 $96,391 $45,863 $61,991
Number of Shares Outstanding
(000's) 4,787 4,787 4,787 4,787 4,787 4,787
Value Per Share $15.36 $21.91 $14.02 $20.14 $9.58 $12.95
Small Company Discount - Range 25%-35% 25%-35% 25%-35% 25%-35% 0% 0%
Small Company Discount - Midpoint 30% 30% 30% 30% 05 0%
Adjusted Value Per Share $10.75 $15.34 $9.82 $14.10 $9.58 $12.95
</TABLE>
- ----------
(1) As of December 31, 1997.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 18
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
VALUE BASED ON PURCHASE PRICE OF CABLE MICHIGAN BY AVALON CABLE
- --------------------------------------------------------------------------------
Valuation Overview
o CIBC believes that the most relevant comparable transaction to Mercom
is the value of Cable Michigan on a stand-alone basis implied by the
Avalon Cable $40.50 per share offer.
o CIBC calculated the total enterprise value of Cable Michigan and
Mercom combined by adding the value of the 38.08% of Mercom 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 an EBITDA multiple of approximately 11.62x and at $2,086
per subscriber.
o By backing out the enterprise value of Mercom assuming $12.00 for all
shares, CIBC was able to derive the implied value of Cable Michigan on
a stand-alone basis and compare its valuation multiples with Mercom's
on a stand-alone basis.
o CIBC believes that due to certain operating and size factors as well as
an implied premium for control, a discount to Cable Michigan's
stand-alone valuation multiples is appropriate when using such
multiples to value Mercom.
o CIBC believes that a discount in the range of 15% to 25% to Cable
Michigan stand-alone multiples is appropriate to value Mercom.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 19
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
VALUE BASED ON PURCHASE PRICE OF CABLE MICHIGAN BY AVALON CABLE
- --------------------------------------------------------------------------------
Discount Summary
o CIBC believes that a discount in the range of 15% to 25% to Cable
Michigan stand-alone multiples is appropriate due to the following
reasons:
-- Mercom's subscriber base is much smaller than Cable Michigan's;
-- Mercom operates in a more competitive environment compared
with Cable Michigan since Mercom has a municipal overbuild in
one town (6,000 subscribers);
-- Mercom's cable systems are all analog compared with a mix of
analog and digital at Cable Michigan;
-- Mercom has not yet started to digitally upgrade while Cable
Michigan started the process last year and already provides a
two-way telco-return path modem service to 30 customers; and
-- Mercom's operating statistics including historical revenue and
EBITDA growth and EBITDA margins as shown on the next page are
less attractive to prospective buyers compared with those of
Cable Michigan.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 20
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
VALUE BASED ON PURCHASE PRICE OF CABLE MICHIGAN BY AVALON CABLE
- --------------------------------------------------------------------------------
Discount Summary (cont'd)
o The following table highlights the system characteristics of Cable
Michigan and Mercom that were considered for determining the
appropriate discount to Cable Michigan's multiples used to value
Mercom. CIBC believes, given the lower subscriber base, analog
technology (few fiber miles) and less attractive operating and
profitability statistics, that a discount in the range of 15% to 25% to
multiples of Cable Michigan is appropriate.
Cable Systems Comparison
- --------------------------------------------------------------------------------
<TABLE>
($ in thousands)
Cable Michigan Mercom
<S> <C> <C>
Subscribers 164,550 39,360
Headends 53 5
Subscribers/Headend 3,105 7,872
Bandwidth Range 54% with 45 channels (300 MHz) 55-60 channels (400-450 MHz)
35% with 55 channels (400 MHz)
10% with 60 channels (450 MHz)
Aerial Miles 4,166 1,133
Underground Miles 2,139 206
Total Miles 6,305 1,339
Total Fiber Miles 560 32
Operating Statistics:
Revenue growth (FY 1997) 6.7% 5.6%
EBITDA margin (FY1997) 41.7% 37.1%
Revenue growth (FY1996) 25.6% 11.7%
EBITDA margin (FY1996) 43.6% 36.2%
EBITDA margin (2Q1998) 41.0% 37.9%
EBITDA (RR 2Q1998) $36,592 $6,648
</TABLE>
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 21
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
VALUE BASED ON PURCHASE PRICE OF CABLE MICHIGAN BY AVALON CABLE
- --------------------------------------------------------------------------------
o The following is the analysis of valuation multiples for Cable Michigan
on a stand-alone basis and Mercom based on the Avalon Cable proposal:
<TABLE>
Cable Michigan Plus: Cable Michigan Cable Michigan
($ in thousands, except per share data) (w/62% of Mercom) 38% of Mercom (w/100% of Mercom) Mercom (without Mercom)
----------------- ------------- ------------------ ------ ----------------
<S> <C> <C> <C> <C> <C>
Fully Diluted Shares of Common Stock (000's) 6,894 1,823 - 4,787 -
Price Per Share in Offer $40.50 $12.00 - $12.00 -
-------- ------- -------- ------- --------
Common Equity Value $279,221 $21,875 $301,096 $57,445 $243,651
Plus: Total Debt as of 6/30/98 $135,000 $14,151 $120,849
Less: Cash as of 6/30/98 10,782 5,766 5,016
-------- ------- --------
Total Enterprise Value $425,314 $65,830 $359,484
Run-rate EBITDA (Annualized Quarter
ending 6/30/98) $36,592 $6,648 $29,944
RCN Management Fee 0 0 0
-------- ------- --------
Adjusted Run-rate EBITDA $36,592 $6,648 $29,944
LTM EBITDA (Period ending 6/30/98) $33,501 $6,109 $27,392
RCN Management Fee 0 0 0
-------- ------- --------
Adjusted LTM EBTTDA $33,501 $6,109 $27,392
Subscribers as of December 31, 1997 203,910 39,360 164,550
Total Enterprise Value/Adjusted Run-rate EBITDA 11.62x 9.90x 12.01x
Total Enterprise Value/Adjusted LTM EBITDA 12.70x 10.78x 13.12x
Total Enterprise Value/Subscriber $2,086 $1,673 $2,185
</TABLE>
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 22
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
VALUE BASED ON PURCHASE PRICE OF CABLE MICHIGAN BY AVALON CABLE
- --------------------------------------------------------------------------------
Valuation Summary
o Based on the characteristics compared on the prior page, CIBC believes
that the run-rate EBITDA multiple of Cable Michigan on a stand-alone
basis of 12.01x and the value per subscriber of $2,185 should be
reduced by a discount in the range of 15% to 25% (midpoint 20%) in
order to value Mercom. The following table analyzes the value of
Mercom using a 20% discount to Cable Michigan on a stand alone basis
multiples:
<TABLE>
($ in thousands, except per share data) Run-Rate Per
EBITDA Subscriber
-------- ----------
<S> <C> <C>
Relevant Cable Michigan Multiple 12.01x $2,185
Discount of 20% 9.60x $1,748
Relevant Mercom Data $6,648 39,360
Mercom Total Enterprise Value $63,849 $68,790
Less: Total Debt as of 6/30/98 (14,151) (14,151)
Plus: Cash as of 6/30/98 5,766 5,766
------- -------
Equity Value $55,464 $60,405
Fully Diluted Shares of Common Stock (000's) 4,787 4,787
Equity Value Per Share $11.59 $12.62
</TABLE>
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 23
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
VALUATION BASED ON PREMIUMS PAID FOR MINORITY INTERESTS
- --------------------------------------------------------------------------------
Valuation Summary
o The following table values Mercom's shares based on selected
transactions in which a majority shareholder (50%+) purchased the
remaining outstanding publicly-held shares to achieve 100% ownership:
<TABLE>
Closing Price
% of % Owned Prior to Announcement Premiums Paid
Date Shares After Price ----------------------- --------------------
Announced Target Name Acquiror Name Acq. Transac. paid 1 day 1 week 4 weeks 1 day 1 week 4 weeks
- --------- ----------- ------------- ---- ------- ---- ----- ------ -------- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6/3/98 Mercom, Inc. Cable Michigan, Inc. 38.08 100.0 $12.00 $10.63 $10.63 $10.50 12.9% 12.9% 14.3%
3/1/94 FoxMeyer Corp National Intergroup Inc 19.50 100.0 14.46 13.50 13.25 13.00 7.1% 9.1% 11.2%
6/6/94 Ogden Projects Inc. Ogden Corp 15.80 100.0 18.38 17.38 15.63 15.25 5.8% 17.6% 20.5%
3/15/95 Ropak Corp LinPac Mouldings Ltd. 40.00 100.0 11.00 10.25 10.38 10.50 7.3% 6.0% 4.8%
3/29/96 Great American Mgmt
& Invt Inc Equity Holdings,Chicago,IL 15.60 100.0 50.00 46.50 46.50 45.00 7.5% 7.5% 11.1%
5/27/96 SyStemix Inc Novartis AG 26.80 100.0 19.50 18.63 11.50 12.25 4.7% 69.6% 59.2%
9/9/96 Crocker Realty Trust Inc Highwoods Properties Inc 26.50 100.0 11.88 11.00 11.00 11.63 8.0% 8.0% 2.2%
9/26/96 General Physics Corp National Patent Development 48.00 100.0 5.20 4.38 3.88 3.75 18.9% 34.2% 38.7%
10/10/96 WCI Steel Inc Renco Group Inc 15.53 100.0 10.00 8.50 7.75 5.63 17.6% 29.0% 77.8%
11/6/96 Union Switch & Signal Inc Ansaldo Transporti SpA 38.40 100.0 7.25 7.00 7.00 7.25 3.6% 3.6% 0.0%
11/27/96 Central Tractor Farm &
Country JW Childs Equity Partners LP 38.75 100.0 14.25 12.13 12.13 11.63 17.5% 17.5% 22.6%
1/13/97 Zurich Reinsurance Centre Zurich Versicherungs GmbH 34.00 100.0 36.00 30.75 30.38 32.00 17.1% 18.5% 12.5%
5/14/97 Enron Global Power &
Pipelines Enron Corp 48.08 100.0 35.00 30.25 29.75 28.25 15.7% 17.6% 23.9%
6/3/97 Faulding, Inc. F.H. Faulding & Co. 29.00 100.0 13.50 10.75 11.00 9.25 25.6% 22.7% 45.9%
9/18/97 Guaranty National Corp Orion Capital Corp 22.70 100.0 36.00 32.50 29.06 28.19 10.8% 23.9% 27.7%
Mean 11.9% 20.4% 25.6%
Median 9.4% 17.6% 21.6%
Implied per share value for Mercom using the median premium paid $11.62 $12.50 $12.76
</TABLE>
Note: For transactions where the minority interest was purchased and
with TEV between $25 million and $1 billion from January 1994 to date.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 24
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
VALUATION BASED ON DISCOUNTED CASH FLOW ANALYSIS
- --------------------------------------------------------------------------------
Assumptions to Projections
o CIBC has relied on Mercom management's projections to perform the
discounted cash flow analysis. The key assumptions to the projections
are as follows:
-- Average basic subscribers grows from 40,429 in FY1997 to
43,457 in FY2003.
-- Net revenues are projected to be $17.2 million in FY1998,
representing an increase of $0.7 million, or 4.5%, driven by
an average basic subscriber growth of 2.2%. Net revenues in
FY1999 are projected to be $18.2 million, an increase of 5.8%
over FY1998, due to an average subscriber growth of 1.8% ,
but greater revenue per subscriber of $35.99 versus $34.65 in
the prior year. Thereafter, net revenues are projected to
grow 7.2% due to 2.5% average subscriber growth and 4.6%
growth in revenue per subscriber. Monthly cable expenses per
subscriber are projected to be $19.30 in FY1998 and will
increase to $23.64 by FY2003. Mercom expects to maintain
recurring subscription services and generate additional
revenues from non-subscription services.
-- Operating expenses for FY1998 are projected to be $9.6
million, representing 55.7% of net revenues. In FY1999
operating expenses are expected to be $10.1 million,
representing 55.3% of net revenues. Thereafter, operating
expenses are projected to remain at approximately 55% of net
revenues.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 25
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
VALUATION BASED ON DISCOUNTED CASH FLOW ANALYSIS
- --------------------------------------------------------------------------------
Assumptions to Projections
-- EBITDA is projected to be $6.2 million in FY1998, or 36.1% of
revenues, and $6.6 million, or 36.5% of revenues, in FY1999,
reflecting the gradual improvement in the demand for other
services provided by Mercom such as premium units.
Thereafter, the EBITDA margin increases as revenues increase.
Monthly EBITDA per subscriber is projected to be $12.50 for
FY1998, increasing to $16.20 in FY2003.
-- Capital expenditures are projected to be $8.4 million in
FY1998 and $5.0 million in FY1999, reflecting expenditures for
system extensions and upgrades and the development of new
services. Capital expenditures in FY2000 are projected to be
$4.3 million, reflecting the completion of system extensions
and upgrades, decreasing to $1.9 million in FY2003. Capital
expenditures per basic subscriber is projected to be $203.06
in FY1998, decreasing to $40.01 in FY2003, reflecting the
completion of system extensions and upgrades.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 26
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
VALUATION BASED ON DISCOUNTED CASH FLOW ANALYSIS
- --------------------------------------------------------------------------------
Valuation
o We performed a DCF valuation analysis on financial projections provided
to us by the Company. Assuming a WACC for Mercom of 11.0% and 12.0% and
exit multiples of 10.5x and 11.5x, the range of share prices is $11.28
to $12.98.
<TABLE>
Projected for years ending December 31
--------------------------------------------------------------------------
($ in thousands) 1998(1) 1999 2000 2001 2002 2003
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
EBIT $1,449 $2,263 $2,654 $3,633 $4,687 $5,752
Plus: Depreciation 1,515 4,061 4,201 3,795 3,360 3,189
Plus: Amortization of Goodwill 136 309 309 309 309 83
Plus: (Unlevered Deferred Taxes
- Unlevered Taxes Provision) (52) (313) (732) (870) (1,684) (2,199)
Less: Changes in Working Capital 66 180 235 252 271 290
Less: Capital Expenditures (4,197) (4,959) (4,341) (2,750) (1,811) (1,857)
-------------------------- ------ ------ ------ ------ ------ ------
Unlevered Cash Flow (1,083) 1,541 2,326 4,369 5,132 5,258
Plus: NOL Tax Benefit 0 134 429 429 429 429
------ ------ ------ ------ ------ ------
Free Cash Flow to the Firm (1,083) 1,676 2,755 4,797 5,561 5,686
Terminal Value
EBITDA Multiple
9.5x 10.00% 11.00% 12.00% 13.00%
10.5x ------ ------ ------ ------
11.5x $60,801 $57,733 $54,847 $52,132
65,894 62,557 59,419 56,466
Less: Net Debt (As of June 30, 70,988 67,382 63,991 60,800
1998) 8,385 8,385 8,385 8,385
Implied Equity Value
EBITDA Multiple
9.5x 10.00% 11.00% 12.00% 13.00%
10.5x ------ ------ ------ ------
11.5x $52,416 $49,348 $46,462 $43,747
57,509 54,172 51,034 48,081
62,603 58,997 55,606 52,415
Implied Equity Value Shares Outstanding
Per Share @ EBITDA Multiple as of June 30,1998 Value on 1/1/98
---------------------------------------------------
9.5x 4,787 10.00% 11.00% 12.00% 13.00%
10.5x ------ ------ ------ ------
11.5x $10.95 $10.31 $9.71 $9.14
12.01 11.32 10.66 10.04
13.08 12.32 11.62 10.95
Implied Equity Value
Per Share @ EBITDA Multiple Value on 6/30/98
----------------------------------------------------
9.5x 10.00% 11.00% 12.00% 13.00%
10.5x ------ ------ ------ ------
11.5x $11.48 $10.86 $10.27 $9.71
12.60 11.92 11.28 10.68
13.72 12.98 12.29 11.64
</TABLE>
- ----------
(1) Estimated for the second half of 1998 based on the projections for the full
year (divided by two).
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 27
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
VALUATION BASED ON DISCOUNTED CASH FLOW ANALYSIS
- --------------------------------------------------------------------------------
Calculation of Weighted Average Cost of Capital
o The appropriate discount rates used for the DCF valuation are based on
the following analysis:
<TABLE>
Mkt. Value Debt/ Average LT Asset
Equity Common Preferred Total Total Borrowing Beta
Company Name Beta (1) Stock Stock Debt Capital Rate (Unlevered)(2)
- ------------ -------- ----- ----- ---- ------- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Adelphia Communications Corp. 1.78 $ 1,133 $ 248 $ 2,381 63.3% 8.5% (3) 0.79
Cablevision Systems Corp. 2.00 3,150 1,512 4,368 48.4% 7.5% (3) 1.09
Century Communications Corp. 1.00 1,722 186 2,495 56.7% 8.1% (3) 0.53
Comcast Corporation 1.29 15,107 32 6,763 30.9% 7.7% (3) 1.02
Cox Conummications, Inc. 0.37 12,668 -- 3,071 19.5% 8.5% (3) 0.32
Jones Intercable, Inc. 1.51 995 -- 1,290 56.5% 7.7% (3) 0.85
TCA Cable TV, Inc. 1.12 624 -- 549 46.8% 6.7% (3) 0.73
TCI Group (Tele Comm., Inc.) 1.05 18,090 1,799 14,422 42.0% 7.6% (3) 0.71
Median 1.21 47.6% 7.7% 0.76
Assumptions:
Asset Target
Beta Debt/ Equity Marginal Tax Rate 40.0%
(Unlevered) Capital Beta Risk Free Rate (4) 5.3%
----------- ------- ---- Market Risk Premium(5) 7.5%
Pre-Tax Cost of Debt(6) 6.7%
0.76 47.6% 1.17
Calculation of Cost of Capital
Pre Tax After Tax
Capital Capital % of Weighted
Cost Cost Capital Cost
---- ------- ------- ----
Debt (7) 6.7% 6.7% 47.6% 3.2%
Equity (8) 14.1% 14.1% 52.4% 7.4%
Weighted Average Cost of Capital (9) 10.6%
</TABLE>
- ----------
(1) Source: Bloomberg. Calculated using monthly obervations over the past 5
years.
(2) Unlevered Beta= Equity Beta / [1 + (1 - Marginal Tax Rate) x Debt /
Equity].
(3) Actual yield on recently issued bonds.
(4) Yield on 30-year Treasury Bonds at September 1, 1998.
(5) Source: Ibbotson Associates' "Stocks, Bonds, Bills & Inflation."
(6) Weighted average effective interest rate for Mercom's debt at 12/31/97.
(7) No tax benefit of leverage due to NOL Carryovers.
(8) Cost of Equity = Risk Free Rate + (Equity Beta x Market Risk Premium).
(9) WACC = [Cost of Equity x (Equity/Capital)] + [(Pre Tax Cost of Debt) x
(1 - Marginal Tax Rate) x (Debt Capital)].
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 28
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
CONCLUSIONS
- --------------------------------------------------------------------------------
o Mercom has proven its ability to manage its cable systems in a small
geographic area in Michigan.
o The appropriate valuation of Mercom should be discounted to the implied
value being offered to Cable Michigan by Avalon Cable.
o The range of Mercom's share price obtained using a variety of valuation
techniques is $9.58 to $15.34.
o Based on the valuation methodologies employed, the total consideration
offered to the minority holders of $12.00 per share is close to the
median of the above range. Therefore, in CIBC's opinion the $12.00 per
share offer is fair from a financial point of view.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 29
<PAGE>
Selected Comparable Publicly Traded Cable Companies
(Figures in Millions, Except Per Share and Per Subscriber Data)
<TABLE>
Latest
Financial Stock Price Total Debt &
Ticker Date 9/3/98 Shares O/S Market Value Pref Stock DEBT Cash
------ ---- ------ ---------- ------------ ---------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cable Companies(1)
Mercom MEEO 6/30/98 $12.00(4) 4.8 $57.4 $14.2 $14.2 $5.8
Adelphia Communications ADLAC 6/30/98 36.50 31.0 1,132.9 2,629.0 2,381.0 276.9
Cable Michigan(3) CABL 6/30/98 40.50(5) 6.9 243.9(6) 120.8 120.8 5.0
Cablevision Systems CVC 6/30/98 36.25 86.9(24) 3,149.7 5,879.4 4,367.9 173.0
Century Communications CTYA 2/28/98 23.13 74.5 1,721.9 2,681.2 2,494.9 277.1
Comcast Corporation CMCSA 6/30/98 39.13 386.1(25) 15,106.9 6,794.7 6,762.8 516.6
Cox Communications, Inc. COX 6/30/98 46.63 271.7(26) 12,668.3 3,071.3 3,071.3 20.6
Jones Intercable Inc. JOIN 6/30/98 24.22 41.1 995.1 1,289.9 1,289.9 7.2
MediaOne (U.S. West) UMG 6/30/98 44.50 654.6(27) 29,129.9 6,700.0 5,115.0 384.0
TCA Cable TV, Inc. TCAT 4/30/98 25.00 24.9 623.6 549.0 549.0 4.0
TCI Group (Tele Comm) TCOMA 6/30/98 33.75 536.0(28) 18,090.0 16,221.0 14,422.0 295.0
Mean
Median
Basic Subscribers TEV/R TEV/ RR
TEV (thousands)(2) Revenue EBITDA TEV/ Subscriber
--- ------------- ------- ------ ---------------
<S> <C> <C> <C> <C> <C>
Cable Companies(1)
Mercom $65.8 39(7) 3.8x 9.9x $1,673
Adelphia Communications 3,485.0 1,982(8) 6.4x 12.0x 1,758
Cable Michigan(3) 359.7 165(9) 5.0x 12.0x 2,186
Cablevision Systems 6,227.7(19) 3,413(10) 1.8x 4.7x(18) 1,825
Century Communications 4,126.0 1,314(11) 5.5x 11.9x 3,140
Comcast Corporation 13,277.9(20) 4,366(12) 5.8x 12.0x 3,041
Cox Communications, Inc. 9,505.3(21) 3,359(13) 6.0x 15.6x 2,830
Jones Intercable Inc. 2,277.8 960(14) 5.9x 12.8x 2,373
MediaOne (U.S. West) 12,629.9(22) 4,999(15) 4.9x(23) 14.0x 2,526
TCA Cable TV, Inc. 1,168.7 868(16) 3.0x 6.8x 1,347
TCI Group (Tele Comm) 26,911.0(29) 14,400(17) 4.5x 12.2x 1,869
Mean 4.9x 12.2x $2,289
Median 5.3x 12.0x 2,279
</TABLE>
(1) Operating figures exclude extraordinary items, one-time losses and gains,
etc.
(2) Home with one or more TV sets connected to a cable TV is counted as one
basic subscriber.
(3) Cable Michigan excludes all data related to its 61.9% ownership stake in
Mercom.
(4) Using $12.00 per share that Cable Michigan has agreed to pay for Mercom.
(5) Using $40.50 per share that Avalon has agreed to pay for Cable Michigan.
(6) Excludes market equity value of 61.9% of Mercom (at $12.00 per share)
currently owned by Cable Michigan.
(7) Based on latest 10K.
(8) Based on latest 10K. Also, added 5,800 subscribers through an exchange as
reported in 6/30/98 10Q.
(9) Excludes 39 thousand subscribers of Mercom.
(10) Consists of 2.5 million subscribers from Restricted Group and 877
thousand from Unrestricted Group taken from 6/30/98 10Q.
(11) Per subscriber data may be skewed due to substantial wireless telephony
operations that are included in the financial data.
(12) Subscriber data is as of 12/31/97.
(13) Based on latest 10K as of 10/31/97. Includes 124 thousand subscribers
added based on latest 10Q as of 6/30/98.
(14) As of 12/31/97. Based on estimated subscribers in two clusters
(Virginia/Maryland), where company estimates 93% of total subscribers
reside.
(15) Subscriber data is estimate from CIBC Oppenheimer cable research analyst.
(16) Based on latest 10Q as of 4/30/98.
(17) Based on latest 10K as of 12/31/97.
(18) Excluded from mean and median calculations.
(19) Total Enterprise Value is for cable only using net debt of $4,368 million
plus $1,188 million of preferred minus $28 million of option proceeds and
$2,450 million of non-cable assets. Estimates from CIBC Oppenheimer cable
research analyst.
(20) Total Enterprise Value is for cable only using net debt of $3,296 million
plus $559 million of preferred minus $147 million of option proceeds and
$5,537 million of non-cable assets. Estimates from CIBC Oppenheimer cable
research analyst.
(21) Total Enterprise Value is for cable only using net debt of $3, 100
million minus $5 million or option proceeds and $6,258 million of non-cable
assets. Estimates from CIBC Oppenheimer cable research analyst.
(22) Total Enterprise Value is for cable only using net debt of $4,731 million
plus $661 million of preferred minus $119 million of option proceeds and
$21,773 million of non-cable assets. Estimates from CIBC Oppenheimer cable
research analyst.
(23) Revenues are for Media Group which includes cable businesses.
(24) Shares outstanding includes 10.6 million shares reserved for convertible
preferred and 1.0 shares reserved for options.
(25) Shares outstanding includes 10.5 million shares issuable on conversion of
debt and 6.4 million shares issuable on option exercise.
(26) Shares outstanding includes 0.3 million shares reserved for options.
(27) Shares outstanding includes 38 million shares for convertible preferred,
and 7.2 million issuable for options.
(28) Shares outstanding includes 16 million shares reserved for options, and
83 million shares reserved for convertible debt and preferred.
(29) Total Enterprise Value is for cable only using net debt of $12,565 million
plus $1,644 million of preferred minus $434 million of option proceeds and
$4,954 million of non-cable assets. Estimates from CIBC Oppenheimer cable
research analyst.
<PAGE>
Selected Comparable Publicly Traded Cable Companies
(Figures in Millions, Except Per Share and Per Subscriber Data)
<TABLE>
<CAPTION>
Run Rate
---------------------------------------------------------------
Monthly EBITDA
Revenues Rev/Subs (3) EBITDA Margin
---------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cable Companies (1)
Mercom $17.5 $37.15 $6.6 37.9%
Adelphia Communications (2) 548.5 23.06 290.8 53.0%
Cable Michigan (5) 71.7 36.31 29.9 41.8%
Cablevision Systems (8) 3,489.0 41.65 (6) 1,320.9 37.9%
Century Communications 752.4 47.71 346.2 46.0%
Comcast Corporation (9) 2,273.2 41.32 (7) 1,104.0 48.6%
Cox Communications, Inc. (10) 1,593.2 39.52 607.8 38.2%
Jones Intercable Inc. 388.7 33.75 177.6 45.7%
MediaOne (U.S. West) (11) 2,564.0 37.76 (13) 901.0 (12) 35.1%
TCA Cable TV, Inc. 386.3 37.11 171.8 44.5%
TCI Group (Tele Comm) 6,016.0 34.81 2,200.0 (14) 36.6%
Mean 42.7%
Median 43.1%
Penetration Net Debt/ Net Debt/ Net Debt/
Rate(3) Subscriber EBITDA Mkt Value
------------- ---------- ----------- -------------
Cable Companies (1)
Mercom 60.3% $213 1.3x 0.1x
Adelphia Communications (2) 71.3% $1,077 7.3x 1.9x
Cable Michigan (5) 52.7% 704 3.9x 0.5x
Cablevision Systems (8) 64.7% 1,229 3.2x 1.3x
Century Communications 56.5% 1,688 6.4x 1.3x
Comcast Corporation (9) 61.2% 1,431 5.7x 0.4x
Cox Communications, Inc. (10) 64.4% 908 5.0x 0.2x
Jones Intercable Inc. 64.0% 1,336 7.2x 1.3x
MediaOne (U.S. West) (11) NA 946 5.3x 0.2x
TCA Cable TV, Inc. 75.0% 628 3.2x 0.9x
TCI Group (Tele Comm) NA 981 6.4x 0.8x
Mean 63.7% $1,093 5.4x 0.9x
Median 64.2% 1,029 5.5x 0.8x
</TABLE>
(1) Operating figures exclude extraordinary items, one-time losses and gains,
etc.
(2) Run Rate is annualized using Companys figures excluding Hyperion
investments.
(3) Calculated as monthly revenue divided by basic subscribers.
(4) Penetration rate is calculated as basic subscribers divided by homes
passed by cable connected to distribution system.
(5) Cable Michigan excludes all data related to its 61.9% ownership stake in
Mercom.
(6) Cablevision reported figure for March 1998.
(7) Uses cable revenues only for calculation.
(9) Revenues and EBITDA excludes programming businesses and developing new
media businesses. Figures also include acquired TCI Systems and Systems
held for sale and excludes revenues earned by Lightpath from the
consolidated cable systems.
(9) Revenues and EBITDA are for domestic cable only. Excludes QVC and
Cellular Communications and other non-cable businesses.
(10) Revenues and EBITDA exclude Satellite business.
(11) Revenues are for all of Media Group.
(12) Adjusted for $392 million for non-cable businesses for the 1998 calendar
year estimated by Oppenheimer cable research estimate.
(13) As of FYE 12/31/97.
(14) EBITDA includes $77 million of stock compensation expense. EBITDA of
domestic cable operations, adjusted for cable modern losses.
<PAGE>
Selected Comparable Publicly Traded Cable Companies
(Figures in Millions, Except Per Share and Per Subscriber Data)
<TABLE>
Latest Twelve Months
---------------------------------------------------
Monthly EBITDA
Revenues Rev/Subs (3) EBITDA Margin
--------- -------------- -------- ---------
<S> <C> <C> <C> <C>
Cable Companies (1)
Mercom $16.7 $33.89 $6.1 36.7%
Adelphia Communications 544.4 $22.89 275.4 50.6%
Cable Michigan 67.5 $34.17 27.4 40.6%
Cablevision Systems 2,024.5 $41.65 612.8 30.3%
Century Communications 730.7 $46.34 334.7 45.8%
Comcast Corporation 2,160.6 $40.33 899.5 41.6%
Cox Communications, Inc. 1,541.9 $38.25 611.8 39.7%
Jones Intercable Inc. 389.0 $33.77 172.2 44.3%
MediaOne (U.S. West) 2,053.0 $37.76 949.2 46.2%
TCA Cable TV, Inc. 336.5 $32.32 147.5 43.8%
TCI Group (Tele Comm) 6,349.0 $36.74 2,421.0 38.1%
Mean 42.1%
Median 42.7%
Penetration Net Debt/ Net Debt/ EBITDA/ Net Debt/
Rate(4) Subscriber EBITDA Interest Mkt Value
------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Cable Companies (1)
Mercom 60.3% $213 1.4x 6.3x 0.1x
Adelphia Communications 71.3% $1,062 7.6x 1.1x 1.9x
Cable Michigan 52.7% $704 4.2x 2.8x 0.5x
Cablevision Systems 64.7% $1,229 6.8x 1.6x 1.3x
Century Communications 56.5% $1,688 6.6x 1.5x 1.3x
Comcast Corporation 61.2% $1,431 6.9x 4.0x 0.4x
Cox Communications, Inc. 64.4% $908 5.0x 2.9x 0.2x
Jones Intercable Inc. 64.0% $1,336 7.5x 1.9x 1.3x
MediaOne (U.S. West) NA $946 5.0x 10.7x 0.2x
TCA Cable TV, Inc. 75.0% $628 3.7x 5.6x 0.9x
TCI Group (Tele Comm) NA $981 5.8x 2.2x 0.8x
Mean 63.7% $1091.3 5.9x 3.4x 0.9x
Median 64.2% 1,021.3 6.2x 2.5x 0.8x
</TABLE>
(1) Operating figures exclude extraordinary items, one-time losses and gains,
etc.
(2) Calculated as monthly revenue divided by basic subscribers.
(3) Penetration rate is calculated as basic subscribers divided by homes
passed by cable connected to distribution system.
<TABLE>
TEV/
TEV/ LTM TEV/ TEV/
TEV LTM Revenue EBITDA LTM EBIT Subscribers
--- ----------- ------ -------- -----------
<S> <C> <C> <C> <C> <C>
Cable Companies (1)
Mercom $65.8 4.0x 10.8x 20.5x $2
Adelphia Communications $3,485.0 6.4x 12.7x 26.8x $2
Cable Michigan 359.7 5.3x 13.1x (150.9x) $2
Cablevision Systems 6,227.7 3.1x 10.2x 100.9x $2
Century Communications 4,126.0 5.6x 12.3x 81.0x $3
Comcast Corporation 13,277.9 6.1x 14.8x 51.7x $3
Cox Communications, Inc. 9,505.3 6.2x 15.5x 48.1x $3
Jones Intercable Inc. 2,277.8 5.9x 13.2x (90.8x) $2
MediaOne (U.S. West) 12,629.9 6.2x 13.3x (5.6x) $3
TCA Cable TV, Inc. 1,168.7 3.5x 7.9x 11.8x $1
TCI Group (Tele Comm) 26,911.0 4.2x 11.1x 28.7x $2
Mean 5.15x 12.32x 47.3x (2) 2
Median 5.65x 12.66x 48.1x (2) 2
</TABLE>
(1) Operating figures exclude extraordinary items, one-time losses and gains,
etc.
(2) Excludes outliers.
<PAGE>
Selected Announced Cable Transactions
(All Urban and Rural)
<TABLE>
<CAPTION>
Price Subs Cash Flow
Date Location Buyer Seller Notes ($MMs) (000s) ($MMs)
- ---- -------- ----- ------ ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
2nd Quarter
Jul-98 St. Louis, IL,
Los Angeles, CA Vulcan Partners Charter (1) $4,500.0 1,200 $321.4
Jun-98 Denver-based AT&T TCI (2) 44,100.0 15,100 3,219.0
Jun-98 Michigan Based Cable Michigan Mercom (3) 65.8 39 6.1
Jun-98 Michigan Based Avalon Cable Cable Michigan (4) 362.1 189 27.4
Apr-98 Las Vegas, Nev. Cox Cable Comm Prime Cable Las Vegas (5) 1,270.0 424 96.0
Apr-98 Western Chicago TCI Comm Jones Intercable-Suburban (6) 495.0 255 50.5
Apr-98 TX-based Vulcan Partners Marcus (7) 2,926.3 1,236 233.7
Apr-98 Littlerock, CA Jones Intercble Jones 14B (8) 11.0 6 1.3
Apr-98 Grenada, MS Cable One Bresnan Comm (9) 11.0 7 1.5
Apr-98 Litchfield, CT Cablevision Time Warner (10) 49.0 27 5.3
Apr-98 Rensselaer, NY Time Warner Cablevision (11) 57.0 30 6.2
Apr-98 Palmdale, CA Jones Intercable Jones 12BC (12) 138.0 64 13.3
1st Quarter
Mar-98 TX, OK, MS, LA Cable One Marcus Cable (13) $151.0 72 $15.7
Mar-98 TX, OK, KS, MO Classic Comm Cable One (14) 44.0 29 5.3
Mar-98 Sumpter, MI Frontier Vision N Oakland Cablevision (15) 14.0 8 1.8
Mar-98 Port Clinton, OH Frontier Vision TCI (16) 10.0 7 1.5
Mar-98 Andrews, NC CND Acquisition King Kable (17) 2.0 2 0.3
Mar-98 Waterbury, CT TMC Holdings Marcus Cable-Connecticut (18) 150.0 63 15.0
Feb-98 Laconia, NH Harron Comm Community TV (19) 113.0 57 11.8
Feb-98 E. Cleveland, OH E. Cleveland TBA, Inc. (20) 6.0 4 0.7
Jan-98 Kalamazoo, MI TCI Comm Multimedia Cablevision (21) 75.0 60 10.7
Jan-98 Hartford, CT Cablevision Systems Corp. TCI (22) 380.0 173 38.0
Jan-98 Bardford, CT Cablevision Systems Corp. TCI (23) 75.0 60 11.4
4th Quarter
Dec-97 Sherman Oaks, CA TCI/Century JV Century Comm. $1,342.0 500 $123.1
Dec-97 Chicago, IL TCI Media One 1,284.0 542 121.1
Dec-97 South East FL, GA Media One TCI 1,110.0 508 103.7
Dec-97 Los Angeles Co.,
Ventura, CA TCI/Century JV TCI 455.0 245 50.6
Dec-97 Jefferson, IN Insight/TCI JV Insight Comm. 377.0 160 38.5
Dec-97 Richmond, IN Insight/TCI JV TCI 370.0 160 38.5
Dec-97 Topeka, KS Multimedia TCI 201.0 128 22.8
</TABLE>
<TABLE>
<CAPTION>
Cash Flow
Date Location Buyer Seller Notes Penetration Price/Sub. Multiple
- ---- -------- ----- ------ ----- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2nd Quarter
Jul-98 St. Louis, IL,
Los Angeles, CA Vulcan Partners Charter (1) 65% $3,750 14.0x
Jun-98 Denver-based AT&T TCI (2) 62% 2,921 13.7x
Jun-98 Michigan Based Cable Michigan Mercom (3) 60% 1,673 10.8x
Jun-98 Michigan Based Avalon Cable Cable Michigan (4) 61% 1,916 13.2x
Apr-98 Las Vegas, Nev. Cox Cable Comm Prime Cable Las Vegas (5) 63% 2,995 13.2x
Apr-98 Western Chicago TCI Comm Jones Intercable-Suburban (6) 73% 1,941 9.8x
Apr-98 TX-based Vulcan Partners Marcus (7) 58% 2,368 12.5x
Apr-98 Littlerock, CA Jones Intercble Jones 14B (8) 73% 1,833 8.8x
Apr-98 Grenada, MS Cable One Bresnan Comm (9) 84% 1,571 7.3x
Apr-98 Litchfield, CT Cablevision Time Warner (10) 76% 1,815 9.2x
Apr-98 Rensselaer, NY Time Warner Cablevision (11) 70% 1,900 9.2x
Apr-98 Palmdale, CA Jones Intercable Jones 12BC (12) 72% 2,156 10.4x
1st Quarter
Mar-98 TX, OK, MS, LA Cable One Marcus Cable (13) 72% $2,097 9.6x
Mar-98 TX, OK, KS, MO Classic Comm Cable One (14) 83% 1,517 8.3x
Mar-98 Sumpter, MI Frontier Vision N Oakland Cablevision (15) 59% 1,750 7.7x
Mar-98 Port Clinton, OH Frontier Vision TCI (16) 70% 1,429 6.6x
Mar-98 Andrews, NC CND Acquisition King Kable (17) NM 1,000 6.9x
Mar-98 Waterbury, CT TMC Holdings Marcus Cable-Connecticut (18) 69% 2,381 10.0x
Feb-98 Laconia, NH Harron Comm Community TV (19) 76% 1,982 9.6x
Feb-98 E. Cleveland, OH E. Cleveland TBA, Inc. (20) 58% 1,500 8.3x
Jan-98 Kalamazoo, MI TCI Comm Multimedia Cablevision (21) 83% 1,250 7.0x
Jan-98 Hartford, CT Cablevision Systems Corp. TCI (22) 64% 2,197 10.0x
Jan-98 Bardford, CT Cablevision Systems Corp. TCI (23) 80% 1,250 6.6x
4th Quarter
Dec-97 Sherman Oaks, CA TCI/Century JV Century Comm. 51% $2,684 10.9x
Dec-97 Chicago, IL TCI Media One 63% 2,368 10.6x
Dec-97 South East FL, GA Media One TCI 55% 2,186 10.7x
Dec-97 Los Angeles Co.,
Ventura, CA TCI/Century JV TCI 54% 1,857 9.0x
Dec-97 Jefferson, IN Insight/TCI JV Insight Comm. 67% 2,356 9.8x
Dec-97 Richmond, IN Insight/TCI JV TCI 77% 2,313 9.6x
Dec-97 Topeka, KS Multimedia TCI 59% 1,570 8.8x
</TABLE>
<TABLE>
<CAPTION>
Price Subs Cash Flow
Date Location Buyer Seller Notes ($MMs) (000s) ($MMs)
- ---- -------- ----- ------ ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
4thQuarter
Dec-97 Fairfield, CA TCI Century Comm. $191.0 90 $19.7
Dec-97 Kansas, IL, IN TCI Multimedia 189.0 93 19.9
Dec-97 S. Fernando, CA Century Comm. TCI 167.0 90 18.6
Dec-97 Evansville, IN Insight Comm. TCI 131.0 63 13.5
Dec-97 Brigham, UT TCI Insight Comm. 125.3 58 13.6
Dec-97 DE, MD Comcast Marcus Cable 65.5 27 6.6
Nov-97 Jackson, TN Renaissance Time Warner 291.0 125 29.7
Nov-97 Anniston, AL CableOne Time Warner 65.0 36 6.8
Nov-97 Mountain Brook, AL Marcus Cable McDonald Investment 62.0 23 6.3
Nov-97 Surfside, SC CableOne Jones Intercable Inc. 51.5 25 5.0
Nov-97 New England Avalon Partners Pegasus Cable TV, Inc. 29.5 15 3.3
Oct-97 NY, FL, NC TWE/AN Time Warner 1,327.0 640 141.2
Oct-97 Broward, FL Comcast Jones Intercable Inc. 140.0 55 13.3
Oct-97 S. Carolina Counties Northland Cable InterMedia & Robin
Cable Systems 70.0 35 6.7
Oct-97 Auburn, NY Harron Communications Auburn Cable 28.0 14 2.7
</TABLE>
<TABLE>
<CAPTION>
Cash Flow
Date Location Buyer Seller Penetration Price/Sub. Multiple
- ---- -------- ----- ------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
4thQuarter
Dec-97 Fairfield, CA TCI Century Comm. 71% $2,122 9.7x
Dec-97 Kansas, IL, IN TCI Multimedia 65% 2,032 9.5x
Dec-97 S. Fernando, CA Century Comm. TCI 45% 1,856 9.0x
Dec-97 Evansville, IN Insight Comm. TCI 62% 2,079 9.7x
Dec-97 Brigham, UT TCI Insight Comm. 45% 2,160 9.2x
Dec-97 DE, MD Comcast Marcus Cable 65% 2,472 9.9x
Nov-97 Jackson, TN Renaissance Time Warner 70% 2,328 9.8x
Nov-97 Anniston, AL CableOne Time Warner 86% 1,814 9.5x
Nov-97 Mountain Brook, AL Marcus Cable McDonald Investment 68% 2,680 9.8x
Nov-97 Surfside, SC CableOne Jones Intercable Inc. 78% 2,060 10.3x
Nov-97 New England Avalon Partners Pegasus Cable TV, Inc. 70% 1,922 9.0x
Oct-97 NY, FL, NC TWE/AN Time Warner 72% 2,073 9.4x
Oct-97 Broward, FL Comcast Jones Intercable Inc. 74% 2,545 10.5x
Oct-97 S. Carolina Counties Northland Cable InterMedia & Robin
Cable Systems 60% 1,982 10.4x
Oct-97 Auburn, NY Harron Communications Auburn Cable 86% 1,958 10.2x
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Price Subs Cash Flow
Date Location Buyer Seller Notes ($MMs) (000s) ($MMs)
- ---- -------- ----- ------ ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
3rd Quarter
Sep-97 MN, MI, NE, WI Bresnan/TCI TCI $800.0 445 $93.0
Sep-97 Montgomery/
Arlington, VA Prime Cable SBC Corp. 637.0 268 77.7
Sep-97 FL, NC, MO MediaCom Cablevision 315.0 265 33.2
Sep-97 NJ, PA, Central OH FrontierVision Cox Communications, Inc. 193.0 88 19.5
Sep-97 New Port, NH,
St. Albans, VT FrontierVision TCI 34.5 22 4.1
Sep-97 Blackwell, OK Post Newsweek TCA Cable 28.0 17 3.1
Sep-97 Lufkin, TX TCA Cable Post Newsweek 28.0 16 3.1
Sep-97 Clearlake, CA MediaCom Jones Intercable Inc. 21.4 17 2.9
Aug-97 Albuquerque, NM Jones Intercable Inc. Cable TV Fund 12-BCD (Jones) 223.0 113 25.9
Aug-97 Rockford, IL Insight Comm. Cablevision Systems Corp. 97.0 65 10.2
Aug-97 Phoenix, AZ Cox Communications, Inc. Insight Comm. 77.0 36 8.5
Aug-97 Lafayette, IL Insight Comm. Cox Communications, Inc. 77.0 38 8.0
Aug-97 Central, OH FrontierVision Phoenix Cable 13.5 8 1.7
</TABLE>
<TABLE>
<CAPTION>
Cash Flow
Date Location Buyer Seller Penetration Price/Sub. Multiple
- ---- -------- ----- ------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
3rd Quarter
Sep-97 MN, MI, NE, WI Bresnan/TCI TCI 74% $1,798 8.6x
Sep-97 Montgomery/
Arlington, VA Prime Cable SBC Corp. 66% 2,377 8.2x
Sep-97 FL, NC, MO MediaCom Cablevision NA 1,190 9.5x
Sep-97 NJ, PA, Central OH FrontierVision Cox Communications, Inc. 75% 2,200 9.9x
Sep-97 New Port, NH,
St. Albans, VT FrontierVision TCI 78% 1,560 8.4x
Sep-97 Blackwell, OK Post Newsweek TCA Cable 80% 1,679 8.9x
Sep-97 Lufkin, TX TCA Cable Post Newsweek 84% 1,819 8.9x
Sep-97 Clearlake, CA MediaCom Jones Intercable Inc. 61% 1,237 7.4x
Aug-97 Albuquerque, NM Jones Intercable Inc. Cable TV Fund 12-BCD (Jones) 47% 1,977 8.6x
Aug-97 Rockford, IL Insight Comm. Cablevision Systems Corp. 67% 1,492 9.5x
Aug-97 Phoenix, AZ Cox Communications, Inc. Insight Comm. 80% 2,131 9.1x
Aug-97 Lafayette, IL Insight Comm. Cox Communications, Inc. 75% 2,018 9.6x
Aug-97 Central, OH FrontierVision Phoenix Cable NA 1,776 8.0x
</TABLE>
<TABLE>
<CAPTION>
Price Subs Cash Flow Price Cash Flow
Date Location Buyer Seller Notes ($MMs) (000s) ($MMs) Penetration /Sub. Multiple
- ---- -------- ----- ------ ----- ------ ------ ------ ----------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3rdQuarter
Jul-97 Kentucky InterMedia Partners TCI $946.0 425 $93.7 68% $2,226 10.1x
Jul-97 TX, LA TCI/TCA jv TCI 310.0 150 33.7 68% 2,067 9.2x
Jul-97 TX, LA, NM TCI/TCA jv TCA Cable 285.0 155 32.8 69% 1,839 8.7x
Jul-97 Roselawn, IN Triax Midwest Triax Associates 50.0 33 6.8 50% 1,509 7.3x
Jul-97 Jackson County, GA Genesis Cable McDonald Investment 45.0 21 5.1 60% 2,035 8.9x
Jul-97 Kuai, HI G Force LLC InterMedia 24.0 12 2.8 88% 2,065 8.6x
Jul-97 Kuai, HI G Force LLC Rifkin & Associates 14.0 8 1.6 85% 1,744 8.7x
2nd Quarter
Jun-97 NY Area Cablevision TCI $1,996.7 820 $199.7 NA $2,435 10.0x
Jun-97 Five States Falcon Holding
Group L.P. TCI 504.9 300 50.5 65% 1,683 10.0x
Jun-97 Buffalo, NY;
Erie, PA; OH Adelphia TCI 349.9 166 35.0 NA 2,108 10.0x
Jun-97 Boone, NC/
Anderson, SC Helicon Partners Booth-American 66.1 35 7.0 61% 1,889 9.4x
Jun-97 Dagsboro, DE Mediacom American Cable
TV Investors 5 43.1 29 4.8 85% 1,471 8.9x
May-97 St. Paul, MN Charter Comm., Inc. U.S. West Media 600.3 290 60.0 60% 2,070 10.0x
May-97 Bangor/Lewiston, ME FrontierVision A-R Cable Services-
ME, Inc. (CVC) 78.2 53 8.5 60% 1,464 9.2x
May-97 Waterville, FrontierVision Triax Associates 1 &
Fulton, OH Phoenix Cable 34.2 21 3.7 61% 1,667 9.3x
Total Deals (4/1/97 to date)
MEAN $1,974 9.5x
MEDIA $1,977 9.5x
WEIGHTED AVERAGE $2,662 12.4x
Total Deals (1/1/98 to date)
MEAN $1,965 9.7x
MEDIA $1,900 9.6x
WEIGHTED AVERAGE $2,878 13.4x
Less than $75 million Purchase Price (4/1/97 to date
MEAN $1,733 8.6x
MEDIA $1,750 8.9x
WEIGHTED AVERAGE $1,788 8.9x
</TABLE>
<PAGE>
Notes:
1 Price, Subscribers, Cash Flow and Penetration from Bloomberg News.
2 Price, Subscribers, Cash Flow and Penetration from Paul Kagan Report.
3 Price calculated as Total Enterprise Value from latest financials ($52.7
million plus debt of $14.2 million less cash of $5 million). Subscribers,
Cash Flow and Penetration taken from Latest financials.
4 Price from Company source represents cash-for-stock deal at $40.5 per
share. Subscribers, Cash Flow and Penetration are from Latest financials.
Cash Flow and Subscribers excludes 38% of Mcrcom it does not already own.
5 Cash Flow based on CIBC Oppenheimer Cable analyst report. Cash Flow run
rate is estimated to be $96 million (Transaction price of $1,325 mil less
Value of Equity of $55 mil). Subscriber and Price from Securities Data
($1.325 billion of cash and stock (80% interest), subscribers include 319
thousand residential cable and 105 thousand hotel rooms). Penetration from
Paul Kagan Report.
6 Cash Flow multiple is based on run rate data taken from CIBC Oppenheimer
Cable analyst and Price, Subscribers and Penetration from Paul Kagan
Report.
7 Price based on Bloomberg news comprising of 95% of $2.92 billion in cash
and debt. Subscribers as of 3/31/98 quarterly report, Cash Flow taken from
10Q, using run rate and Penetration from Paul Kagan Report.
8 Price, Cash Flow and Penetration from Paul Kagan Report and Bloomberg News.
Subscribers of 64 thousand taken from Bloomberg news and Paul Kagan.
9 Price, Subscribers, Cash Flow and Penetration from Paul Kagan Report.
10 Price, Cash Flow and Penetration from Paul Kagan Report, Subscribers (77.6
thousand) from Paul Kagan and Bloomberg News.
11 Price, Cash Flow and Penetration from Paul Kagan Report, Subscribers (29.3
thousand) from Paul Kagan and Bloomberg News.
12 Price, Cash Flow and Penetration from Paul Kagan Report. Subscribers of 64
thousand from Bloomberg news and Paul Kagan.
13 Cash Flow and Penetration from Paul Kagan Report, Price and Subscribers
from Paul Kagan and Bloomberg News.
14 Price, Subscribers, Cash Flow and Penetration from Paul Kagan Report.
15 Price, Subscribers, Cash Flow and Penetration from Paul Kagan Report.
16 Price, Subscribers, Cash Flow and Penetration from Paul Kagan Report.
17 Price, Subscribers, Cash Flow and Penetration from Paul Kagan Report.
18 Price from Securities Data Co., Cash Flow and Penetration from Paul Kagan
Report. Subscribers of 250 thousand from Bloomberg news.
19 Price, Subscribers, Cash Flow and Penetration from Paul Kagan Report.
20 Price, Subscribers, Cash Flow and Penetration from Paul Kagan Report.
21 Price, Subscribers, Cash Flow and Penetration from Paul Kagan Report.
22 Price, Subscribers, Cash Flow and Penetration from Paul Kagan Report.
23 Subscribers, Cash Flow and Penetration from Paul Kagan Report, Price from
Paul Kagan and Bloomberg news.
<PAGE>
CIBC Oppenheimer Corp.
Mercom,Inc.
Financial Analysis
------------------
TABLE OF CONTENTS
-----------------
Pages
-----
TRANSACTION SUMMARY.................................................. 1
HISTORICAL AND PROJECTED BALANCE SHEETS.............................. 2
HISTORICAL AND PROJECTED INCOME STATEMENTS........................... 3
PROJECTED CASH FLOW STATEMENTS....................................... 5
CAPITALIZATION....................................................... 6
TAX RECONCILIATION................................................... 7
DEPRECIATION AND AMORTIZATION SCHEDULES.............................. 9
DISCOUNTED CASH FLOW ANALYSIS........................................ 11
<PAGE>
CIBC Oppenheimer Corp.
Mercom,Inc.
Financial Analysis
------------------
Page 1
TRANSACTION SUMMARY
SUMMARY CREDIT STATISTICS
<TABLE>
<CAPTION>
FINANCIAL DATA: Pro Forma Projected For Year Ending December 31,
---------- ----------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Subscribers (in thousands): 39,300 40,147 40,950 41,769 42,605 43,457 44,326
Net Revenue $ 16,439 $ 17,185 $ 18,178 $ 19,487 $ 20,890 $ 22,392 $ 24,006
Growth NA 4.5% 5.8% 7.2% 7.2% 7.2% 7.2%
EBITDA $ 6,099 $ 6,199 $ 6,633 $ 7,164 $ 7,737 $ 8,356 $ 9,024
Margin 37.1% 36.1% 36.5% 36.8% 37.0% 37.3% 37.6%
Capital Expenditures $ 2,614 $ 8,393 $ 4,959 $ 4,341 $ 2,750 $ 1,811 $ 1,857
Total Interest Expense 1,056 1,004 1,219 1,186 975 566 180
Total Debt 14,151 14,729 15,304 13,762 9,644 4,496 0
Common Stock 16,161 16,161 16,161 16,161 16,161 16,161 16,161
Cash 4,829 1,000 1,000 1,000 1,000 1,000 2,048
TEV (Book Capitalization) 25,483 29,890 30,465 28,923 24,805 19,657 14,113
TEV (Market Capitalization)(1) 70,312 75,719 80,634 84,402 86,014 87,056 88,192
COVERAGE AND LEVERAGE RATIOS:
EBITDA/Total Interest Expense 5.8x 6.2x 5.4x 6.0x 7.9x 14.8x 50.2x
(EBITDA-CAPEX)/Total Interest expense 3.3x NM 1.4x 2.4x 5.1x 11.6x 39.9x
Total Debt/EBITDA 2.3x 2.4x 2.3x 1.9x 1.2x 0.5x --
TRADING MULTIPLES:
TEV(Book)EBITDA 4.2x 4.8x 4.6x 4.0x 3.2x 2.4x 1.6x
TEV(Market)/EBITDA 11.5x 12.2x 12.2x 11.8x 11.1x 10.4x 9.8x
TEV(Book)/EBIT 8.0x 10.3x 13.5x 10.9x 6.8x 4.2x 2.5x
TEV(Market)/EBIT 21.9x 26.1x 35.6x 31.8x 23.7x 18.6x 15.3x
</TABLE>
(1) Market Capitalization based on exit multiple of 10x EBITDA.
TEV
Target Name: Jack
Primary Shares Outstanding: 4,787
Price per Share (as of 9/3/98): $11.25
Primary Market Capitalization: $53,854
+ Total Debt $14,151
- - Cash(1) $5,766
-------
Total Enterprise Value $62,239
(1) As of 6/30/98.
Transaction Multiples Summary
Total Firm Value/
LTM Sales 3.7x
LTM EBITDA 10.2x
LTM EBIT 19.4x
LTM EBITDA - CAPEX 10.2x
1999E FY Sales 3.4x
1999E FY EBITDA 9.4x
1999E FY EBIT 27.5x
1999E FY EBITDA-CAPEX 37.2x
CAPITALIZATION
<TABLE>
<CAPTION>
($ in millions)
As of June 30, 1998
----------------------------------------------------
% of Total
Actual Adjs. Pro Forma Capitalization
---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $5.8 $0.0 $5.8 --
Existing Debt $14.2 $0.0 $14.2 89.0%
Shareholders' Equity 1.8 0.0 1.8 11.0%
Total Capitalization $15.90 $15.90 100.0%
Total Debt/Total Capitalization 89.0% 89.0%
Assumed Transaction Closing Date 31-Dec-98
Year Days 365
</TABLE>
<PAGE>
CIBC Oppenheimer Corp.
Mercom,Inc.
Financial Analysis
------------------
Page 2
<TABLE>
<CAPTION>
HISTORICAL, PRO FORMA AND PROJECTED BALANCE SHEETS
($ in thousands)
Pro Forma Projected as of December 31,
-------------------------------- -----------------------------------------------------------------
1996 1997 1997PF 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 3,054 $ 4,829 $ 4,829 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 2,048
Receivables 369 365 365 382 404 433 464 497 533
Prepaids & other 734 568 568 594 628 673 722 774 829
Total Current Assets 4,157 5,762 5,762 1,976 2,032 2,106 2,186 2,271 3,410
Property, Plant & Equipment 41,399 42,212 42,212 50,605 55,564 59,905 62,655 64,466 66,323
Accumulated depreciation (27,395) (28,998) (28,998) (32,028) (36,089) (40,290) (44,085) (47,445) (50,634)
Property, Plant & Equipment,
net 14,004 13,214 13,214 18,577 19,475 19,615 18,570 17,021 15,689
Other Assets
Intangible assets 2,079 1,743 1,743 1,472 1,163 854 545 236 153
Deferred income taxes 2,341 -- -- -- -- -- -- -- --
Other assets -- -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Assets $22,581 $20,719 $20,719 $22,025 $22,670 $22,575 $21,301 $19,528 $19,252
========== ========== ========== ========== ========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities
Accounts payable $ 1,611 $ 980 $ 980 $ 1,024 $ 1,084 $ 1,162 $ 1,245 $ 1,335 $ 1,431
Accrued expenses 1,449 2,909 2,909 3,041 3,217 3,448 3,697 3,963 4,248
Other liabilities 2,100 1,400 1,400 700 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Current
Liabiities 5,160 5,289 5,289 4,765 4,301 4,610 4,942 5,298 5,679
Existing debt 17,430 -- -- -- -- -- -- -- --
New bank debt -- 14,151 14,151 14,729 15,304 13,762 9,644 4,496 --
Total Debt 17,430 14,151 14,151 14,729 15,304 13,762 9,644 4,496 --
Deferred income taxes 2,730 -- -- 445 632 1,030 1,860 2,245 2,488
Total Liabilities 25,320 19,440 19,440 19,939 20,237 19,402 16,446 12,039 8,167
Capital Stock 16,340 16,161 16,161 16,161 16,161 16,161 16,161 16,161 16,161
Retained Earnings (19,079) (14,882) (14,882) (14,075) (13,728) (12,988) (11,306) (8,672) (5,076)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Stockholders' Equity (2,739) 1,279 1,279 2,086 2,433 3,173 4,855 7,489 11,085
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Liabilities and
Stockholders' Equity $22,581 $20,719 $20,719 $22,025 $22,670 $22,575 $21,301 $19,528 $19,252
========== ========== ========== ========== ========== ========== ========== ========== ==========
WORKING CAPITAL ASSUMPTIONS:
Accounts Receivable (DSO)(1) 8.7 8.1 8.1 8.1 8.1 8.1 8.1 8.1 8.1
Prepaid Expenses (% of Revenues) 4.7% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%
Accounts Payable (DOEO)(2) 71.5 39.2 39.2 39.1 39.3 39.4 39.4 39.6 39.7
Accrued Expenses (% of Revenues) 9.3% 17.7% 16.9% 17.7% 17.7% 17.7% 17.7% 17.7% 17.7%
(1) DSO: Days Sales Outstanding
(2) DOEO: Days Operating
Expenses Outstanding
</TABLE>
<PAGE>
CIBC Oppenheimer Corp.
Mercom,Inc.
Financial Analysis
------------------
Page 3
HISTORICAL, PRO FORMA AND PROJECTED INCOME STATEMENTS
($ in thousands, except per share data)
<TABLE>
Pro Forma Projected as of December 31,
-------------------------------- -----------------------------------------------------------------
1996 1997 1997PF 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $15,570 $16,439 $16,439 $17,185 $18,178 $19,487 $20,890 $22,392 $24,006
Operating expenses 8,219 9,136 9,136 9,571 10,066 10,778 11,538 12,305 13,164
------- ------- ------- ------- ------- ------- ------- ------- -------
Cable EBITDA 7,351 7,303 7,303 7,614 8,112 8,709 9,352 10,087 10,842
Cable Margin 47.2% 44.4% 44.4% 44.3% 44.6% 44.7% 44.8% 45.0% 45.2%
Management fee 1,709 1,204 1,204 1,415 1,479 1,545 1,615 1,731 1,818
------- ------- ------- ------- ------- ------- ------- ------- -------
EBITDA 5,642 6,099 6,099 6,199 6,633 7,164 7,737 8,356 9,024
Margin 36.2% 37.1% 37.1% 36.1% 36.5% 36.8% 37.0% 37.3% 37.6%
Depreciation 2,731 2,612 2,612 3,030 4,061 4,201 3,795 3,360 3,189
Amortization 287 282 282 271 309 309 309 309 83
------- ------- ------- ------- ------- ------- ------- ------- -------
EBIT 2,624 3,205 3,205 2,898 2,263 2,654 3,633 4,687 5,752
Interest expense 1,227 1,056 1,056 1,004 1,219 1,186 975 566 180
Interest income 127 195 195 97 30 30 30 30 61
Other expense/(income) 25 (2,519) (2,519) 720 540 360 100 100 100
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before taxes 1,499 4,863 4,863 1,271 534 1,138 2,588 4,051 5,533
Tax provision 28 665 665 464(1) 187 398 906 1,418 1,937
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Income $1,471 $4,198 $4,198 $807 $347 $740 $1,682 $2,633 $3,597
======= ======= ======= ======= ======= ======= ======= ======= =======
Shares outstanding (in thousands) 4,787 4,787 4,787 4,787 4,787 4,787 4,787 4,787 4,787
Earnings per share $0.31 $0.88 $0.88 $0.17 $0.07 $0.15 $0.35 $0.55 $0.75
</TABLE>
(1) Adjusted by the Company's budget for 1998.
<PAGE>
CIBC Oppenheimer Corp.
Mercom,Inc.
Financial Analysis
------------------
Page 4
HISTORICAL, PRO FORMA AND PROJECTED SYSTEMS SUMMARY
($ in thousands, except per subscriber data)
<TABLE>
<CAPTION>
For years ended December 31, Projected for years ending December 31,
--------------------------------- ---------------------------------------------------------------
1996 1997 1997PF 1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Subscribers 40,012 39,360 39,360 40,147 40,950 41,769 42,605 43,457 44,326
%growth 3.0% -1.6% -1.6% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Homes passed 65,998 65,291 65,291 66,270 67,264 68,273 69,297 70,337 71,392
% growth 0.8% -1.1% -1.1% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%
Franchise penetration 60.6% 60.3% 60.3% 60.6% 60.9% 61.2% 61.5% 61.8% 62.1%
Beginning subs 39,318 40,012 40,012 39,360 40,147 40,950 41,769 42,605 43,457
Net new subs 694 (652) (652) 787 803 819 835 852 869
Ending subs 40,012 39,360 39,360 40,147 40,950 41,769 42,605 43,457 44,326
Average basic subs 39,665 40,429 40,429 41,332 42,089 43,100 44,177 45,282 46,414
% growth 3.6% 1.9% 1.9% 2.2% 1.8% 2.4% 2.5% 2.5% 2.5%
Basic penetration (EOY) 60.6% 60.3% 60.3% 60.6% 60.9% 61.2% 61.5% 61.8% 62.1%
Revenue/sub/month(1) 33 34 34 35 36 38 39 41 43
% growth 7.9% 3.6% 3.6% 2.3% 3.9% 4.7% 4.6% 4.6% 4.6%
Revenue 15,570 16,439 16,439 17,185 18,178 19,487 20,890 22,392 24,006
% growth 11.7% 5.6% 5.6% 4.5% 5.8% 7.2% 7.2% 7.2% 7.2%
Operating expenses $8,219 $8,823 $8,823 $9,571 $10,066 $10,778 $11,538 $12,305 $13,164
% of Revenue 52.8% 55.6% 55.6% 55.7% 55.4% 55.3% 55.2% 55.0% 54.8%
Cable expenses/
Sub/Month 17 19 19 19 20 21 22 23 24
Management fee 1,709 1,516 1,516 1,415 1,479 1,545 1,615 1,731 1,818
% growth 41.9% -29.5% -29.5% -6.7% 4.5% 4.5% 4.5% 7.2% 5.0%
Cable EBITDA 7,351 7,303 7,303 7,614 8,112 8,709 9,352 10,087 10,842
Cable EBITDA margin 47.2% 44.4% 44.4% 44.3% 44.6% 44.7% 44.8% 45.0% 45.2%
Cable EBITDA/
Sub/Month $15.44 $15.05 $15.05 $15.35 $16.06 $16.84 $17.64 $18.56 $19.47
EBITDA (1) 5,642 6,099 6,099 6,199 6,633 7,164 7,737 8,356 9,024
EBITDA margin 36.2% 37.1% 37.1% 36.1% 36.5% 36.8% 37.0% 37.3% 37.6%
EBITDA/Sub/Month $11.85 $12.57 $12.57 $12.50 $13.13 $13.85 $14.59 $15.38 $16.20
Capex $1,821 $2,614 $2,614 $8,393 $4,959 $4,341 $2,750 $1,811 $1,857
Capex/Basic sub $45.91 $64.66 $64.66 $203.06 $117.82 $100.72 $62.25 $39.99 $40.01
Tax Rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
(1) Post Management Fee
</TABLE>
<PAGE>
CIBC Oppenheimer Corp.
Mercom,Inc.
Financial Analysis
------------------
Page 5
<TABLE>
<CAPTION>
PROJECTED CASH FLOW STATEMENTS
($ in thousands)
Projected for years ending December 31,
---------------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Income $807 $347 $740 $1,682 $2,633 $3,597
Non-Cash charges
Depreciation 3,030 4,061 4,201 3,795 3,360 3,189
Deferred income taxes 445 187 398 830 385 243
Amortization 271 309 309 309 309 83
Changes in current assets (43) (56) (74) (80) (85) (91)
Change in A/P and Accrued Exp 176 236 309 332 356 381
Change in other current liabilities (700) (700) -- -- -- --
Change in other non-cash -- -- -- -- -- --
Change in other assets -- -- -- -- -- --
Deferred interest -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Net cash provided by operations 3,986 4,384 5,883 6,868 6,959 7,401
Investment cash flows:
Capital expenditures (8,393) (4,959) (4,341) (2,750) (1,811) (1,857)
------ ------ ------ ------ ------ ------
Asset sale/Acquisition -- -- -- -- -- --
Cash flow before financing (4,407) (575) 1,542 4,118 5,148 5,544
Financing transactions:
Issuance (repurchase) common stock -- -- -- -- -- --
Amortization bank debt -- -- -- -- -- --
Increase (decrease) revolving credit facility 578 575 (1,542) (4,118) (5,148) (4,496)
Dividends -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Cash generated by financing 578 575 (1,542) (4,118) (5,148) (4,496)
Free Cash Flow $(3,829) -- -- -- -- $1,048
====== ====== ====== ====== ====== ======
Beginning cash balance $4,829 $1,000 $1,000 $1,000 $1,000 $1,000
Free cash flow (3,829) -- -- -- -- 1,048
Ending cash balance 1,000 1,000 1,000 1,000 1,000 2,048
Cash available for debt service 422 425 2,542 5,118 6,148 6,544
</TABLE>
<PAGE>
CIBC Oppenheimer Corp.
Mercom,Inc.
Financial Analysis
------------------
Page 6
<TABLE>
<CAPTION>
DEBT SCHEDULE
($ in thousands)
Minimum Cash Level $1,000 FYE Projected for years ending December 31,
-------- ----------------------------------------------------------------------
12/31/97 1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
New bank Debt (Revolver)
Beginning Balance $14,151 $14,151 $14,729 $15,204 $13,762 $9,644 $4,496
Additions 0 578 575 0 0 0 0
Minimum Amortization 0 0 0 0 0 0 0
Repayment -- Excess Cash 0 0 0 (1,542) (4,118) (5,148) (4,496)
------ ------ ------ ------ ------ ------ ------
Ending Balance 14,151 14,729 15,304 13,762 9,644 4,496 0
Average Balance 14,151 14,440 15,016 14,533 11,703 7,070 2,248
Unused Balance 5,849 5,271 4,696 6,238 10,356 0 0
Interest Expense 991 984(1) 1,201 1,163 936 566 180
Commitment Fee @ 3/8%
of Unused Bal. 22 20 18 23 39 0 0
Borrowing Base 20,000 20,000 20,000 20,000 20,000 0 0
Interest Rate 7.0% 7.5% 8.0% 8.0% 8.0% 8.0% 8.0%
LIBOR 6.0% 6.5% 7.0% 7.0% 7.0% 7.0% 7.0%
Spread 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
TOTAL INTEREST EXPENSE $1,013 $1,004 $1,219 $1,186 $975 $566 $180
====== ====== ====== ====== ====== ====== ======
Cash & Cash Equivalents
Beginning Balance $3,054 $4,829 $1,000 $1,000 $1,000 $1,000 $1,000
Ending Balance 4,829 1,000 1,000 1,000 1,000 1,000 2,048
Average Balance 3,942 2,915 1,000 1,000 1,000 1,000 1,524
TOTAL INTEREST INCOME $87 $97 $30 $30 $30 $30 $61
====== ====== ====== ====== ====== ====== ======
Interest Income Rate 2.2% 3.3% 3.0% 3.0% 3.0% 3.0% 4.0%
(1) Adjustment was made to bring interest expense in line with the 1998 company's budget that uses monthly
revolver balance to calculate interest expense instead of annual revolver balance used herein.
</TABLE>
<PAGE>
CIBC Oppenheimer Corp.
Mercom,Inc.
Financial Analysis
------------------
Page 7
<TABLE>
<CAPTION>
INCOME TAX RECONCILIATION
($ in thousands)
FYE Projected for years ending December 31,
-------- --------------------------------------------------------------
12/31/97 1998 1999 2000 2001 2002 2003
-------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
BOOK BASIS:
Income before tax $4,863 $1,271 $534 $1,138 $2,588 $4,051 $5,533
Plus: Goodwill Amortization 0 0 0 0 0 0 0
------ ------ ------ ------ ------ ------ ------
Book Taxable Income 4,863 1,271 534 1,138 2,588 4,051 0
Income Tax Rate @ 0.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
------ ------ ------ ------ ------ ------ ------
Book Provision Taxes $0 $445 $187 $398 $906 $1,418 $1,937
====== ====== ====== ====== ====== ====== ======
TAX BASIS:
Income Before Tax $4,863 $1,271 $534 $1,138 $2,588 $4,051 $5,533
Add:
Book Depreciation 2,612 3,030 4,061 4,201 3,795 3,360 3,189
Book Amortization of
Intangibles 282 271 309 309 309 309 83
------ ------ ------ ------ ------ ------ ------
Less:
Tax Depreciation 3,669 5,754 5,600 4,934 5,175 3,470 2,665
Tax Amortization 178 147 140 138 75 75 75
------ ------ ------ ------ ------ ------ ------
Tax Amortization 178 147 140 138 75 75 75
Taxable Income 3,910 (1,329) (836) 576 1,442 4,175 6,065
NOL Utilization 0
(1,225) 0 (576) (1,225) (1,225) (1,225)
------ ------ ------ ------ ------ ------ ------
Non Taxable Income 2,685 (1,329) (836) 0 217 2,950 4,840
Income Tax Rate @ 0.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
------ ------ ------ ------ ------ ------ ------
Currently Payable Taxes $665 $0 $0 $0 $76 $1,033 $1,694
====== ====== ====== ====== ====== ====== ======
CALCULATION OF DEFERRED TAX:
Book Provision Taxes $0 $445 $187 $398 $906 $1,418 $1,937
Less: Currently Payable (taxable Income) (665) 0 0 0 (76) (1,033) (1,694)
Plus: Change in Deferred Tax Assets 0 0 0 0 0 0 0
------ ------ ------ ------ ------ ------ ------
Total Deferred Taxes $0 $445 $187 $398 $830 $385 $243
====== ====== ====== ====== ====== ====== ======
TAX NOL COMPUTATION:
Beginning Balance $10,100 $8,875 $10,204 $11,040 $10,464 $9,239 $8,014
Plus: NOL Generated 0 1,329 836 0 0 0 0
Less: NOL Utilized (1,225) 0 0 (576) (1,225) (1,225) (1,225)
------ ------ ------ ------ ------ ------ ------
Ending Balance $8,875 $10,204 $11,040 $10,464 $9,239 $8,014 $6,789
====== ====== ====== ====== ====== ====== ======
------------------------------------------------------------------------------------------------------------------------
Annual Limitation 1,225 1,225 1,225 1,225 1,225 1,225 1,225
NOL Utilized (1,225) 0 0 (576) (1,225) (1,225) (1,225)
Carryforward 0 1,225 1,225 649 0 0 0
------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CIBC Oppenheimer Corp.
Mercom,Inc.
Financial Analysis
------------------
Page 8
<TABLE>
<CAPTION>
INCOME TAX RECONCILIATION
($ in thousands)
FYE Projected for years ending December 31,
-------- --------------------------------------------------------------
CALCULATION OF DEFERRED TAX excl. NOL 12/31/97 1998 1999 2000 2001 2002 2003
-------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Tax Depreciation $3,669 $5,754 $5,600 $4,934 $5,175 $3,470 $2,665
Tax Amortization 178 147 140 138 75 75 75
------ ------ ------ ------ ------ ------ ------
TAX PROVISION 3,847 5,901 5,740 5,072 5,250 3,545 2,740
Book Depreciation 2,612 3,030 4,061 4,201 3,795 3,360 3,189
Book Amortization 282 271 309 309 309 309 83
------ ------ ------ ------ ------ ------ ------
BOOK PROVISION 2,894 3,301 4,370 4,510 4,104 3,669 3,272
Timing Difference 953 2,600 1,370 562 1,146 (124) (532)
Tax Rate 0% 35% 35% 35% 35% 35% 35%
------ ------ ------ ------ ------ ------ ------
Deferred Tax Provision $0 $910 $480 $197 $401 $(43) $(186)
====== ====== ====== ====== ====== ====== ======
TAX NOL COMPUTATIONS ADJUSTED
FOR INTEREST EXP.
Taxable Income $3,910 $(1,329) $(836) $576 $1,442 $4,175 $6,065
Plus: Interest Expense 1,056 1,004 1,219 1,186 975 566 180
------ ------ ------ ------ ------ ------ ------
Unlevered Taxable Income 4,966 (325) 383 1,762 2,417 4,741 6,245
Annual Limitation $1,225 $1,225 $1,225 $1,225 $1,225 $1,225 $1,225
NOL Utilized (1,225) 0 (383) (1,225) (1,225) (1,225) (1,225)
Net Taxable Income $3,741 $(325) $0 $537 $1,192 $3,516 $5,020
Beginning Balance $10,100 $8,875 $8,875 $8,492 $7,267 $6,042 $4,817
Plus: NOL Generated 0 0 0 0 0 0 0
Less: NOL Utilized (1,225) 0 (383) (1,225) (1,225) (1,225) (1,225)
------ ------ ------ ------ ------ ------ ------
Ending Balance $8,875 $8,875 $8,492 $7,267 $6,042 $4,817 $3,592
====== ====== ====== ====== ====== ====== ======
FMV of Company $17,500
-------
Tax-Exempt Rate: 7%
-------
$1,225
-------
</TABLE>
<PAGE>
CIBC Oppenheimer Corp.
Mercom,Inc.
Financial Analysis
------------------
Page 9
DEPRECIATION SCHEDULE
<TABLE>
<CAPTION>
($ in thousands)
For years ended
December 31, Projected for years ending December 31,
1995 Book Book Life Capital --------------- ----------------------------------------------
Basis S/L Expenditures 1996 1997 1998 1999 2000 2001 2002 2003
---------- --------- ------------- ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BOOK DEPRECIATION:
Existing Assets [$14,995] $0 $2,264 $2,071 $2,360 $1,984 $1,184 $495 $120
Additions: [9]
1996 1,821 101 202 202 202 202 202 202 202
1997 2,614 145 290 290 290 290 290 290
1998 8,393 466 933 933 933 933 933
1999 4,959 276 551 551 551 551
2000 4,341 241 482 482 482
2001 2,750 153 306 306
2002 1,811 101 201
2003 1,857 103
------ ------ ------ ------ ------ ------ ------ ------
Total Book Depreciation $101 $2,612 $3,030 $4,061 $4,201 $3,795 $3,360 $3,189
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
TAX DEPRECIATION:
Tax
Life Capital
Tax Basis DDB Expenditures
--------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Existing Assets [$6,198] $1,724 $1,273 $1,153 $1,052 $643 $211 $211 $211
Percent Accelerated [175% ]
Additions: [ 5 ]
Depreciation Rate [35.0%]
1996 1,821 637 414 269 175 114 74 48 31
1997 2,614 915 595 387 251 163 106 69
1998 8,393 2,938 1,909 1,241 807 524 341
1999 4,959 1,736 1,128 733 477 310
2000 4,341 1,519 988 642 417
2001 2,750 963 626 407
2002 1,811 634 412
2003 1,857 650
------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Tax Depreciation:
Additions (OPCO Calculation)(1) 637 1,329 3,802 4,207 4,254 3,727 3,057 2,637
Total Tax Depreciation:
Additions (Company Calucation) 637 2,396 4,601 4,548 4,291 4,964 3,259 2,454
------ ------ ------ ------ ------ ------ ------ ------
Total Tax Depreciation $2,361 $3,669 $5,754 $5,600 $4,934 $5,175 $3,470 $2,665
====== ====== ====== ====== ====== ====== ====== ======
Less: Computed Book Depreciation (101) (2,612) (3,030) (4,061) (4,201) (3,795) (3,360) (3,189)
------ ------ ------ ------ ------ ------ ------ ------
Total Book/Tax Difference $2,260 $1,057 $2,724 $1,539 $733 $1,380 $110 ($524)
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
(1) There is a discrepancy between OPCO calculations and Company estimates.
<PAGE>
CIBC Oppenheimer Corp.
Mercom,Inc.
Financial Analysis
------------------
Page 10
AMORTIZATION SCHEDULE
($ in thousands)
<TABLE>
<CAPTION>
As of
1995 December 31, Projected for years ending December 31,
Book Book --------------- ----------------------------------------------
Basis Life 1996 1997 1998 1999 2000 2001 2002 2003
---------- --------- ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BOOK AMORTIZATION:
Intangible Assets:
Beginning Balance [$2,365] $2,365 $2,076 $1,741 $1,472 $1,163 $854 $545 $236
Amortization 289 282 271 309 309 309 309 83
------ ------ ------ ------ ------ ----- ----- ----
Ending Balance 2,076 1,741 1,472 1,163 854 545 236 153
$2,079 $1,743 $1,472 $1,163 $854 $545
Goodwill
Beginning Balance [$0] 0 0 0 0 0 0 0 0
Amortization 0 0 0 0 0 0 0 0
------ ------ ------ ------ ------ ----- ----- ----
Ending Balance 0 0 0 0 0 0 0 0
TOTAL BOOK AMORTIZATION $289 $282 $271 $309 $309 $309 $309 $83
====== ====== ====== ====== ====== ===== ===== ====
TAX AMORTIZATION Tax Basis
---------
Intangible Assets:
Beginning Balance [$1,020] $1,020 $820 $642 $495 $355 $217 $142 $67
Amortization 200 178 147 140 138 75 75 75
------ ------ ------ ------ ------ ----- ----- ----
Ending Balance 820 642 495 355 217 142 67 (8)
TOTAL TAX AMORTIZATION $200 $178 $147 $140 $138 $75 $75 $75
====== ====== ====== ====== ====== ===== ===== ====
Computed Tax Amortization $200 $178 $147 $140 $138 $75 $75 $75
Computed Book Amortization 289 282 271 309 309 309 309 83
------ ------ ------ ------ ------ ----- ----- ----
Total Book/Tax Difference ($89) ($104) ($124) ($169) ($171) ($234) ($234) ($8)
</TABLE>
<PAGE>
CIBC Oppenheimer Corp.
Mercom,Inc.
Financial Analysis
------------------
Page 11
DISCOUNTED CASH FLOW ANALYSIS (Based on New Projections as of 6/30/98)
<TABLE>
<CAPTION>
Projected for years ending December 31,
--------------------------------------------------------------------
($ in thousands) 1998(1) 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
EBIT $1,449 $2,263 $2,654 $3,633 $4,687 $5,752
Plus: Depreciation 1,515 4,061 4,201 3,795 3,360 3,189
Plus: Amortization of Goodwill 136 309 309 309 309 83
Plus: (Unlevered Deferred Taxes -
Unlevered Taxes Provision) (52) (313) (732) (870) (1,684) (2,199)
Less: Changes in Working Capital 66 180 235 252 271 290
Less: Capital Expenditures (4,197) (4,959) (4,341) (2,750) (1,811) (1,857)
-------------------------- ------- ------- ------- ------- ------- -------
Unlevered Cash Flow (1,083) 1,541 2,326 4,369 5,132 5,258
Plus: NOL Tax Benefit 0 134 429 429 429 429
-------------------------- ------- ------- ------- ------- ------- -------
Free Cash Flow to the Firm (1,083) 1,676 2,755 4,797 5,561 5,686
</TABLE>
<TABLE>
<CAPTION>
Terminal Value
EBITDA Multiple 10.00% 11.00% 12.00% 13.00%
--------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
9.5x $60,801 $57,733 $54,847 $52,132
10.5x 65,894 62,557 59,419 56,466
11.5x 70,988 67,382 63,991 60,800
Less: Net Debt (As of June 30, 1998) 8,385 8,385 8,385 8,385
<CAPTION>
Implied Equity Value
EBITDA Multiple 10.00% 11.00% 12.00% 13.00%
--------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
9.5x $52,416 $49,348 $46,462 $43,747
10.5x 57,509 54,172 51,034 48,081
11.5x 62,603 58,997 55,606 52,415
<CAPTION>
Value on 1/1/98
Implied Equity Value Shares Outstanding ---------------------------------------------------
Per Share @ EBITDA Multiple as of June 30, 1998 10.00% 11.00% 12.00% 13.00%
--------------------------- ------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
9.5x $10.95 $10.31 $9.71 $9.14
10.5x 4,787 12.01 11.32 10.66 10.04
11.5x 13.08 12.32 11.62 10.95
<CAPTION>
Implied Equity Value Value on 6/30/98
Per Share @ EBITDA Multiple ---------------------------------------------------
--------------------------- 10.00% 11.00% 12.00% 13.00%
------- ------- ------- -------
<S> <C> <C> <C> <C>
9.5x $11.48 $10.86 $10.27 $9.71
10.5x 12.60 [ 11.92 11.28 ] 10.68
11.5x 13.72 [ 12.98 12.29 ] 11.64
</TABLE>
- -------------------
(1) Estimated for the second half of 1998 based on the projections for the full
year (divided by two).
<PAGE>
CIBC Oppenheimer Corp.
Mercom,Inc.
Financial Analysis
------------------
Page 12
DISCOUNTED CASH FLOW ANALYSIS (Based on Old Projections from 1997)
<TABLE>
<CAPTION>
Mkt. Value Debt/ Average LT Asset
Equity Common Preferred Total Total Borrowing Beta
Company Name Beta(1) Stock Stock Debt Capital Rate (Unlevered)(2)
- ------------ -------- ---------- --------- ------- ------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Adelphia Communications Corp. 1.78 $1,133 $248 $2,381 63.3% 8.5%(3) 0.79
Cablevision Systems Corp. 2.00 3,150 1,512 4,368 48.4% 7.5%(3) 1.09
Century Communications Corp. 1.00 1,722 186 2,495 56.7% 8.1%(3) 0.53
Comcast Corporation 1.29 15,107 32 6,763 30.9% 7.7%(3) 1.02
Cox Communications, Inc. 0.37 12,668 -- 3,071 19.5% 8.5%(3) 0.32
Jones Intercable, Inc. 1.51 995 -- 1,290 56.5% 7.7%(3) 0.85
TCA Cable TV, Inc. 1.12 624 -- 549 46.8% 6.7%(3) 0.73
TCI Group (Tele Comm, Inc.) 1.05 18,090 1,799 14,422 42.0% 7.6%(3) 0.71
[Median 1.21 47.6% 7.7% 0.76]
</TABLE>
<TABLE>
<CAPTION>
Asset Beta Target
(Unlevered) Debt/Capital Equity Beta
- ----------- ----------- -----------
<S> <C> <C>
0.76 47.6% 1.17
</TABLE>
<TABLE>
<S> <C>
Assumptions:
Marginal Tax Rate 40.0
Risk Free Rate(4) 5.3
Market Risk Premium(5) 7.5
Pre-Tax Cost of Debt(6) 6.7
</TABLE>
- --------------------------------------------------------------------------------
Calculation of Cost of Capital
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Pre Tax After Tax
Capital Capital % of Weighted
Cost Cost Capital Cost
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Debt(7) 6.7% 6.7% 47.6% 3.2%
Equity(8) 14.1% 14.1% 52.4% 7.4%
- -----------------------------------------------------------------------------------------
Weighted Average Cost of Capital(9) 10.6%
- -----------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Source: Bloomberg. Calculated using monthly observations over the past 5
years.
(2) Unlevered Beta= Equity Beta / [1 + (1 - Marginal Tax Rate) x Debt /
Equity].
(3) Actual yield on recently issued bonds.
(4) Yield on 30-year Treasury Bonds at September 1, 1998.
(5) Source: Ibbotson Associates' "Stocks, Bonds, Bills & Inflation."
(6) Weighted average effective interest rate for Mercom's debt at 12/31/97.
(7) No tax benefit of leverage due to NOL Carryovers.
(8) Cost of Equity = Risk Free Rate + (Equity Beta x Market Risk Premium).
(9) WACC = [Cost of Equity x (Equity/Capital)] + [(Pre Tax Cost of Debt) x
(1 - Marginal Tax Rate) x (Debt/Capital)].
<PAGE>
[Mercom logo]
[Date], 1999
Dear Shareholder,
You are cordially invited to attend a Special Meeting of shareholders of
Mercom, Inc. ("Mercom") to be held on [Date], 1999 at [11:00] a.m. at the
offices of Kirkland & Ellis at Citicorp Center, 153 East 53rd Street, 39th
floor, New York, New York 10022.
At the Special Meeting, you will be asked to approve a merger of Mercom
with Avalon Cable of Michigan, Inc., which currently owns approximately 62% of
the outstanding Mercom common stock. In the merger, shares of Mercom common
stock (other than those held by Avalon Cable of Michigan, Inc.) will generally
be converted into the right to receive $12.00 per share, in cash.
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.
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.
<PAGE>
Mercom, Inc.
-----------------------
Notice of Special Meeting of Shareholders
To Be Held On
[Date], 1999
-----------------------
To the Shareholders of
Mercom, Inc.:
Notice is hereby given that a special meeting of shareholders (the "Special
Meeting") of Mercom, Inc. ("Mercom") will be held on [Date], 1999 at [11:00]
a.m. at the offices of Kirkland & Ellis located at Citicorp Center, 153 East
53rd Street, 39th floor, 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 (as amended, the "Merger
Agreement") among Mercom, Avalon Cable of Michigan, Inc. (formerly known as
Cable Michigan, Inc.) ("Buyer"), and Mercom Acquisition, Inc., a wholly owned
subsidiary of Buyer, pursuant to Mercom will be merged with and into the Buyer
(the "Merger"). Pursuant to the Merger, each share (a "Share") of common stock,
$1.00 par value, of Mercom issued and outstanding immediately prior to the
effective time of the Merger (other than Shares held by Mercom 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], 1999
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
Mercom's corporate headquarters located at 800 Third Avenue, Suite 3100, New
York, New York 10022. 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], 1999
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.
<PAGE>
Mercom, Inc.
-----------------------
Proxy Statement
For
Special Meeting of Shareholders
To Be Held On
[Date], 1999
-----------------------
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 offices of Kirkland & Ellis located
at Citicorp Center, 153 East 53rd Street, 39th floor, New York, New York 10022
on [Date], 1999 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 (as amended from time to time, 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 the
Company will be merged with and into Buyer (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 direct 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.
The Company believes that the Merger, the Merger Agreement and the
transactions contemplated thereby are fair to and in the best interests of the
Public Shareholders, and recommends that the shareholders of the Company approve
the Merger, the Merger Agreement and the transactions contemplated thereby.
<PAGE>
All Shares 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], 1999.
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], 1999.
2
<PAGE>
AVAILABLE INFORMATION
The Company, Buyer, MergerSub, Avalon Cable of Michigan Holdings, Inc., a
Delaware corporation which owns all of the outstanding shares of Buyer
("Avalon Holdings"), and Avalon Cable Holdings, LLC, a Delaware limited
liability company which owns all of the outstanding shares of Avalon Holdings
("Avalon LLC"), 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." 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 forward-looking 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
3
<PAGE>
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.
4
<PAGE>
-----------------------
TABLE OF CONTENTS
-----------------------
Page
----
INTRODUCTION.................................................................. 1
AVAILABLE INFORMATION......................................................... 3
FORWARD-LOOKING STATEMENTS.................................................... 3
SUMMARY....................................................................... 8
The Company................................................................ 8
The Buyer.................................................................. 9
Avalon Holdings............................................................ 9
MergerSub.................................................................. 9
The Special Meeting....................................................... 11
The Merger ............................................................... 12
Summary Selected Historical Consolidated Financial Data................... 14
SPECIAL FACTORS.............................................................. 15
Purpose and Structure of the Merger; Reasons of Buyer for the Merger...... 15
Certain Effects of the Transaction........................................ 16
Background of the Merger.................................................. 16
Recommendation of the Special Committee and the Board of Directors........ 22
Reasons of the Company for the Merger; Fairness of the Merger............. 22
Opinion of Financial Advisor to the Special Committee..................... 25
Certain Transactions...................................................... 32
Plans for the Company after the Merger.................................... 33
Conduct of the Business of the Company If the Merger Is Not Consummated... 33
PRICE OF THE COMPANY COMMON STOCK............................................ 34
THE COMPANY.................................................................. 35
Company Strategy.......................................................... 36
Buyer Management Agreement................................................ 36
Service Offerings......................................................... 36
Programming and Suppliers................................................. 37
Advertising Revenues...................................................... 37
Customer Service and Billing.............................................. 37
Franchises................................................................ 38
Competition............................................................... 38
Regulation................................................................ 40
Employees................................................................. 46
Property.................................................................. 47
Legal Proceedings......................................................... 47
THE SPECIAL MEETING.......................................................... 48
Matters to Be Considered.................................................. 48
Required Votes............................................................ 48
Voting and Revocation of Proxies.......................................... 48
Record Date; Stock Entitled to Vote; Quorum............................... 49
Appraisal Rights.......................................................... 49
5
<PAGE>
Solicitation of Proxies................................................... 49
THE MERGER................................................................... 50
Overview.................................................................. 50
Certain Federal Income Tax Consequences................................... 50
Accounting Treatment...................................................... 51
Interests of Certain Persons in the Merger................................ 51
Merger Financing.......................................................... 51
CERTAIN PROVISIONS OF THE MERGER AGREEMENT................................... 53
The Merger................................................................ 53
Merger Consideration...................................................... 53
Surrender and Payment..................................................... 53
The Surviving Corporation................................................. 54
Representations and Warranties............................................ 54
Certain Pre-Closing Covenants............................................. 55
Indemnification and Insurance............................................. 55
Best Efforts; Certain Filings............................................. 56
Conditions to the Consummation of the Merger.............................. 56
Termination............................................................... 57
Amendment and Waiver...................................................... 57
Fees and Expenses......................................................... 58
CERTAIN PROJECTIONS OF FUTURE OPERATING RESULTS.............................. 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................. 59
Nine Months Ended September 30, 1998 Compared With Nine Months Ended
September 30, 1997...................................................... 59
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996... 60
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995... 61
Liquidity and Capital Resources........................................... 61
Regulatory Issues......................................................... 62
Competition............................................................... 63
Year 2000 Information and Readiness Discussion............................ 63
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............... 64
Security Ownership in the Company by Company Management................... 64
Security Ownership in the Company by Certain Beneficial Owners............ 64
Security Ownership in the Company by Cable Michigan Management............ 65
REGULATORY CONSIDERATIONS.................................................... 66
Antitrust................................................................. 66
Franchises................................................................ 66
BUYER AND MERGERSUB.......................................................... 66
AVALON HOLDINGS.............................................................. 67
DISSENTING SHAREHOLDERS' RIGHTS.............................................. 67
INDEPENDENT ACCOUNTANTS...................................................... 69
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY..................... F-1 - F-18
6
<PAGE>
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
7
<PAGE>
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.
Overview
Mercom is furnishing this Proxy Statement to allow its shareholders to
consider and vote on a proposal to approve and adopt the Merger Agreement with
Cable Michigan. Pursuant to the Merger Agreement, Mercom will be merged directly
into Cable Michigan (the "Merger") and shareholders of Mercom (other than Cable
Michigan) who do not dissent from the Merger as described herein will receive
$12.00 per share for each share of Company Common Stock that they own at the
effective time of the Merger. Cable Michigan currently owns approximately 62% of
the outstanding Company Common Stock.
At the time the Merger Agreement was negotiated and signed, Cable Michigan
was a public company and Level 3 Telecom Holdings Inc., a Delaware corporation
("LTTH"), owned approximately 48% of Cable Michigan. After the Merger Agreement
was executed, Avalon Holdings acquired all of the outstanding shares of Cable
Michigan 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
Holdings and Avalon Cable of Michigan, Inc., a wholly owned subsidiary of Avalon
Holdings ("Avalon MergerSub"). As contemplated by the Buyer Merger Agreement, on
November 6, 1998, Avalon 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.
During the time the Merger Agreement was negotiated and at the time the
Merger Agreement was executed, all of the executive officers and four of the
seven directors of Mercom were executive officers and/or directors of one or
more of Cable Michigan, LTTH, Commonwealth Telephone Enterprises, Inc. (formerly
C-TEC Corporation) ("CTE") and RCN Corporation ("RCN") (the "Old Cable Michigan
Representatives"). Cable Michigan and RCN had both been spun off from CTE on
September 30, 1997. The three Mercom directors who were not affiliated with
Cable Michigan, LTTH, CTE and RCN formed the Special Committee of the Board of
Directors of Mercom described herein that negotiated the terms of the Merger
Agreement. In connection with the execution of the Merger Agreement, both the
Board of Directors of Mercom (the "Board") and the Special Committee determined
that the Merger, the Merger Agreement and the transactions contemplated thereby
were fair.
At the time of the Buyer Merger, the Old Cable Michigan Representatives
resigned as directors and executive officers of Mercom 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 (the "Avalon
Representatives"). The members of the Board unaffiliated with Cable Michigan,
LTTH, CTE and RCN remained on the Board and continue to serve as members of the
Special Committee. These directors are also unaffiliated with Avalon Holdings.
For additional information on the directors and executive officers of the
Company and Cable Michigan, see Annex D attached hereto.
The Company
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., a Michigan corporation
("CCV"). As of December 31, 1998, the Systems served approximately 41,069
subscribers. Mercom is
8
<PAGE>
managed by Cable Michigan, which also owns 2,964,250 shares, or approximately
62%, of the 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 December 31, 1998, Cable Michigan served approximately 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. See "Buyer."
On November 6, 1998, pursuant to the Buyer Merger Agreement, Cable Michigan
became a wholly owned subsidiary of Avalon Holdings and changed its name to
Avalon Cable of Michigan, Inc.
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. 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. See "Avalon
Holdings and Related Parties."
9
<PAGE>
AVALON CABLE
HOLDINGS LLC
(DELAWARE)
|
| 100%
|
AVALON CABLE OF MICHIGAN
HOLDINGS, INC.
(DELAWARE)
|
| 100%
|
AVALON CABLE OF
MICHIGAN, INC., FORMERLY
CABLE MICHIGAN, INC.
(PENNSYLVANIA)
|
| 62%
|
MERCOM, INC.
(DELAWARE)
The entities contained in the organizational chart above, with the
exception of Mercom, Inc. and Cable Michigan, Inc., are collectively referred to
herein as "Avalon/ABRY."
10
<PAGE>
The Special Meeting
Time and Place of Meeting
The Special Meeting will be held at the offices of Kirkland & Ellis located
at Citicorp Center, 153 East 53rd Street, 39th floor, New York, New York 10022
on [Date], 1999, starting at [11:00] a.m., local time. See "The Special
Meeting."
Matter to be Considered
The Special Meeting has been called for the holders of the Company Common
Stock to consider and vote upon a proposal to approve and adopt the Merger
Agreement. See "Certain Provisions of the Merger Agreement."
Record Date; Vote Required
Holders of record of Company Common Stock at the close of business on
[Date] , 1999 (the "Record Date") have the right to receive notice of and to
vote at the Special Meeting. Each share of Company Common Stock is entitled to
one vote on each matter presented to the shareholders for a vote at the Special
Meeting. The affirmative vote of the holders of a majority of the outstanding
shares of the Company Common Stock is required to approve and adopt the Merger
Agreement. Cable Michigan beneficially owns approximately 62% of the outstanding
Company Common Stock, which is sufficient to cause the Merger Agreement to be
approved and adopted without the vote of any other Company stockholders. Cable
Michigan 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
Because of the conflicts of certain members of the Board with respect to
any transaction between Mercom and Cable Michigan, the Board established a
special committee (the "Special Committee") 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 the transaction with the Buyer and
evaluating the fairness of the Merger, the Merger Agreement and the transactions
contemplated thereby. The Special Committee is composed solely of directors
unaffiliated with Cable Michigan, LTTH, CTE and RCN. The members of the Special
Committee are also unaffiliated with Avalon Holdings and have continued to serve
on the Board after the completion of the Buyer Merger. They will cease to be
directors of Mercom upon completion of the Merger.
The Special Committee and the Board each unanimously determined on
September 10, 1998 that the Merger, the Merger Agreement and the transactions
contemplated thereby are fair to and in the best interests of the Public
Shareholders and recommend 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 of the Company for the Merger; Fairness of
the Merger."
11
<PAGE>
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 and a copy of such opinion is attached to this Proxy Statement as Annex B
(the "CIBC Oppenheimer Opinion"). The CIBC Oppenheimer Opinion 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
Pursuant to the Merger Agreement, the Company will be merged directly into
the Buyer, with Buyer 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").
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,
including that (i) the Company's stockholders adopt the Merger Agreement, (ii)
the fairness opinion delivered by CIBC Oppenheimer with respect to the Merger
has not been withdrawn or modified in any materially adverse respect, and (iii)
120 calendar days 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. 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
certain circumstances, including if the Merger has not been completed by March
31, 1999. See "Certain Provisions of the Merger Agreement-Termination."
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 will finance the Merger from borrowings under a secured credit facility of
Buyer and its affiliates and cash on hand. See "The Merger--Merger Financing."
12
<PAGE>
Appraisal Rights
If the Merger is consummated, under applicable Delaware law, holders of
Company Common Stock who follow the appropriate procedures, including filing a
written demand for appraisal with the Company prior to the Special Meeting, and
who do not vote in favor of the Merger will be entitled to receive payment of
the fair value of their shares of Company Common Stock as appraised by the
Delaware Court of Chancery. Under certain circumstances, a holder may forfeit
the right to appraisal, in which case, such holder's shares will be treated as
if they had been converted, as of the Effective Time, into a right to receive
the Merger Consideration, without interest thereon. See "Dissenting
Shareholders' Rights."
Interests of Certain Persons in the Merger
Primarily as a result of their relationships with Cable Michigan and its
affiliates, certain directors and executive officers of the Company had at the
time the Merger Agreement was negotiated and executed, and currently have,
interests, described herein, that present them with direct 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--Background of the Merger,"
"--Recommendation of the Special Committee and the Board of Directors,"
"--Reasons of the Company for the Merger; Fairness of the Merger," and "The
Merger--Interests of Certain Persons in the Merger."
Certain Effects of the Transaction
Following the Merger, 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. Rather, Cable Michigan will own 100% 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
In order for Cable Michigan to achieve certain efficiencies that may result
from integrating certain functions and operations of the Company with those of
Cable Michigan and to facilitate its financing arrangement, after the Merger,
Cable Michigan intends to transfer substantially all of its assets and
liabilities and those of the Company to one of its affiliates, Avalon Cable of
Michigan LLC, a Delaware limited liability company.
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.
13
<PAGE>
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>
14
<PAGE>
SPECIAL FACTORS
Purpose and Structure of the Merger; Reasons of Buyer for the Merger
In April 1998, Cable Michigan determined to explore strategic transactions
for Cable Michigan and its shareholders. Among the strategic transactions being
considered were transactions that would result in the sale of Cable Michigan. In
connection with such a transaction, Cable Michigan determined that it would be
appropriate to provide an opportunity for liquidity to the Public Shareholders
as the Company Common Stock is not listed and there exists only a limited
trading market for the Company Common Stock. Cable Michigan further determined
that in order for a third party acquiror of Cable Michigan to be willing to
enter into a transaction that would provide an opportunity for liquidity to
holders of the Company Common Stock, there would have to be a benefit for the
third party acquiror. Cable Michigan determined that a benefit to a third party
acquiror of Cable Michigan could be achieved if the Mercom transaction resulted
in the acquisition of all Shares held by the Public Shareholders. Acquiring all
Shares held by the Public Shareholders would result in the benefits described in
the third paragraph of this section under (b) and (f). Accordingly, the
principal purposes of the Merger are to provide liquidity to the Public
Shareholders and for Cable Michigan to increase its ownership of Shares from
approximately 62% to 100%. The other option considered by Cable Michigan was
simply maintaining the status quo with respect to Mercom (i.e. leaving the 38%
minority interest in the hands of the Public Shareholders). Cable Michigan
determined that it should make the proposal to Mercom and thereby provide the
Special Committee and Mercom with the choice of whether to provide liquidity to
the Public Shareholders or maintain the status quo with respect to Mercom.
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 the
38% ownership of the Company held by the Public Shareholders to Cable Michigan
and to provide such Public Shareholders with cash for their Shares. Cable
Michigan did consider, as an alternative, a cash tender offer for all of the
Shares held by the Public Shareholders. Cable Michigan ultimately rejected this
alternative in the belief that the Merger would be more efficient than a
transaction involving a tender offer. 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. It is almost certain that in order to obtain 100% of the
Shares, Cable Michigan would have had to complete a second-step merger after
completion of the cash tender offer. Such a second-step merger would have added
time and expense to the transaction without providing a material benefit to the
Public Shareholders.
Cable Michigan's principal reasons for the Merger are: (a) the Merger will
provide liquidity to the Public Shareholders; (b) 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; (c) the
Merger will permit Cable Michigan to consolidate the operations and the cash
flow of the Company with that of Cable Michigan; (d) as a privately held
company, the Company can be managed with a greater emphasis on long-term growth
than on short-term profits; (e) 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 (f) 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.
Avalon/ABRY expects that, over time, it could save up to $300,000 per year in
costs as a result of the acquisition of the minority interest in Mercom. These
savings are expected to result from consolidating the customer service
operations and warehouse facilities of Cable Michigan and Mercom and elimination
of the public company expenses described above.
Cable Michigan did not consider a stock-for-stock transaction as an
alternative to a cash-out merger. A stock-for-stock transaction would have been
inconsistent with the reasons for the Mercom transaction described above. Except
as set forth above, Cable Michigan did not explore other options.
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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, the Company
will merge with and into the Buyer, with the Buyer as the surviving corporation.
Upon the consummation of the Merger, the 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 and bylaws of the
Buyer shall be the certificate of incorporation and bylaws of the Surviving
Corporation until amended in accordance with applicable law.
In the Merger, the Public Shareholders will receive cash consideration of
$12.00 per Share and cease to have any ownership interest in the Company or
rights as holders of Shares. After the Merger, 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. Following the Merger, Cable Michigan's
beneficial interest in the net book value and net earnings of the Company would
increase from approximately 62% 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 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.
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 is consummated, there will not be another meeting for Public
Shareholders and the Company Credit Agreement and the Management Agreement
described below under "-Certain Transactions" will be terminated.
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. After the Merger, the Company will be able to consolidate
the Company for federal income tax purposes. For information regarding certain
tax consequences to Public Shareholders, see "The Merger-Certain Federal Income
Tax Consequences."
As described above in "-Purpose and Structure of the Merger; Reasons of
Buyer for the Merger," Avalon/ABRY expects that, over time, it could save up to
$300,000 per year in costs as a result of the acquisition of the minority
interest in Mercom. These savings are expected to result from consolidating the
customer service operations and warehouse facilities of Cable Michigan and
Mercom and elimination of the public company expenses described above.
Background of the Merger
Cable Michigan was formerly a subsidiary of Commonwealth Telephone
Enterprises, Inc. (formerly known as C-TEC 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.
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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 Company's Board
formed a special committee (the "Special Committee"), comprised of the three
directors of the Company, Clifford L. Jones, Harold J. Rose, Jr. and George
Stephenson, who were not affiliated with Cable Michigan, LTTH, C-TEC or RCN (the
"Independent Directors"), to consider this proposal. For more information on the
members of the Special Committee, see Annex D. 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
General Corporation Law of the State of Delaware (as amended, 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 of Directors, 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 as the
information might facilitate a transaction that would provide liquidity to the
Public Shareholders.
Starting on May 4, 1998, when Cable Michigan received an unsolicited letter
from Avalon Cable Television, 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/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 to advise it on strategic alternatives for Cable
Michigan.
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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. Avalon/ABRY was
not interested in pursuing a transaction with Mercom because it thought that
negotiating a Mercom transaction at the same time as the Cable Michigan
transaction would add unnecessary complication and delay to the Cable Michigan
transaction. Avalon/ABRY also did not believe that the Mercom cable systems were
as attractive as the Cable Michigan systems. Avalon/ABRY did not believe that
the areas in which the Mercom cable systems are located had the same growth
prospects as the areas in which the Cable Michigan cable systems are located. In
addition, Mercom faces more competition from competing cable systems or
"overbuilds." In any event, Cable Michigan informed Avalon/ABRY that it was
necessary for Avalon/ABRY to permit Cable Michigan to acquire the minority
interest in Mercom.
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.
Although Avalon/ABRY would not have been willing to offer a Mercom Price in
excess of $10.00 in a separate transaction for Mercom, it offered a Mercom Price
of $11.00 as part of the negotiations for Cable Michigan. Avalon/ABRY was
willing to offer such higher price, although it believed it would not yield the
same return as its investment in Cable Michigan, because if it owned all of
Mercom it would be easier to manage its cable systems with those of Cable
Michigan, and the expense and potential conflicts related to managing Mercom as
a separate public company could be eliminated. 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, the Independent Directors discussed with separate legal
counsel the advisability of approving the transaction between Cable Michigan and
Avalon/ABRY under Section 203 of the DGCL as it related to the Company. Such
members did not discuss the existence or viability of any other offers received
by Cable Michigan with respect to the Company. Cable Michigan was under no
obligation under Delaware law to solicit offers for the Company from other
parties and was not interested in pursuing alternate transactions.
After further discussions, on June 3, 1998, the Cable Michigan Board of
Directors 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. The terms approved by
the Cable Michigan Board included a Cable Michigan Price of $40.50 (subject to
certain adjustments) and a Mercom Price of $11.00. Also on June 3, 1998, the
Board, including the Independent Directors, 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
Avalon MergerSub 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
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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 Mercom Offer
Letter. The Special Committee, comprised of the Independent Directors, 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.
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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 Mercom 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. CIBC Oppenheimer
informed the Special Committee that Cable Michigan and Avalon Holdings were not
prepared at this time to increase the offer from $11.00 per share. 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. The Special Committee authorized CIBC
Oppenheimer to continue to negotiate to try to obtain a price in excess of
$11.00 per share. During the early part of August 1998, there were several more
conversations concerning an increase in the price from $11.00 per share.
Avalon/ABRY continued to state its belief that the $11.00 per share offer was
fair. Nevertheless, after discussions with representatives of CIBC and Cable
Michigan, Avalon/ABRY determined that it would be willing to authorize Cable
Michigan to increase the price for Mercom shares to $12.00 per share. Although
Avalon/ABRY believed that, if such an offer was accepted, it would earn a lower
return on its investment than it would on its investment in Cable Michigan, it
was willing to approve the increased price in order to get the benefits of
owning all of Mercom, including a simplified management structure and
elimination of public company expenses. Avalon/ABRY also considered its
relationship with Cable Michigan and its desire to consummate the pending Cable
Michigan transaction on an orderly basis. However, Avalon/ABRY indicated that it
would not authorize a price in excess of $12.00 per share of Mercom common
stock.
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
Avalon 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. Under the terms of its agreement with
Avalon/ABRY, Cable Michigan could not offer a greater price.
[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.
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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. The primary terms that
were the subject of such negotiations were: (i) a condition that 120 days elapse
after the consummation of the Buyer Merger; (ii) the termination date of the
Merger Agreement; (iii) a proposed franchise consent condition; and (iv) a
provision limiting Mercom's liability for its representations and warranties
under the Merger Agreement. Each of these terms is described below.
(i) During the course of the negotiations, Avalon/ABRY requested the
addition of a condition to the Merger that 120 days elapse after the
consummation of the Buyer Merger. Avalon/ABRY requested this condition in order
to allow sufficient time for it to obtain regulatory approvals for an internal
reorganization. The Special Committee agreed to accept this condition because it
concluded that it would not significantly delay closing of the Merger.
(ii) The Merger Agreement provides that it may be terminated by either the
Company or Buyer if the Merger has not been consummated by March 31,1999.
Avalon/ABRY initially proposed that the Merger Agreement could be terminated by
Mercom or Cable Michigan if the Merger had not been consummated by June 3, 1999.
Avalon/ABRY had proposed the June 3, 1999 date because the Buyer Merger
Agreement provided for termination if the Buyer Merger was not completed by that
date. The Special Committee proposed the earlier date to ensure that if the
Merger was not consummated relatively quickly each party would have the
opportunity to assess whether it wished to complete the transaction. Ultimately,
Avalon/ABRY concluded that the March 31, 1999 date would be acceptable.
(iii) Avalon/ABRY proposed that there be a condition to Cable Michigan's
obligation to consummate the Merger that a certain percentage of the
authorizations necessary to transfer control of the franchises of Mercom be
obtained from the applicable franchise authorities. The Special Committee
disagreed because, with respect to most of the franchises, either no consent was
required or the consent was to be obtained in connection with the Buyer Merger.
Avalon/ABRY ultimately agreed that no such condition be included because it
believed it would have the opportunity to seek any necessary consents during the
120 day period referred to in (i) above.
(iv) The Special Committee proposed to include language in the Merger
Agreement to the effect that Mercom would have no liability for any breach of
its representations and warranties contained in the Merger Agreement and that
Mercom was providing its representations and warranties solely for the purpose
of making their correctness at closing a condition to the obligation of Cable
Michigan to consummate the Merger. Mercom proposed this language because it felt
that Cable Michigan, as the controlling entity of Mercom, was in a better
position than Mercom and the Special Committee to assess the correctness of
Mercom's representations and warranties and that under these circumstances
Mercom should not be liable for any misrepresentations. Cable Michigan
ultimately agreed to include the proposed language in the Merger Agreement.
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.
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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 Avalon 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 (the "Old Cable
Michigan Representatives") 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 (the "Avalon
Representatives"). The Old Cable Michigan Representatives had been directors
and/or executive officers of Cable Michigan prior to the Buyer Merger. Since the
Buyer Merger, the directors of the Company have consisted of the Avalon
Representatives and the Independent Directors, and the Independent Directors
have continued to serve as the Special Committee. 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). See Annex D for
additional information.
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, composed of the Old Cable Michigan
Representatives and the Independent Directors, 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 direct 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 among 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
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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
size of the Company as compared to the remaining companies in 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.
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. 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."
(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 and achieve liquidity 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 alternatives to the Merger and determined
that there were no alternatives other than for the Company to remain a
publicly traded entity. The Special Committee preferred the Merger to the
Company remaining a publicly traded entity since the Merger afforded the
Public Shareholders liquidity for their Company Common Stock at fair value
without the possible diminution of value resulting from the lack of an
active trading market.
23
<PAGE>
The Old Cable Michigan Representatives on the Board (Bruce Godfrey, David
C. McCourt, Michael J. Mahoney and Raymond B. Ostroski) had direct conflicts of
interests due to their relationships with Cable Michigan. None of these
directors were members of the Special Committee.
The Special Committee did not (i) consider either the net book value or the
liquidation value of the Company since each was materially lower than the Merger
Consideration, (ii) receive for their consideration any other offers for the
Company Common Stock held by the Public Shareholders and (iii) consider any
prior purchases of the Company's securities since there was no purchase which
was deemed relevant in the context of this transaction.
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. The
Special Committee did not consider any factors which led the Special Committee
to believe that the Merger may be unfair to the Public Shareholders. As
described further 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
"--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. At the time of this
determination, the Board was composed of the Old Cable Michigan Representatives
and the Independent Directors.
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 "--Opinion of Financial
Advisor to the Special Committee." The Board 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. 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 did not consider any
factors which led the Board to believe that the Merger may be unfair to the
Public Shareholders.
The Board, composed of the Old Cable Michigan Representatives and the
members of the Special Committee, determined that the Merger was 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. The Board believed that such safeguards were
sufficient to assure that the Merger is fair to, and in the best
24
<PAGE>
interests of the Public Shareholders, and, therefore, the approval of the Merger
by a majority of the Public Shareholders, voting as a separate class, was not
required.
Fairness of the Merger. Based on the factors set forth above, Mercom
believes that the consideration to be received by the Public Shareholders
pursuant to the Merger is fair to the Public Shareholders. Cable Michigan also
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, prior to the Buyer Merger, 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, prior to the Buyer Merger, and that Cable
Michigan is not entitled to rely upon such opinion, the fact that the Special
Committee and the Board, prior to the Buyer Merger, 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. In addition, each of Avalon Holdings
(which owns all of the outstanding shares of Cable Michigan) and Avalon LLC
(which owns all of the outstanding shares of Avalon Holdings) believe that the
consideration to be received by the Public Shareholders pursuant to the Merger
is fair to the Public Shareholders. Avalon Holdings and Avalon LLC base their
belief as to the fairness of the Merger on the factors relied upon by Cable
Michigan.
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. After conducting due diligence regarding the
Company and conducting a preliminary analysis concerning the $11.00 per share
offer made in the Initial Offer Letter, CIBC Oppenheimer determined that the
range of value was above the offer of $11.00 per share; therefore CIBC would not
render an opinion that the $11.00 price was fair. The analysis conducted to
arrive at this conclusion included comparable publicly traded company analysis,
comparable mergers and acquisition transactions analysis, value based on
purchase price of Cable Michigan by Avalon Holdings analysis, premiums paid for
comparable minority interest transaction analysis and discounted cash flow
analysis, in each case as described below. 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, which was in the range of value for Mercom. 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.
25
<PAGE>
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 800 Third Avenue,
Suite 3100, New York, New York 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 as set forth
below; (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.
The financial projections provided to CIBC Oppenheimer were not publicly
available. 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 (as
described in the preceding paragraph) 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. Rather, the Company
acknowledges that the projections are subjective and subject to uncertainty. 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".
26
<PAGE>
<TABLE>
<CAPTION>
Mercom, Inc. (1)
Forecasted Information (in thousands)
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 (2)......................... 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) The projections assume the following average subscriber numbers: 41,132
(1998); 42,049 (1999); 43,100 (2000); 41,177 (2001); 45,282 (2002) and
46,414 (2003). The total revenue per average subscriber was assumed to be
$34.82 for 1998 (2.8% increase from prior year), $36.56 for 1999 (5.0%),
$38.43 for 2000 (5.1%), $40.39 for 2001(5.1%), $42.44 for 2002 (5.1%) and
$44.61 for 2003 (5.1%). The projections further assumed the following
capital expenditures (in thousands): $8,393 (1998), $4,959 (1999), $4,341
(2000), $2,750 (2001), $1,811 (2002) and $1,857 (2003), which represented
231.3%, -40.9%, -12.5%, -36.7%, -39.1% and 1.73% changes from the
respective prior years. The assumed increase in subscriber revenue per
average subscriber is based on new services that the Company expects to
provide. Such new services are expected to result from enhanced systems
with increased channel capacity. See "The Company-Company Strategy."
(2) 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.
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 waiver of the
condition that the Merger not be effected within 120 days of the Buyer Merger
does not effect the CIBC Oppenheimer Opinion. 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
27
<PAGE>
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 25% to 35% to the
Comparable Companies and used the midpoint of 30% 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 73 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 the thirty-two
transactions with a total consideration less than $75 million. No discount was
applied to transactions with total
28
<PAGE>
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, and $9.58 to $12.95 per share
of the Company Common Stock for transactions with a value less than $75 million.
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. For these transactions, CIBC applied a
discount of 15% to 25% (midpoint 20%) to the derived multiples of Cable Michigan
on a stand-alone basis. This discount was for the following reasons: (i)
Mercom's subscriber base is approximately 25% that of Cable Michigan's
subscriber base; (ii) Mercom operates in a more competitive environment than
Cable Michigan because an additional cable company has begun to provide cable
programming to an area served by Mercom; (iii) Mercom's cable systems require
substantial upgrades, whereas Cable Michigan's systems require less substantial
upgrades; (iv) Mercom's revenue growth and EBITDA margin for fiscal year 1997
were 5.6% and 37.1%, respectively, whereas Cable Michigan's were 6.7% and 41.7%
respectively (further, Cable Michigan's EBITDA was 4.5x greater than Mercom's,
making it more attractive to a buyer); (v) the market value of Mercom's publicly
traded stock is substantially lower than the publicly traded stock of Cable
Michigan and as a
29
<PAGE>
consequence Mercom's stock is less liquid; and (vi) the valuation of Cable
Michigan implied a control premium, whereas the valuation of Mercom was for a
minority interest.
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. The 14 selected transactions that
CIBC reviewed in this analysis were (i) the purchase of the remaining 19.5% of
FoxMeyer Corporation by National Intergroup Incorporated, (ii) the purchase of
15.8% of Ogden Projects Incorporated by Ogden Corporation, (iii) the purchase of
40% of Ropak Corporation by LinPac Mouldings Limited, (iv) the purchase of 15.6%
of Great American Management & Investment Incorporated by Equity Holdings,
Chicago, (v) the purchase of 26.8% of shares of SyStemix Incorporated by
Norvatis AG, (vi) the purchase of 26.5% of Crocker Realty Trust Incorporated by
Highwoods Properties Incorporated, (vii) the purchase of 48% of General Physics
Corporation by National Patent Development Corporation, (viii) the purchase of
15.5% of WCI Steel Incorporated by Renco Group Incorporated, (ix) the purchase
of 38.4% of Union Switch & Signal Incorporated by Ansaldo Transport SpA, (x) the
purchase of 38.8% of Central Tractor Farm & Country by JW Childs Equity Partners
LP, (xi) the purchase of 34% of Zurich Reinsurance Centre by Zurich
Versicherungs GmbH, (xii) the purchase of 48.1% of Enron Global Power &
Pipelines by Enron Corporation, (xiii) the purchase of 29% of Faulding, Inc. by
F.H. Faulding & Company and (xiv) the purchase of 22.7% of Guaranty National
Corporation by Orion Capital Corporation. 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 the 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 set forth above. 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.
The subjective judgments made by CIBC Oppenheimer about the capital
markets, the Company's prospects and the cable industry in relation to the DCF
are as follows: (1) the cable television business continues to be a
high-multiple business that is desirable to prospective purchasers due to its
stable cash flow, limited competition and ability to deliver additional services
due to digital capabilities; (2) the cost of capital assumption used to
determine the discount rates do not change materially and capital markets are
similar to those in place at the time of the transaction; (3) it is unlikely
that there will be additional direct competitors to enter Mercom's markets and
cause it to cut its margins; (4) Mercom's relatively low growth rates would not
warrant a materially higher terminal multiple than those used by CIBC
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<PAGE>
Oppenheimer; and (5) Mercom was still majority owned by Cable Michigan, putting
a limit on the interest of its equity in the public market and diminishing the
likelihood of a strategic buyer offering to purchase it.
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 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.
CIBC Oppenheimer placed relatively more emphasis on the Comparable M&A
Transaction Analysis because of the size of the Mercom transaction and because
the multiples paid in completed transactions with values less than $75 million
are materially different from valuations of larger companies. This analysis was
relevant since there are no publicly traded comparable companies as small as
Mercom. Also, CIBC Oppenheimer placed relatively more emphasis on the Value
Based on Purchase Price of Cable Michigan by Avalon Cable Analysis due to the
belief that Cable Michigan should perform a similar analysis when valuing the
purchase of Mercom. The acquisition of Cable Michigan by Avalon Cable was
completed close in time to the Mercom announcement as opposed to other
transactions which occurred more than six months or twelve months prior to
Mercom's announcement of the transaction. Finally, CIBC Oppenheimer placed
relatively more emphasis on the Discounted Cash Flow Analysis due to the belief
that valuing the Company's financial projections relative to its historical
performance as well as the performance of the market would indicate a proper
valuation of the Company. CIBC Oppenheimer relied on the fact that the Company,
like other cable companies, has steady and predictable cash flows, which can be
easily forecasted in contrast to companies in other industries that tend to have
cyclical and unpredictable cash flow streams.
The description set forth above is a summary of all of the material
analyses performed and factors considered by CIBC Oppenheimer. Such description
is qualified by reference to the full text of the CIBC Oppenheimer Opinion set
forth in Annex B attached 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. These assumptions were as follows: (1) the U.S. economy does not
undergo a major recession during the five-year projection period such that the
economy of Michigan would not materially decline in such a way as to preclude
residents from purchasing cable services, (2) cable continues to be a
high-multiple business that is desirable to prospective purchasers due to its
stable cash flow, limited competition and ability to deliver additional services
due to digital capabilities; (3) other large cable companies remain in business
and exhibit similar margin, growth, capital structure and valuation parameters
to those in place at the time of the transaction, and (4) Cable Michigan remains
in business and does not experience financial difficulties such that its
majority ownership of Mercom and its ability to provide services to Mercom
remain undiminished.
In addition, CIBC Oppenheimer 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
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<PAGE>
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.
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.
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 Mercom. 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 "Consolidated 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 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
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<PAGE>
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."
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.
Avalon/ABRY expects the efficiencies will result from consolidating the customer
service operations and warehouse facilities of Cable Michigan and Mercom. In
order to better combine the operations of Cable Michigan and Mercom and to
facilitate its financing arrangements, after the Merger, Cable Michigan intends
to transfer substantially all of its assets and liabilities and those of the
Company to one of its affiliates, Avalon Cable of Michigan LLC.
If the Merger is consummated, the Company Credit Agreement and the
Management Agreement will be terminated since Cable Michigan and Mercom will
have 100% common ownership.
After the Merger, Cable Michigan generally intends to continue the
Company's current strategy. See "The Company-Company Strategy." In addition,
consistent with its strategy for its other operations, Cable Michigan plans to
focus on its customers and market aggressively. It will work to improve customer
service by expanding and upgrading its cable plants (including Mercom's). In
addition, Cable Michigan intends to increase and rearrange programming packages
and tier offerings to meet the needs of the various communities it serves,
including those currently served by Mercom. By centralizing customer service
operations and operating local offices, Cable Michigan believes it will be able
to enhance its ability to implement its customer service policies on a more
consistent and uniform basis, while maintaining a local presence in the markets
it serves. In addition, Cable Michigan plans to promote and market aggressively
by (i) introducing targeted marketing campaigns, including outbound
tele-marketing, direct mail, advertising and sponsorship of community based
events such as fairs and sports teams, (ii) using price promotions, such as
installation specials, to attract new subscribers, (iii) using premium channel
promotions, such as free weekend premium channels and a second premium channel
at no charge for a limited period with a subscription for another premium
channel, to encourage existing basic and premium subscribers to upgrade their
services, (iv) using contacts between customer service personnel and customers
as opportunities to upgrade service and (v) centralizing marketing and
programming under the Vice President of Marketing.
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.
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<PAGE>
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. The table also sets forth the average daily trading volume for
Mercom common stock for each period presented.
<TABLE>
<CAPTION>
Average
Daily
Trading
High Low Volume
------ ------ -------
<S> <C> <C> <C>
1997
First Quarter............................... 7 5 3/4 3,767
Second Quarter.............................. 7 5 1/2 350
Third Quarter............................... 9 6 1/4 527
Fourth Quarter.............................. 9 3/4 7 7/8 2,444
1998
First Quarter............................... 10 1/4 8 1/2 1,390
Second Quarter ............................. 11 3/4 10 1/4 5,770
Third Quarter............................... 11 7/8 10 1/4 5,214
Fourth Quarter ............................. 11 3/4 10 1/8 700
1999
First Quarter (1) .......................... [ ] [ ] [ ]
</TABLE>
- -------------------
(1) Through February [__], 1998
On May 20, 1998, the last trading day before the public announcement by
Cable Michigan that it had retained Merrill Lynch 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], 1999, the closing price of the Company Common Stock as reported
was $[ ] per share.
On [Date], 1999, 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.
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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, CCV. As of December 31, 1998, the Systems had approximately 41,069
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%
Average revenue per subscriber for last
month of period(5).................... $ 29.70 $ 29.36 $ 30.41 $ 32.72 $ 33.89 $ 34.09 $ 35.34
</TABLE>
- -------------------
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.
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<PAGE>
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
purchases made on the Home Shopping Network, aired on the Company's cable
systems, by the Company's subscribers. Monthly subscription rates and related
charges vary according to the type of service or equipment selected.
Company Strategy
Cable Michigan's primary objective with respect to capital expenditures in
relation to its Mercom cable systems will be to maintain, expand and upgrade the
cable plant in order to improve and expand its cable television services. The
Company may institute new services, such as Internet access, high speed data,
on-screen navigators and new video-on-demand, 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 intends to spend approximately $15,000,000 million to upgrade Mercom's
existing systems. Upon the completion of its planned upgrades, Cable Michigan
will be able to offer new tiers of basic channels and services, additional
multi-channel premium offerings, expanded pay-per-view options and two-way high
speed internet. See "--Technology."
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.
Technology
The Company's cable systems generally consist of a headend, a distribution
system and subscriber connection equipment. Each headend includes a tower,
antennas, earth stations for the reception of satellite signals, and electronic
equipment for receiving, amplifying and modulating signals. The Company also
uses microwave receive sites for the reception of microwave signals.
As it upgrades its cable systems, the Company is using fiber optic
technology to enhance its coaxial cable distribution system allowing it to
improve picture quality, system reliability and maintenance expenditures. Fiber
optic strands are capable of carrying hundreds of video, data and voice channels
over extended distances without the extensive signal amplification typically
required for coaxial cable.
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
36
<PAGE>
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 such as HBO,
Showtime, Cinemax and Starz/Encore. At December 31, 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 under the
Management Agreement. See "- Buyer Management Agreement" and "Special Factors -
Certain Transactions" for a description of the Management Agreement.
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.
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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, direct
DBS service whereby signals are
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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 have recently
proposed regulations that would reduce the impact of the existing legal
obstacles DBS providers face with respect to such services. Recently proposed
transactions among DBS providers may further improve DBS' competitive posture.
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 cable systems and to provide multi-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) have or 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 private 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
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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
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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, 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. Mercom's systems qualify as "small systems" under the FCC's
rules. 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.
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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
rulemaking 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
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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 or change in ownership control,
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 franchising authority 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
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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. In a
recent decision, the United States Supreme Court largely upheld the FCC's
interconnection regulations, including those related to certain pricing and
access issues. Despite the need to resolve other outstanding issues, the Court's
decision suggests promise for competition in local exchange services.
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 modify the current pole attachment provisions of
the Communications Act by immediately permitting certain providers of
telecommunications services to rely upon the protections of the current law and
requiring 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
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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 1996 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 and the United States District
Court for the District of Delaware recently enjoined enforcement of the
provision. An appeal of the Delaware court's ruling is pending. 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 revenues to a federal copyright royalty pool, cable operators obtain, by
operation of law, blanket licenses to retransmit
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the copyrighted material on broadcast signals. The nature and amount of future
payments for broadcast signal carriage cannot 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 the three primary 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 generally 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 December 31, 1998, the Company had a total of approximately 54
full-time employees. The Company believes that its relationships with its
employees are good.
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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.
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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. If the Merger Agreement is approved by
the shareholders of the Company and the other conditions to the Merger are
satisfied or waived, the Company will merge with and into Buyer 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
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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, New
York 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.
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THE MERGER
Overview
For a description of the principal terms of the Merger and the Merger
Agreement, including the consideration to be received by the Public
Shareholders, see "Certain Provisions of the Merger Agreement."
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.
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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, primarily as a result of their
relationships with Cable Michigan and its affiliates, certain directors and
executive officers of the Company had at the time the Merger Agreement was
negotiated and executed, and currently have, interests, described herein, that
are different from, or in addition to, the interests of holders of Shares
generally. These interests have presented them with direct 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."
Aside from the members of the Special Committee, each of the 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. The members of the
Special Committee will not serve as directors of Buyer or any of its affiliates
subsequent to the Effective Time. None of the officers or directors of Mercom
will receive a compensation package or severance payments as a result of the
Merger. The Old Cable Michigan Representatives, who were replaced as directors
and officers of the Company in connection with the Buyer Merger, did not receive
any severance payments in connection with their termination of services to the
Company.
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
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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. As of January 20, 1999, there were approximately
$11,240,400 million of Tranche A Loans outstanding, approximately $129,635, 000
million of Tranche B Loans outstanding, $22,000,000 million of availability
under the Tranche A Term Loan Facility and $30,000,000 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 (which is generally defined as the greater of (a) the
prime or base rate as announced from time to time by a specified lender under
the Avalon Credit Facility and (b) a federal funds rate) or (ii) the Eurodollar
Rate (which is generally defined as the rate appearing on Page 3750 of the Dow
Jones Markets screen at a specified time or, if such rate does not so appear,
another comparable publicly available service for displaying eurodollar rates)
plus, in either case, the applicable margin. As of January 20, 1999, the
interest rate on the Tranche A Term Loans was 7.94% per annum and (b) with
respect to the Tranche B Term Loans was 8.69% per annum. 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.
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Buyer expects to obtain the Merger Financing from borrowings under the
Tranche A Term Loan and cash on hand. Buyer expects to pay off the borrowings
under the Tranche A Term Loan with cash from operations.
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 Cable Michigan 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, Mercom shall be merged at the Effective Time with
and into Buyer, the separate existence of Mercom shall cease, and the Buyer
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, 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 Company Common Stock held by Buyer 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.
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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 and bylaws of the
Buyer shall be the certificate of incorporation and 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 or their earlier resignation or removal, the
directors and officers of Buyer at the Effective Time shall be the directors and
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;
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<PAGE>
(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.
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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.
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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 MegerSub, 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.
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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>
<CAPTION>
<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."
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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 December 31, 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.
The Company had operating income before depreciation and amortization of
$4,291 in 1998 compared to $4,637 in 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. However, there can be no assurance that the full
amount of operating income will be available to meet debt service requirements
and to replace and modernize plant as the Company may require amounts for other
business purposes.
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
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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. Depreciation and amortization expenses for the year
ended 1997 were $2,849 compared to $3,018 for the year ended 1996. The main
reason for the change in depreciation and amortization expenses was the sale of
the Company's investment in Mercom of Florida, which was consummated on July 1,
1997. Due to the sale of the 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.
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.
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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.
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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.
In 1996, Mercom initiated a five-year plan to rebuild it coaxial cable
plant. This rebuild initiative is part of a comprehensive program initiated by
Cable Michigan. The primary objective of the plan is to expand Mercom's current
channel offerings, improve reliability and enhance reception. During 1998,
Mercom invested over $2.2 million to begin upgrades in certain of its cable
systems.
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.
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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).
In particular, the Company is in the process of completing a review and
survey of all information technology and non-information technology equipment
and software in order to discover items that may not be Year 2000 compliant. The
Company intends to contact each material third party vendor of products and
services used by the Company in writing in order to determine the Year 2000
status of the products and services provided by such vendors. To date, the
Company's third party vendors have indicated that all material products and
services are Year 2000 compliant. The Company anticipates that it will complete
its survey of equipment and software prior to March 1999 and that it will
complete all required remediation and testing prior to December 31, 1999.
The Company's most reasonably likely worst case Year 2000 scenario involves
the complete failure of its third party billing and customer support system.
Such a scenario is, however, highly unlikely given that the Company's billing
and customer support systems are relatively new and that the Company's vendors
provide readily available Year 2000 upgrades and/or system replacement packages.
In the unlikely event that the Company's third party billing, customer support
and addressable control systems failed, the Company could rely on its extensive
microfiche back-up records. The Company intends to update its microfiche records
on a regular basis prior to December 1999.
To date, the Company has incurred approximately $30,000 in expenses
relating to its Year 2000 compliance review. The Company anticipates that it
will incur less than $30,000 of additional Year 2000 compliance expenses prior
to January 2000.
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.
63
<PAGE>
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 February 1, 1999, 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. The table does not include shares owned by Cable Michigan,
which shares represent approximately 62% of the outstanding Shares. Certain of
the directors and officers of the Company may be deemed to have beneficial
ownership of such shares by virtue of their relationships to Cable Michigan.
Such beneficial ownership is disclaimed.
<TABLE>
<CAPTION>
Number of Shares Percent of
Name of Benefical 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 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 February 1, 1999, 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) 520,735 10.88%
One Corporate Center
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>
- -------------------
64
<PAGE>
(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 February 1, 1999, 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. The table does not include shares owned by
Cable Michigan, which shares represent approximately 62% of the outstanding
Shares. Certain of the directors, officers and affiliates of Cable Michigan may
be deemed to have beneficial ownership of such shares by virtue of their
relationships to Cable Michigan. Such beneficial ownership is disclaimed.
<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, 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 -- --
Royce Yudkoff, Director (3) -- --
All Directors and Executive Officers as a Group ((8) persons) -- --
</TABLE>
Other than through their interest in Cable Michigan, Avalon Holdings and
Avalon LLC do not beneficially own Company Common Stock.
Except as disclosed above, none of the directors, officers and managers of
Avalon Holdings or Avalon LLC beneficially own Company Common Stock.
65
<PAGE>
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
Cable Michigan operates cable television systems in the State of Michigan.
As of December 31, 1998, Cable Michigan served approximately 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.
Cable Michigan became a separate, publicly traded company on September 30,
1997, when it was spun off from CTE. At the same time, CTE spun off RCN. In
connection with such spin-offs, RCN and CTE agreed to provide programming,
customer service and other significant services to Cable Michigan. After the
spin-off, LTTH owned approximately 48% of Cable Michigan's outstanding common
stock. LTTH is a subsidiary of Level 3 Communications, Inc. ("LTC").
On November 6, 1998, pursuant to the Buyer Merger Agreement, Avalon
MergerSub was merged with and into Cable Michigan, with Cable Michigan 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.
MergerSub 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 its telephone number is (212) 421-0600.
Information as to each executive officer and director of Buyer, the
Company and certain of Buyer's affiliates is set forth in Annex D hereto.
66
<PAGE>
AVALON HOLDINGS AND RELATED PARTIES
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 LLC. Avalon LLC 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 Broadcast Partners III, L.P. ("ABRY
III") is the controlling member of Avalon LLC. The general partner of ABRY III
is ABRY Equity Investors, L.P. ("AEI"). The general partner of AEI is ABRY
Holdings III, Inc. ("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 C 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 C. This discussion and Annex
C 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
C.
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.
67
<PAGE>
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
68
<PAGE>
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.
69
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
INDEX TO 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
F-1
<PAGE>
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.
Philadelphia, Pennsylvania
March 13, 1998
F-2
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<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
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
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
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
<TABLE>
<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 $ --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
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)
<TABLE>
<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
===== ======= ======== ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
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.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars In Thousands, Except Per Share Data)
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:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
Amortization expense charged to operations in 1997, 1996 and 1995 was $291,
$287 and $309, respectively.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars In Thousands, Except Per Share Data)
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:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current-
Federal.......................................... $ 248 $ 28 $ (2)
State............................................ -- -- --
------ ------ ------
Total......................................... $ 248 $ 28 $ (2)
====== ====== ======
Deferred-
Federal.......................................... $ 417 $ -- $ --
State............................................ -- -- --
------ ------ ------
Total......................................... $ 417 $ -- $ --
------ ------ ------
Total provision (benefit) for income taxes.......... $ 665 $ 28 $ (2)
====== ====== ======
</TABLE>
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
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) $ --
======== ========
</TABLE>
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:
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
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:
<TABLE>
<CAPTION>
Tax Net
Year Operating Losses Expiration Date
---- ---------------- ---------------
<S> <C> <C>
1991 $ 329 2006
1992 $ 1,628 2007
1995 $ 2,713 2010
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Note Payable, Affiliate.......... $ 14,151 $ --
Term Credit Agreement............ -- 17,430
-------- --------
Total Debt....................... $ 14,151 $ 17,430
======== ========
</TABLE>
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
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars In Thousands, Except Per Share Data)
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
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars In Thousands, Except Per Share Data)
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:
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Dollars In Thousands, Except Per Share Data)
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>
F-13
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<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."
F-14
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<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......................... 1,537 743
-------- --------
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
======== ========
</TABLE>
- -------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
F-15
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<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
</TABLE>
- -------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
F-16
<PAGE>
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.
F-17
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
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.
F-18
<PAGE>
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 Mercom Acquisition,
Inc., an affiliate of Cable Michigan, entered into the Merger Agreement.
Pursuant to the Merger Agreement and subject to the terms and conditions set
forth therein, Mercom will be merged with and into Cable Michigan with Cable
Michigan 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 Company Common Stock held by Buyer 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 additional 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.
F-19
<PAGE>
ANNEX A
[MERGER AGREEMENT]
A-1
<PAGE>
AGREEMENT AND PLAN OF MERGER
dated as of
September 10, 1998
as amended
among
MERCOM, INC.,
CABLE MICHIGAN, INC.
and
MERCOM ACQUISITION, INC.
<PAGE>
TABLE OF CONTENTS(1)
-----------------
PAGE
----
ARTICLE 1
THE MERGER
SECTION 1.01. The Merger .................................................1
SECTION 1.02. Conversion of Shares.........................................2
SECTION 1.03. Surrender and Payment........................................2
SECTION 1.04. Dissenting Shares............................................4
ARTICLE 2
THE SURVIVING CORPORATION
SECTION 2.01. Certificate of Incorporation.................................5
SECTION 2.02. Bylaws .................................................5
SECTION 2.03. Directors and Officers.......................................5
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY
SECTION 3.01. Corporate Existence and Power................................5
SECTION 3.02. Corporate Authorization; Approval of the
Board............................................6
SECTION 3.03. Governmental Authorization...................................6
SECTION 3.04. Non-contravention............................................7
SECTION 3.05. Capitalization...............................................7
SECTION 3.06. Subsidiaries.................................................7
SECTION 3.07. SEC Filings .................................................8
SECTION 3.08. Financial Statements.........................................9
SECTION 3.09. 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
- --------
(1) The Table of Contents is not a part of this Agreement.
<PAGE>
PAGE
----
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF
BUYER
SECTION 4.01. Corporate Existence and Power...............................17
SECTION 4.02. Corporate Authorization.....................................17
SECTION 4.03. Governmental Authorization..................................18
SECTION 4.04. Non-contravention...........................................18
SECTION 4.05. Proxy Statement; Schedule 13E-3.............................18
SECTION 4.06. Finders' Fees...............................................19
SECTION 4.07. Financing ................................................19
SECTION 4.08. Ownership of Shares.........................................19
ARTICLE 5
COVENANTS OF THE COMPANY
SECTION 5.01. Conduct of the Company......................................19
SECTION 5.02. Stockholder Meeting; Proxy Material.........................20
SECTION 5.03. Access to Information.......................................20
ARTICLE 6
COVENANTS OF BUYER
SECTION 6.01. Obligations of Merger Subsidiary............................21
SECTION 6.02. Voting of Shares............................................21
SECTION 6.03. Director and Officer Liability..............................21
SECTION 6.04. Absence of Actions Causing Breach...........................22
ARTICLE 7
COVENANTS OF BUYER AND THE COMPANY
SECTION 7.01. Best Efforts; SEC Filings...................................22
SECTION 7.02. Public Announcements........................................22
SECTION 7.03. Further Assurances..........................................23
SECTION 7.04. Notices of Certain Events...................................23
ARTICLE 8
CLOSING; CONDITIONS TO THE MERGER
SECTION 8.01. Closing ................................................23
SECTION 8.02. Conditions to the Obligations of Each Party.................23
SECTION 8.03. Conditions to the Obligations of Buyer and
Merger Subsidiary...............................24
SECTION 8.04. Conditions to the Obligations of the Company................25
ii
<PAGE>
PAGE
----
ARTICLE 9
TERMINATION
SECTION 9.01. Termination ................................................25
SECTION 9.02. Effect of Termination.......................................26
ARTICLE 10
MISCELLANEOUS
SECTION 10.01. Notices ................................................27
SECTION 10.02. Survival ................................................28
SECTION 10.03. Amendments; No Waivers.....................................28
SECTION 10.04. Expenses ................................................29
SECTION 10.05. Successors and Assigns.....................................29
SECTION 10.06. Governing Law..............................................29
SECTION 10.07. Counterparts; Effectiveness................................29
SECTION 10.08. Parties in Interest........................................29
SECTION 10.09. 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
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of September 10, 1998, as
amended, 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 the Merger be effected
through the Company being merged with and into the Buyer with the Buyer as the
surviving corporation; 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 1.01. The Merger. (a) At the Effective Time (as defined below),
the Company shall be merged (the "Merger") with and into Buyer in accordance
with the General Corporation Law of the State of Delaware (the "Delaware Law")
whereupon the separate existence of the Company shall cease, and the Buyer shall
be the surviving corporation (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
Buyer 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").
<PAGE>
(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 Buyer and the Company, all as
provided under Delaware Law.
SECTION 1.02. Conversion of Shares. At the Effective Time by virtue of
the Merger and without any other action on the part of the Company, Buyer 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 Buyer 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 1.02(A) or as provided
in Section 1.04 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 1.03. 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).
2
<PAGE>
(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 1.03(A) that remains unclaimed by the holders
of Shares three months after the Effective Time shall be returned to Buyer, upon
3
<PAGE>
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 1.03(A) to pay for Shares for which appraisal
rights have been perfected shall be returned to Buyer, upon demand.
SECTION 1.04. Dissenting Shares. Notwithstanding Section 1.02, 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 2.01. Certificate of Incorporation. The certificate of
incorporation of Buyer in effect at the Effective Time shall be the certificate
of incorporation of the Surviving Corporation until amended in accordance with
applicable law.
4
<PAGE>
SECTION 2.02. Bylaws. The bylaws of Buyer in effect at the Effective
Time shall be the bylaws of the Surviving Corporation until amended in
accordance with applicable law.
SECTION 2.03. Directors and Officers. From and after the Effective
Time, until successors are duly elected or appointed and qualified in accordance
with applicable law or their earlier resignation or removal, the directors and
officers of Buyer shall be the directors and officers of the Surviving
Corporation.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Buyer that:
SECTION 3.01. 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 3.02. 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
5
<PAGE>
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 3.03. 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 3.04. 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 3.03, 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 3.04 and with such other exceptions as would not individually
6
<PAGE>
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 3.05. 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
3.05(A), 3.05(B), 3.05(C) and 3.05(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 3.06. 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 3.06(A).
7
<PAGE>
(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
3.06(B)(I), 3.06(B)(II) and 3.06(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 3.07. 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
8
<PAGE>
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 3.08. 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 3.07 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 3.09. 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);
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(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
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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,
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).
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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).
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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,
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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
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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
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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,
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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 4.01. 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 4.02. 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 4.03. 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
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operations or the conduct of the business of Buyer and its Subsidiaries taken as
a whole.
SECTION 4.04. 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 4.03, 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 4.04, 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 4.05. 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 4.06. 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 4.07. 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 4.08. Ownership of Shares. Buyer is the record and beneficial
owner of 2,964,250 Shares.
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ARTICLE 5
COVENANTS OF THE COMPANY
The Company agrees that:
SECTION 5.01. Conduct of the Company. Except as set forth in Schedule
5.01 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 5.01:
(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
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(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 5.02. 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 5.03. 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 6.01. Obligations of Merger Subsidiary. Buyer will take all
action necessary to cause Merger Subsidiary to perform its obligations under
this Agreement.
SECTION 6.02. 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.
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SECTION 6.03. 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 6.04. 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.
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ARTICLE 7
COVENANTS OF BUYER AND THE COMPANY
The parties hereto agree that:
SECTION 7.01. 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 7.02. 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 7.03. 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 Buyer, any
deeds, bills of sale, assignments or assurances and to take and do, in the name
and on behalf of the Company or Buyer, 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 7.04. Notices of Certain Events. The parties shall promptly
notify each other of:
22
<PAGE>
(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 8.01. 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 8.02. 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
23
<PAGE>
authority before any court, arbitrator or governmental body, agency or
official and be pending.
SECTION 8.03. 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 8.04. 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
24
<PAGE>
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 9.01. 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
7.01), 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;
25
<PAGE>
(e) by the Company (provided that at the time Buyer would not be
entitled to terminate this Agreement under Section 9.01(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 9.01(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 9.01(B)
9.01(C), 9.01(D), 9.01(E) or 9.01(F) shall give written notice of such
termination to the other party in accordance with Section 10.01.
SECTION 9.02. Effect of Termination. If this Agreement is terminated
pursuant to Section 9.01, 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 10.04 shall survive the termination hereof.
ARTICLE 10
MISCELLANEOUS
SECTION 10.01. Notices. All notices, requests and other
communications to any party hereunder shall be in writing (including telecopy or
similar writing) and shall be given,
26
<PAGE>
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 10.02. 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
27
<PAGE>
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 8.03(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 10.03. 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 10.04. Expenses. All costs and expenses incurred in connection
with this Agreement shall be paid by the party incurring such cost or expense.
SECTION 10.05. 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 10.06. Governing Law. This Agreement shall be construed in
accordance with and governed by the law of the State of Delaware.
28
<PAGE>
SECTION 10.07. 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 10.08. 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 6.03 and 10.09 (which are also intended to be for
the benefit of the persons provided for therein and may also be enforced by such
persons).
SECTION 10.09. 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 10.01, 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.
29
<PAGE>
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.
30
<PAGE>
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
31
<PAGE>
ANNEX B
[COPY OF THE CIBC OPPENHEIMER OPINION]
<PAGE>
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
<PAGE>
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 opinion is for the 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 so advised the Special Committee and the Board of
Directors.
<PAGE>
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,
<PAGE>
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 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. Any
stockholder of record 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(d) 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.
C-1
<PAGE>
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. THIS PROXY STATEMENT CONSTITUTES NOTICE TO HOLDERS OF COMPANY
COMMON STOCK THAT APPRAISAL RIGHTS ARE AVAILABLE TO THEM. 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.
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(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
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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
C-4
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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 in subsection (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.
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(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.
C-6
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ANNEX D
MANAGEMENT OF CABLE MICHIGAN,
THE COMPANY AND OTHER RELATED PARTIES
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 and
Mercom Acquisition, Inc., an affiliate of Cable Michigan, as of February 1, 1999
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.
Prior to November 6, 1998, the directors and officers of Cable Michigan
were David C. McCourt (Chairman of the Board, Chief Executive Officer and
Director), Mark Haverkate (President, Chief Operating Officer and Director),
Bruce C. Godfrey (Secretary and Director), Timothy J. Stoklosa (Executive Vice
President, Chief Financial Officer and Director), John J. Gdovin (Executive Vice
President) and R. Douglas Bradbury (Director), Frank M. Henry (Director), Daniel
E. Knowles (Director), David C. Mitchell (Director) and Raymond B. Ostroski
(Director). Each of Messrs. McCourt, Haverkate, Godfrey, Stoklosa, Gdovin,
Bradbury, Henry, Knowles, Mitchell and Ostroski resigned their positions as
directors and officers of Cable Michigan upon the consummation of the Buyer
Merger.
Prior to November 6, 1998, the directors and officers of the Company were
David C. McCourt (Chairman of the Board, Chief Executive Officer and Director),
Mark Haverkate (President, Chief Operating Officer and Director), Bruce C.
Godfrey (Secretary and Director), Timothy J. Stoklosa (Executive Vice President,
Chief Financial Officer and Director), John J. Gdovin (Executive Vice
President), Clifford L. Jones (Director), Harold J. Rose, Jr. (Director) and
George C. Stephenson (Director) and Michael J. Mahoney (Director), Raymond B.
Ostroski (Director), John J. Jones (Executive Vice President, General Counsel
and Corporate Secretary). Each of Messrs. McCort, Haverkate, Godfrey, Stoklosa,
Gdovin, Mahoney, Ostroski and Jones resigned their positions as directors and
officers of the Company upon the consummation of the Buyer Merger.
<TABLE>
<CAPTION>
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DIRECTORS OF AVALON CABLE OF MICHIGAN, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
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 and Assistant Secretary of Avalon, Cable
New York, New York 10022 Assistant 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.
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</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
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DIRECTORS OF AVALON CABLE OF MICHIGAN, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
Name Age Address Office Held Principal Occupations
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 of Avalon. Mr. Cohen co-founded Avalon in
1998 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.
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</TABLE>
D-2
<PAGE>
<TABLE>
<CAPTION>
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DIRECTORS OF AVALON CABLE OF MICHIGAN, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
Name Age Address Office Held Principal Occupations
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jay M. Grossman 39 18 Newbury Street Vice President and Jay M. Grossman is a Vice President and
Boston, Massachusetts Assistant Assistant Secretary of Cable Michigan,
02116 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.
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Peggy J. Koenig 41 18 Newbury Street Vice President and Peggy J. Koenig is a Vice President and
Boston, Massachusetts Assistant Assistant Secretary of Cable Michigan, Avalon
02116 Secretary, Director and Mercom. She is also Manager of Avalon and
since 1998 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.
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Royce Yudkoff 43 18 Newbury Street Director since Royce Yudkoff is a Manager of Avalon and
Boston, Massachusetts 1998 President and Managing Partner of ABRY. Prior
02116 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.
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</TABLE>
D-3
<PAGE>
<TABLE>
<CAPTION>
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EXECUTIVE OFFICERS OF AVALON CABLE OF MICHIGAN, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
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 Cable Michigan, Mercom, and Avalon.
New York, New York 10022 Mr. Polimino is a financial professional with
over 18 years of experience in cable,
broadcast and network television and radio.
Prior to joining 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.
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</TABLE>
D-4
<PAGE>
<TABLE>
<CAPTION>
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EXECUTIVE OFFICERS OF AVALON CABLE OF MICHIGAN, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
Name Age Address Office Held Principal Occupations
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mark Dineen 34 800 Third Avenue General Manager Mark Dineen is the General Manager of Avalon's
Suite 3100 of Michigan Michigan operations. He is Vice President of
New York, New York 10022 Operations 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 President and Michigan, Inc."
02116 Assistant Secretary
- ------------------------------------------------------------------------------------------------------------------------------------
Peggy J. Koenig 41 18 Newbury Street Director, Vice Please see "Directors of Avalon Cable of
Boston, Massachusetts President and Michigan, Inc."
02116 Assistant Secretary
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
D-5
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DIRECTORS OF MERCOM, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
Name Age Address Office Held Principal Occupations
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------------------
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 Assistant Secretary, Michigan, Inc."
02116 Director since 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Peggy J. Koenig 41 18 Newbury Street Vice President and Please see "Directors of Avalon Cable of
Boston, Massachusetts Assistant Secretary, Michigan, Inc."
02116 Director since 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Clifford L. Jones 70 548 Dogwood Drive Director since 1991 President, Capital Region Economic
Messiah Village Development Corporation from September 1992
Mechanicsburg, to February 1994. He also served as
Pennsylvania 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.
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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
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</TABLE>
D-6
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS OF MERCOM, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
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 "Executive Officers of Avalon
Suite 3100 Finance Cable of Michigan, Inc."
New York, New York 10022
- ------------------------------------------------------------------------------------------------------------------------------------
Peter Luscombe 41 800 Third Avenue Vice President, Please see "Executive Officers of Avalon
Suite 3100 Engineering Cable of Michigan, Inc."
New York, New York 10022
- ------------------------------------------------------------------------------------------------------------------------------------
Mark Dineen 34 800 Third Avenue General Manager Please see "Executive Officers of Avalon
Suite 3100 Michigan Cable of Michigan, Inc."
New York, New York 10022 Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Jay M. Grossman 39 18 Newbury Street Vice President and Please see "Directors of Avalon Cable of
Boston, Massachusetts Assistant Secretary Michigan, Inc."
02116
- ------------------------------------------------------------------------------------------------------------------------------------
David W. Unger 42 800 Third Avenue Chairman of the Please see "Directors of Avalon Cable of
Suite 3100 Board and Michigan, Inc."
New York, New York 10022 Assistant Secretary
since 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Peggy J. Koenig 41 18 Newbury Street Vice President and Please see "Directors of Avalon Cable of
Boston, Massachusetts Assistant Secretary Michigan, Inc."
02116
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
DIRECTORS OF MERCOM ACQUISITION, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
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>
D-7
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS OF MERCOM ACQUISITION, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
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 and
Director since
1998
- ------------------------------------------------------------------------------------------------------------------------------------
Peter Polimino 41 800 Third Avenue Vice President, Please see "Executive Officers of Avalon
Suite 3100 Finance Cable of Michigan, Inc."
New York, New York 10022
- ------------------------------------------------------------------------------------------------------------------------------------
Peter Luscombe 41 800 Third Avenue Vice President, Please see "Executive Officers of Avalon
Suite 3100 Engineering Cable of Michigan, Inc."
New York, New York 10022
- ------------------------------------------------------------------------------------------------------------------------------------
Mark Dineen 34 800 Third Avenue General Manager Please see "Executive Officers of Avalon
Suite 3100 Michigan Cable of Michigan, Inc."
New York, New York 10022 Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Jay M. Grossman 39 18 Newbury Street Vice President and Please see "Directors of Avalon Cable of
Boston, Massachusetts Assistant Secretary Michigan, Inc."
02116
- ------------------------------------------------------------------------------------------------------------------------------------
David W. Unger 42 800 Third Avenue Chairman of the Please see "Directors of Avalon Cable of
Suite 3100 Board and Michigan, Inc."
New York, New York 10022 Assistant Secretary
since 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Peggy J. Koenig 41 18 Newbury Street Vice President and Please see "Directors of Avalon Cable of
Boston, Massachusetts Assistant Secretary Michigan, Inc."
02116
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
D-8
