<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 4
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.
(NAME OF THE PERSONS FILING STATEMENT)
(SEE TABLE OF ADDITIONAL FILING PARTIES)
COMMON STOCK $1.00 PAR VALUE PER SHARE
(TITLE OF CLASS OF SECURITIES)
58935D109
(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:
<TABLE>
<CAPTION>
<S> <C> <C>
JILL SUGAR FACTOR, ESQ. WILLIAM L. TAYLOR, ESQ. CHARLES WEISSMAN, ESQ.
KIRKLAND & ELLIS DAVIS POLK & WARDWELL SWIDLER BERLIN SHEREFF FRIEDMAN LLP
200 EAST RANDOLPH DRIVE 450 LEXINGTON AVENUE 919 THIRD AVENUE
CHICAGO, ILLINOIS 60601 NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10022
TELEPHONE: (312) 861-2000 TELEPHONE: (212) 450-4000 TELEPHONE: (212) 891-9500
</TABLE>
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:
Transaction Valuation* Amount of Filing Fee**
-----------------------------------------------------------------
$21,873,720 $4,380
-----------------------------------------------------------------
* 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
<PAGE>
TABLE OF ADDITIONAL FILING PARTIES
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.
ROYCE YUDKOFF
JOEL C. COHEN
DAVID W. UNGER
MERCOM ACQUISITION, INC.
MERCOM, INC.
2
<PAGE>
INTRODUCTION
This final 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 merged with and into the Buyer (the "Merger") on March 26,
1999. 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 final
Schedule 13E-3 is being filed by Cable Michigan, Mercom, 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,
Avalon Cable Holdings, LLC ("Avalon LLC"), which owns all of the outstanding
shares of Avalon Holdings, ABRY Broadcast Partners III, L.P. ("ABRY III"), the
controlling member of Avalon LLC, ABRY Equity Investors, L.P., the general
partner of ABRY III ("AEI"), ABRY Holdings III, Inc., the general partner of AEI
("ABRY Inc."), Royce Yudkoff, the controlling shareholder of ABRY Inc.
("Yudkoff"), David W. Unger, Chairman of the Board of Directors of Cable
Michigan and Mercom ("Unger"), Joel C. Cohen, President, Chief Executive
Officer, Secretary and a Director of Cable Michigan and Mercom ("Cohen" and
together with Cable Michigan, MergerSub, Avalon Holdings, Avalon LLC, ABRY III,
AEI, ABRY Inc., Yudkoff and Unger, the "Avalon Filing Parties"). This final
Schedule 13-E3 amends and supplements the Schedule 13E-3 as filed previously
hereto.
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 cover page to the Proxy Statement and in
the sections entitled "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 the Company and the Avalon
Filing Parties. See "Buyer". The information set forth in the cover page to
the Proxy Statement and in the sections entitled "Summary --The Buyer," "--The
Company" and "--Avalon Holdings," "Buyer," "Avalon Holdings and Related Parties"
and Annex D to the Proxy Statement is incorporated herein by reference.
(e)-(f) None of the Company or any of the Avalon Filing Parties, or to the
best knowledge of the officers and directors of the Avalon Filing Parties and
the Company, any of the persons listed in Annex D to the Proxy Statement (except
as described in such Annex D) 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,
3
<PAGE>
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.
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; Conduct of
the Business of the Company if the Merger is not Consummated," 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; Conduct of the Business of the Company if the Merger is not
Consummated," "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" and "--Plans For the
Company After the Merger; Conduct of the Business of the Company if the Merger
is not Consummated" is incorporated herein by reference.
(d) The information set forth in the sections entitled "The Merger --Certain
Federal Income Tax Consequences" and "--Accounting Treatment" and "Certain
Provisions of the Merger Agreement --The Merger," "--Merger Consideration" and
"--The Surviving Corporation" 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" 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.
4
<PAGE>
(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," "--Background of the
Merger" and "--Reasons of the Company for the Merger; Fairness of the Merger" is
incorporated herein by reference.
(e) The information set forth in the cover page to the Proxy Statement and in
the sections entitled "Summary--Overview" 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 sections entitled "Special Factors--
Background of the Merger" and "--Opinion of Financial Advisor to the Special
Committee" 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 sections entitled "Available
Information" and "Special Factors--Opinion of Financial Advisor to the Special
Committee" 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," "The Merger--Merger Financing" and "Certain
Provisions of The Merger Agreement" 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 "Summary--The Special
Meeting," "--Security Ownership of Management," "The Merger --Interests of
Certain Persons in The Merger" and "The Special Meeting--Required Votes" is
incorporated herein by reference.
5
<PAGE>
(b) 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," " --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.
(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 "The Special Meeting--
Solicitation of Proxies" and "Certain Provisions of the Merger Agreement--Fees
and Expenses," is incorporated herein by reference.
ITEM 16. ADDITIONAL INFORMATION.
Additional Information is set forth in the 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.
6
<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: March 29, 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
7
<PAGE>
ABRY BROADCAST PARTNERS III, L.P.
By: ABRY Equity Investors, L.P.
Its: General Partner
By: ABRY Holdings III, Inc.
Its: General Partner
By: /s/ Royce Yudkoff
----------------------------
Name: Royce Yudkoff
Title: President
ABRY EQUITY INVESTORS, L.P.
By: ABRY Holdings III, Inc.
Its: General Partner
By: /s/ Royce Yudkoff
----------------------------
Name: Royce Yudkoff
Title: President
ABRY HOLDINGS III, INC.
By: /s/ Royce Yudkoff
----------------------------
Name: Royce Yudkoff
Title: President
/s/ Royce Yudkoff
----------------------------
ROYCE YUDKOFF
/s/ Joel C. Cohen
----------------------------
JOEL C. COHEN
/s/ David W. Unger
----------------------------
DAVID W. UNGER
8
<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 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 Proxy Statement filed as Exhibit 17(d)(1) hereto).
17(d)(1) Proxy Statement (filed herewith).
17(e) Section 262 of the Delaware General Corporation Law (incorporated
herein by reference to Annex C to the Proxy Statement filed as
Exhibit 17(d)(1) hereto).
17(f) Not applicable.
9
<PAGE>
EXHIBIT 17(b)(2)
CONFIDENTIAL
- --------------------------------------------------------------------------------
Presentation to the Board of Directors
of
Mercom, Inc.
CIBC Oppenheimer
September 10, 1998
- --------------------------------------------------------------------------------
<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 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.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
MERCOM, INC.
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
CIBC Oppenheimer
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 1
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 2
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
PROFILE OF MERCOM, INC.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
CIBC Oppenheimer
Page 3
<PAGE>
CONFIDENTIAL
- --------------------------------------------------------------------------------
PROFILE OF MERCOM, INC.
- --------------------------------------------------------------------------------
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]
- --------------------------------------------------------------------------------
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]
- --------------------------------------------------------------------------------
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>
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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>
March 4, 1999
Dear Shareholder,
You are cordially invited to attend a Special Meeting of shareholders of
Mercom, Inc. ("Mercom") to be held on March 26, 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
March 26, 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 March 26, 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 February 24, 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
March 4, 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
March 26, 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 March 26, 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"). Subsequent to the consummation
of the Merger, the stockholders of Mercom other than the Buyer and its
subsidiaries (the "Public Shareholders") will no longer have an interest in
Mercom. 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 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
<PAGE>
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. In addition, as described further herein, Buyer, MergerSub, Avalon
Cable of Michigan Holdings, Inc., a Delaware corporation which owns all of the
outstanding shares of Buyer ("Avalon Holdings"), Avalon Cable Holdings, LLC, a
Delaware limited liability company which owns all of the outstanding shares of
Avalon Holdings ("Avalon LLC"), ABRY Broadcast Partners III, L.P., a Delaware
limited partnership which is the controlling member of Avalon LLC ("ABRY III"),
ABRY Equity Investors, L.P., a Delaware limited partnership which is the
general partner of ABRY III ("AEI"), ABRY Holdings III, Inc., a Delaware
corporation which is the general partner of AEI ("ABRY Inc."), Royce Yudkoff,
an individual resident of the Commonwealth of Massachusetts who is the
controlling shareholder of ABRY Inc. ("Yudkoff"), David W. Unger, an individual
resident of the State of New York and the Chairman and a Director of the
Company ("Unger"), and Joel C. Cohen, an individual resident of the State of
New York and the President, Chief Executive Officer, Secretary and a Director
of the Company ("Cohen" and together with Buyer, MergerSub, Avalon Holdings,
Avalon LLC, ABRY III, AEI, ABRY Inc., Yudkoff and Unger, the "Avalon Filing
Parties") also believe that the Merger is fair to the Public Shareholders.
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 March 4, 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 March 4, 1999.
2
<PAGE>
AVAILABLE INFORMATION
The Company and the Avalon Filing Parties 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
3
<PAGE>
and capital expenditure plans; and other factors referenced herein. In
addition, such forward-looking statements are necessarily dependent upon
assumptions, estimates and dates that may be incorrect or imprecise and involve
known and unknown risks, uncertainties and other factors. Accordingly, any
forward-looking statements included herein do not purport to be predictions of
future events or circumstances and may not be realized. Given these
uncertainties, shareholders are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
4
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TABLE OF CONTENTS
<TABLE>
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INTRODUCTION.............................................................. 1
AVAILABLE INFORMATION..................................................... 3
FORWARD-LOOKING STATEMENTS................................................ 3
SUMMARY................................................................... 7
Overview................................................................ 7
The Company............................................................. 7
The Buyer............................................................... 8
Avalon Holdings......................................................... 8
The Special Meeting..................................................... 9
The Merger.............................................................. 10
Summary Selected Historical Consolidated Financial Data................. 12
SPECIAL FACTORS........................................................... 13
Purpose and Structure of the Merger..................................... 13
Certain Effects of the Transaction...................................... 14
Background of the Merger................................................ 15
Recommendations of the Special Committee and the Board of Directors..... 23
Reasons of the Company for the Merger; Fairness of the Merger........... 23
Opinion of Financial Advisor to the Special Committee................... 26
Certain Transactions.................................................... 33
Plans for the Company after the Merger; Conduct of the Business of the
Company If the Merger Is Not Consummated............................... 34
PRICE OF THE COMPANY COMMON STOCK......................................... 36
THE COMPANY............................................................... 37
Company Strategy........................................................ 38
Technology.............................................................. 38
Buyer Management Agreement.............................................. 38
Service Offerings....................................................... 38
Programming and Suppliers............................................... 39
Advertising Revenues.................................................... 39
Customer Service and Billing............................................ 40
Franchises.............................................................. 40
Competition............................................................. 40
Regulation.............................................................. 42
Employees............................................................... 49
Property................................................................ 49
Legal Proceedings....................................................... 49
THE SPECIAL MEETING....................................................... 50
Matters to Be Considered................................................ 50
Required Votes.......................................................... 50
Voting and Revocation of Proxies........................................ 50
Record Date; Stock Entitled to Vote; Quorum............................. 51
Appraisal Rights........................................................ 51
Solicitation of Proxies................................................. 51
</TABLE>
5
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THE MERGER................................................................ 52
Overview................................................................ 52
Certain Federal Income Tax Consequences................................. 52
Accounting Treatment.................................................... 53
Interests of Certain Persons in the Merger.............................. 53
Merger Financing........................................................ 53
CERTAIN PROVISIONS OF THE MERGER AGREEMENT................................ 56
The Merger.............................................................. 56
Merger Consideration.................................................... 56
Surrender and Payment................................................... 56
The Surviving Corporation............................................... 57
Representations and Warranties.......................................... 57
Certain Pre-Closing Covenants........................................... 58
Indemnification and Insurance........................................... 58
Best Efforts; Certain Filings........................................... 59
Conditions to the Consummation of the Merger............................ 59
Termination............................................................. 60
Amendment and Waiver.................................................... 61
Fees and Expenses....................................................... 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 62
Nine Months Ended September 30, 1998 Compared With Nine Months Ended
September 30, 1997..................................................... 62
Year Ended December 31, 1997 Compared With Year Ended December 31,
1996................................................................... 63
Year Ended December 31, 1996 Compared With Year Ended December 31,
1995................................................................... 64
Liquidity and Capital Resources......................................... 64
Regulatory Issues....................................................... 65
Competition............................................................. 66
Year 2000 Information and Readiness Discussion.......................... 66
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 66
Security Ownership in the Company by Company Management................. 66
Security Ownership in the Company by Certain Beneficial Owners.......... 67
Security Ownership in the Company by Cable Michigan Management.......... 67
REGULATORY CONSIDERATIONS................................................. 69
Antitrust............................................................... 69
Franchises.............................................................. 69
BUYER..................................................................... 69
AVALON HOLDINGS AND RELATED PARTIES....................................... 69
DISSENTING SHAREHOLDERS' RIGHTS........................................... 70
INDEPENDENT ACCOUNTANTS................................................... 72
</TABLE>
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<C> <S> <C> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY..................F-1-F-19..
Annex A Merger Agreement........................................... A-1
Annex B Opinion of CIBC Oppenheimer Corp........................... B-1
Rights of Dissenting Stockholders Under Delaware General
Annex C Corporation Law............................................ C-1
Annex D Management of Cable Michigan, the Company and MergerSub.... D-1
</TABLE>
6
<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.,
7
<PAGE>
a Michigan corporation ("CCV"). As of December 31, 1998, the Systems served
approximately 41,069 subscribers. Mercom is 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. As indicated by the structure chart below, Avalon
Holdings is a wholly-owned subsidiary of Avalon LLC. 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."
Avalon Cable
Holdings LLC
100%
Avalon Cable of Michigan
Holdings, Inc.
100%
Avalon Cable of
Michigan, Inc., Formerly
Cable Michigan, Inc.
62%
Mercom, Inc.
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."
8
<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 March 26, 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
February 24, 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."
9
<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 and
(ii) the fairness opinion delivered by CIBC Oppenheimer with respect to the
Merger has not been withdrawn or modified in any materially adverse respect.
See "Certain Provisions of the Merger Agreement--Conditions to the Consummation
of the Merger."
Termination of the Merger Agreement
Either Buyer or the Company may terminate the Merger Agreement under 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."
10
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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 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, a Delaware limited liability company ("Avalon Michigan LLC").
Certain Federal Income Tax Consequences
For a summary of the material U.S. federal income tax consequences of the
Merger, see "The Merger--Certain Federal Income Tax Consequences."
EACH SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING
THE FEDERAL INCOME, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE
MERGER.
11
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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>
12
<PAGE>
SPECIAL FACTORS
Purpose and Structure of the Merger
Reasons 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 of the
Company with that of Cable Michigan and to have full access to the cash flow of
the Company; (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 most of the reasons for the Mercom transaction described
above. Specifically, a stock-for-stock transaction would have resulted in a
continuing public minority interest in Cable Michigan after the Buyer Merger.
This would have shifted the detriments of being a public company with a
minority interest from Mercom to Cable Michigan and would have eliminated the
benefits
13
<PAGE>
described in items (b), (d), (e) and (f) of the preceding paragraph. In
addition, since there would have been no public market for the stock of Cable
Michigan after the Buyer Merger, the Public Shareholders would not have had
meaningful liquidity for the stock they would have received. Except as set
forth above, Cable Michigan did not explore other options.
The additional Avalon Filing Parties principal reason for the Merger is that
Cable Michigan required that any person acquiring Cable Michigan provide an
opportunity for liquidity to the Public Shareholders as set forth above and the
Avalon Filing Parties believed it was desirable for Avalon Holdings to acquire
Cable Michigan.
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 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 the other Avalon
Filing Parties believe that the consideration to be received by the Public
Shareholders pursuant to the Merger is fair to the Public Shareholders. The
Avalon Filing Parties base their belief as to the fairness of the Merger on the
factors relied upon by Cable Michigan.
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.
14
<PAGE>
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.
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. This proposal was not made in terms of the
consideration to be offered per share of Company Common Stock. Rather, the
proposal was that the minority shareholders of Mercom would have received in
the aggregate 8.75% of the common stock of Cable Michigan when issued. At that
time, Cable Michigan was a wholly owned subsidiary of C-TEC. No decision had
been made as to how many shares of common stock of Cable Michigan would be
issued in the spin-off and no market then existed for the common stock of Cable
Michigan. Consequently, it is not possible to indicate the per share amount
each Mercom shareholder would have received had that proposed transaction been
consummated.
15
<PAGE>
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
from C-TEC. 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 (the "Other 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 the Other Group, for discussion purposes. The
draft Buyer Merger Agreement provided for the acquisition of Cable Michigan and
included a provision allowing Cable Michigan to acquire for cash the publicly
held minority interest in the Company. It left in blank the price at which
Cable Michigan would be permitted to acquire the minority interest in Mercom.
Prior to sending the Buyer Merger Agreement to Avalon/ABRY and the Other Group,
Cable Michigan consulted with Merrill Lynch whether it should include a
provision regarding the purchase of the minority interest in Mercom. Merrill
Lynch's view was that a transaction involving the minority interest in Mercom
should be structured as a
16
<PAGE>
purchase of the entire minority interest for a number of the reasons set out
above under "--Purpose and Structure for the Merger; Reasons for the Merger."
Most significantly, the acquisition of the entire minority interest would allow
the acquiror to have access to all of Mercom's cash flow.
The discussion that Cable Michigan held with the Other Group did not
progress beyond preliminary discussions and the distribution of the first draft
of the Buyer Merger Agreement. The Other Group never discussed the provision
regarding the acquisition of the minority interest in Mercom and never
discussed or proposed a price at which Cable Michigan would be permitted to so
acquire the minority interest in the Company.
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.
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. Cable Michigan proposed a Mercom
Price of $12.00 because it believed that an increase of 20% from the $10.00
price proposed by Avalon/ABRY was the most Cable Michigan could reasonably
request given Avalon/ABRY's stated preference that Cable Michigan not acquire
the Mercom minority interest.
In response to Cable Michigan's June 1, 1998 proposal, 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.
17
<PAGE>
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 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:
18
<PAGE>
CABLE MICHIGAN, INC.
105 Carnegie Center
Princeton, NJ 08540
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
19
<PAGE>
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.
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.
20
<PAGE>
CABLE MICHIGAN, INC.
105 Carnegie Center
Princeton, NJ 08540
August 11, 1998
Board of Directors
Mercom, Inc.
105 Carnegie Center
Princeton, NJ 08540
Gentlemen:
I am pleased to inform you that Cable Michigan, Inc. ("Cable Michigan") is
increasing to $12.00 per share the price of its proposal for the acquisition of
the 38% interest in Mercom, inc. ("Mercom") that it does not already own. The
increased price has been authorized under the Agreement and Plan of Merger
between Cable Michigan, Avalon Cable of Michigan Holdings Inc. ("Avalon") and
Avalon Cable of Michigan Inc. Avalon has informed Cable Michigan that the
$12.00 price is the highest price that it will authorize.
As previously noted, our proposal is subject to the execution and delivery
of mutually satisfactory definitive documentation, receipt of all required
regulatory approvals and other customary conditions. For reasons you can
appreciate, we plan to issue a press release informing the public of our
increased proposal by 9:00 A.M. New York City time, tomorrow.
Very truly yours,
/s/ Mark Haverkate
-------------------------------------
Mark Haverkate
President and Chief Operating
Officer
21
<PAGE>
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.
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.
22
<PAGE>
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.
On February 25, 1999, each of the Special Committee and the Board approved
and adopted an Amendment to the Merger Agreement (the "Amendment"). On February
25, 1999, the Company, Cable Michigan and MergerSub entered into the Amendment.
The Amendment changed the form of the Merger such that the Company will be
merged directly into Buyer rather than a merger of MergerSub with and into the
Company. The Amendment was proposed by Cable Michigan to facilitate the
internal reorganization contemplated for immediately following the Merger as
described below under "Plans for the Company after the Merger; Conduct of the
Business of the Company if the Merger is not Consummated." The Company agreed
to the Amendment because it did not adversely affect the Company or the Public
Shareholders and because it was consistent with other provisions of the Merger
Agreement which gave Cable Michigan the flexibility to change the form of the
Merger.
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.
Since the addition of the Avalon Representatives to the Board, the Board has
not revoked or modified its September 10, 1998 determination that the Merger,
the Merger Agreement and the transactions contemplated thereby are fair to and
in the best interests of the Public Shareholders.
None of the Avalon Representatives or the Avalon Filing Parties are making a
recommendation to shareholders as to the approval or adoption of the Merger,
the Merger Agreement and the transactions contemplated thereby.
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
23
<PAGE>
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 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, including the financial projections supplied to CIBC and the
inherent uncertainties and contingencies associated with such financial
projections, 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 effect on the Company and the
Public Shareholders of conditioning the Merger on the consummation of the
Buyer Merger and determined that such condition was appropriate.
(vi) The Special Committee also considered the 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."
24
<PAGE>
(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.
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
25
<PAGE>
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 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.
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.
26
<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."
27
<PAGE>
Mercom, Inc. (1)
Forecasted Information (in thousands)
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003
------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Revenue.................. $17,185 $ 18,178 $19,487 $20,890 $22,392 $24,006
EBITDA(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 CIBC Oppenheimer Opinion does not address the tax
consequences of the Merger to any holders of shares of Company Common Stock.
28
<PAGE>
The following is a summary of the material financial analyses performed by
CIBC Oppenheimer in connection with the CIBC Oppenheimer Opinion and the
related presentation to the Special Committee and the Board on September 10,
1998 (subsequently confirmed in writing). A copy of the CIBC Oppenheimer
Opinion is attached hereto as Annex B.
Comparable Publicly Traded Company Analysis. CIBC Oppenheimer compared
certain historical and estimated earnings, operating and financial data, and
ratios and multiples of income statement and operating cash flow parameters of
the Company to certain other publicly traded cable companies that CIBC
Oppenheimer deemed to have operations similar to those of the Company. The
publicly traded companies selected by CIBC Oppenheimer for the purpose of this
analysis were: Adelphia Communications Corporation, Cable Michigan, Inc.,
Cablevision Systems Corp., Century Communications Corp., Comcast Corporation,
Cox Communications, Inc., Jones Intercable, Inc., MediaOne Group, Inc., TCA
Cable TV, Inc., and TCI Group, Inc. (collectively, the "Comparable Companies").
Although CIBC Oppenheimer used the Comparable Companies for comparative
purposes, none of the Comparable Companies are truly comparable to the Company
due to the Company's significantly smaller size. CIBC Oppenheimer reviewed the
enterprise value (defined as the sum of the face value of a company's debt plus
the market value of its equity securities ("market capitalization") less cash
and cash equivalents) for the Comparable Companies as a multiple of their run
rate (i.e. last quarter annualized) ("RR") and their latest twelve-months
("LTM") revenues, earnings before interest, taxes, depreciation and
amortization ("EBITDA") and per subscriber values.
Such analyses indicated that enterprise value as a multiple of RR revenues
ranged from 1.8x to 6.4x, with a median of 5.3x, compared to 3.8x implied for
the enterprise value of the Company based upon a $12.00 per share price for the
Company Common Stock (the "Mercom Enterprise Value"), enterprise value as a
multiple of RR EBITDA ranged from 6.8x to 15.6x, with a median of 12.0x,
compared to 9.9x for the Mercom Enterprise Value and enterprise value per
subscriber ranged from $1,347 to $3,140 with a median of $2,279, compared to
$1,673 for the Mercom Enterprise Value. Also, such analysis indicated
enterprise value as a multiple of LTM revenues ranged from 3.1x to 6.4x, with a
median of 5.7x, compared to 4.0x for the Mercom Enterprise Value and enterprise
value as a multiple of LTM EBITDA ranged from 7.9x to 15.5x, with a median of
12.7x, compared to 10.8x for the Mercom Enterprise Value.
CIBC Oppenheimer applied a discount in the range of 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
29
<PAGE>
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 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. 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
30
<PAGE>
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 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.
CIBC Oppenheimer concluded that the appropriate multiple was 9.6x for EBITDA
and $1,748 per subscriber assuming the midpoint discount of 20%. This analysis
implied an equity value range of $11.59 to $12.62 per share of Common Stock.
CIBC Oppenheimer noted that the price per share for the Company contemplated by
the Merger was within the range of values give the appropriate discounts. CIBC
Oppenheimer drew no specific conclusion from this analysis but subjectively
factored its observations from this analysis into its qualitative assessment of
the relevant facts and circumstances.
Premiums Paid for Comparable Minority Interest Transactions Analysis. CIBC
Oppenheimer reviewed the premiums paid in transactions completed since January
1994 in which owners of a majority interest acquired the remaining publicly
owned shares to achieve complete ownership. 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
31
<PAGE>
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 does 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 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.
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<PAGE>
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 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,
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<PAGE>
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
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; Conduct of the Business of the Company
if the Merger is not Consummated
Whether or not the Merger is consummated, Cable Michigan generally intends
to continue the Company's current operating 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 certain 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.
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
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<PAGE>
Michigan and Mercom and to facilitate its financing arrangements, after the
Merger, Cable Michigan intends to transfer substantially all of its assets and
liabilities, including those of the Company, to one of its affiliates, Avalon
Michigan LLC. Similarly, Cable Michigan and the Company expect to cause the
liquidation of the Company's subsidiaries into the Company immediately prior to
the consummation of the Merger. Thus, the assets and liabilities of such
subsidiaries will also be transferred to Avalon Michigan LLC. If the Merger is
not completed, the Company Common Stock held by Cable Michigan will be
contributed to Avalon Michigan LLC and the Company will become a subsidiary of
Avalon Michigan LLC.
Other than as discussed above, Cable Michigan has no current plans or
proposals relating to any extraordinary corporate transactions, such as a
merger, reorganization or liquidation involving Mercom or any of its
subsidiaries, any sale or transfer or a material amount of the assets of Mercom
or any of its subsidiaries or any other material change in Mercom's corporate
structure or business. Cable Michigan, however, will continue to be open to
reviewing and exploring any opportunities to maximize shareholder value and
will evaluate any transactions involving its business as they arise. Buyer has
no plans (other than pursuant to the Merger Agreement) to acquire the shares of
Company Common Stock held by the Public Shareholders. 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. If
the Merger is not completed, the Company Credit Agreement and the Management
Agreement will continue in accordance with their terms.
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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
High Low Trading 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)................................ 11 3/4 11 1/2 694
</TABLE>
- --------
(1) Through March 1, 1999
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 March 1, 1999, the closing price of the Company Common Stock as reported
was $11.50 per share.
On February 24, 1999, there were approximately 1,525 record 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.
36
<PAGE>
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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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.
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The first level of service is referred to as Limited Basic Service. It
consists primarily of off-air broadcast networks, access channels and the home
shopping networks. Expanded Basic Service includes Limited Basic Service plus
certain channels regulated by the Federal Communications Commission ("FCC") as
"Cable Programming Service" or "CPS" tier channels. These include ESPN, USA
Network, MTV, Lifetime and other traditional cable channels.
The Family Value Package was created through the conversion of some of its
traditional cable channels such as CNN and Discovery and the launch of new
channels such as ESPN 2 and fX to form a new level.
Like many cable operators in the United States, over the last four years the
Company has modified its existing programming services, equipment and rates in
an effort to comply with changing FCC regulations.
Monthly service rates include fees for Limited Basic Service, Expanded Basic
Service, the Family Value Package, and premium services 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.
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<PAGE>
Customer Service and Billing
The Company places a great deal of importance on customer service. Mercom
administers its own customer service function, primarily out of its office in
Monroe.
Franchises
The Company's cable television systems are constructed and operated under
fixed-term franchises or other types of operating authorities (referred to
collectively herein as "franchises") that are generally non-exclusive and are
granted by local governmental authorities. These franchises typically contain
many conditions, such as time limitations on commencement and completion of
construction, conditions of service, including the number of channels, the
provision of free service to schools and certain other public institutions, and
the maintenance of insurance and indemnity bonds. The provisions of these local
franchises are subject to federal regulation.
The Company holds approximately 78 franchises. These franchises provide for
the payment of fees to the issuing authorities and generally range from 3% to
5% of revenues. The Communications Policy Act of 1984 (the "1984 Act")
prohibits franchising authorities from imposing annual franchise fees in excess
of 5% of gross revenues and also permits the cable television system operator
to seek renegotiation and modification of franchise requirements if warranted
by changed circumstances.
The durations of the Company's outstanding franchises expire at various
points in time through the year 2015. The Company's ability to provide cable
television service is dependent to a large extent on its ability to obtain and
renew its franchises on acceptable terms. To date, all of the Company's cable
franchises have been renewed or extended, generally at or prior to their stated
expirations and on acceptable terms. During 1997 and the first nine months of
1998, the Company completed negotiations with three and ten communities,
respectively, resulting in franchise renewals on terms which are acceptable to
it. Some of the issues involved in recent renewal negotiations include customer
service standards, access facilities and equipment, cable plant upgrade or
replacement and shorter terms of franchise agreements. 17 of the Company's
franchises are due for renewal within the next three years. No one franchise
accounts for more than 12% of the Company's total revenue.
Competition
Cable television systems face competition from alternative methods of
receiving and distributing single and/or multiple channels of video
programming, including direct-to-the-home satellite programming and off-air
television broadcast signals, and from other sources of news, information and
entertainment such as newspapers, movie theaters, live sporting events,
interactive online computer services and home video products, including
videotape cassette recorders. There is also the potential for competition with
the Company's systems from other operators of cable television systems,
including systems operated by local governmental authorities. Other
distribution systems capable of delivering programing to homes and businesses
include direct broadcast satellite ("DBS") systems, private satellite master
antenna television ("SMATV") systems and wireless terrestrial program
distribution services such as multipoint, multichannel distribution service
("MMDS"). In recent years, there has been significant national growth in the
number of subscribers to DBS services. Additionally (i) Congress and the FCC
have recently proposed regulations that could make it easier for DBS providers
to legally deliver certain distant and local broadcast signals and (ii) recent
changes in federal law and recent administrative and judicial decisions have
removed certain of the restrictions that have limited entry into the cable
television business by potential competitors such as telephone companies,
registered utility holding companies and their subsidiaries. Such developments
will permit local telephone companies to provide a wide variety of video
services in the telephone company's service area which would be directly
competitive with services provided by cable television systems. The extent to
which a cable television system is competitive depends, in part, upon the cable
system's ability to provide, at a reasonable price to consumers, a greater
variety of programming and other services than are available off-air or through
other alternative delivery sources and upon superior technical performance and
customer service. Many of the Company's present and
40
<PAGE>
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 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
41
<PAGE>
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
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.
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<PAGE>
The 1992 Act authorized rate regulation for cable television services and
equipment in communities that are not subject to "effective competition," as
defined by federal law. Except for certain small systems, basic cable service
and equipment are subject to regulation by local franchising authorities that
choose to become certified by the FCC to regulate rates. Such local regulation
occurs with oversight by the FCC, which has prescribed detailed criteria for
the regulation of basic services. The 1992 Act also requires the FCC to resolve
certain complaints about rates for cable programming services tiers ("CPST")
(other than programming offered on a per channel or per program basis, which is
not subject to rate regulation) and to reduce any such rates found to be
unreasonable.
The 1996 Act deregulates rates for CPSTs in March 1999 and immediately for
certain small systems. The 1996 Act also modifies the uniform rate provisions
of the 1992 Act by prohibiting regulation of non-predatory, bulk discount rates
offered to subscribers in commercial residential developments and permits
regulated equipment rates to be computed by aggregating costs of broad
categories of equipment at the franchise, system, regional or company level.
The 1996 Act eliminates the right of individual subscribers to file rate
complaints with the FCC concerning CPSTs and permits franchising authorities to
file CPST rate complaints with the FCC only after having received multiple
subscriber complaints within prescribed time frames. The FCC is required to
issue a final order within 90 days after receipt of a CPST rate complaint 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.
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"Anti-Buy Through" Provisions
The 1992 Act requires cable systems to permit subscribers to purchase video
programming offered by the operator on a per channel or a per program basis
without the necessity of subscribing to any tier of service, other than the
basic cable service tier, unless technological limitations prevent the system
from doing so. There is a statutory exemption for cable systems that do not
have the technological capability to offer programming in the manner required
by the statute. This exemption is available until a system obtains such
capability, but not later than December 2002. The FCC may waive such time
periods. The Company expects that its systems will be in compliance with this
requirement by the December 2002 deadline.
Must Carry/Retransmission Consent
The 1992 Act contains broadcast signal carriage requirements that allow
local commercial television broadcast stations to elect once every three years
to require a cable system to carry the station ("must-carry"), subject to
certain exceptions, or to withhold consent and negotiate the terms of carriage
("retransmission consent"). A cable system generally is required to devote up
to one-third of its activated channel capacity for the carriage of local
commercial television stations whether pursuant to the mandatory carriage or
retransmission consent requirements of the 1992 Act. Local non-commercial
television stations are also given mandatory carriage rights; however, such
stations are not given the option to negotiate retransmission consent for the
carriage of their signals by cable systems. Additionally, cable systems are
required to obtain retransmission consent for all "distant" commercial
television stations (except for certain commercial satellite-delivered
independent "superstations"), commercial radio stations and low-power
television stations carried by such systems. In March 1997, the U.S. Supreme
Court affirmed a three-judge district court decision upholding the
constitutional validity of the 1992 Act's mandatory signal carriage
requirements.
The FCC recently issued rules establishing standards for DTV. Among other
provisions, the FCC's rules require television stations to simulcast their NTSC
and DTV signals for a period of years. The FCC is currently considering in a
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.
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The 1984 Act affirms the right of franchising authorities (state or local,
depending on the practice in individual states) to award one or more franchises
within their jurisdictions and prohibits non-grandfathered cable systems from
operating without a franchise in such jurisdictions. The 1992 Act encourages
competition with existing cable systems by (i) allowing municipalities to
operate their own cable systems without franchises; (ii) preventing franchising
authorities from granting exclusive franchises or from unreasonably refusing to
award additional franchises covering an existing cable system's service area;
and (iii) prohibiting (with limited exceptions) the common ownership of cable
systems and co-located MMDS or SMATV systems. In January 1995, the FCC relaxed
its restrictions on ownership of SMATV systems to permit a cable operator to
acquire SMATV systems in the operator's existing franchise area so long as the
programming services provided through the SMATV system are offered according to
the terms and conditions of the cable operator's local franchise agreement. The
1996 Act provides that the cable/SMATV and cable/MMDS cross-ownership rules do
not apply in any franchise area where the operator faces "effective
competition" as defined by federal law.
The Communications Act also provides that in granting or renewing
franchises, local authorities may establish requirements for cable-related
facilities and equipment, but not for video programming or information services
other than in broad categories. In September 1998, the Policy and Rules
Division of the FCC's Cable Services Bureau issued a discussion paper analyzing
the regulatory classification of Internet and other information services. The
FCC identified three likely classifications: (1) as cable services; (2) as
telecommunications services; and (3) as information services that are currently
unregulated. The ultimate classification could have significant impact on any
regulation of these services, the ability of third parties to use the cable
plant and the authority to provide these services under existing franchises.
Until the FCC formally decides these classification issues, it is not possible
to gauge the impact, if any, such classifications would have on the Company or
the Company's business. The Communications Act limits the payment of franchise
fees to 5% of revenues derived from cable operations and permits the cable
operator to obtain modification of franchise requirements by the franchise
authority or judicial action if warranted by changed circumstances. The
Company's franchises typically provide for periodic payment of fees to
franchising authorities of up to 5% of "revenues" (as defined by each franchise
agreement), which fees may be passed on to subscribers. The 1996 Act generally
prohibits franchising authorities from (i) imposing requirements in the cable
franchising process that require, prohibit or restrict the provision of
telecommunications services by an operator, (ii) imposing franchise fees on
revenues derived by the operator from providing telecommunications services
over its cable system, or (iii) restricting an operator's use of any type of
subscriber equipment or transmission technology.
The 1984 Act provides for a franchise renewal process which, if properly
invoked, contains procedural and substantive provisions designed to protect
cable operators from unreasonable denials of franchise renewals. No assurance
can be given that the Company will be able to retain or renew franchises or
that the terms of any such renewals will be on terms as favorable to the
Company as the existing terms. The non-renewal or termination of franchises
relating to a significant portion of the Company's subscribers could have a
material adverse effect on the Company's results of operations. Historically,
franchises have been renewed for cable operators that have provided
satisfactory services and have complied with the terms of their franchises. The
Company believes that it has generally met the terms of its franchises and has
provided quality levels of service. As such, the Company anticipates that its
future franchise renewal prospects generally will be favorable.
Similarly, if a franchising authority's consent is required for the purchase
or sale of a cable system or franchise 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.
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Inside Wiring Instructions
The 1992 Cable Act directed the FCC to prescribe regulations governing the
disposition of inside wiring after a customer terminates service. In a series
of rulemakings and orders, with the most recent order issued in October 1997,
the FCC developed regulations that limit a cable operator's right to control
its inside wiring after a subscriber terminates service or after a multiple
dwelling unit ("MDU") owner terminates the cable operator's rights to access
the MDU.
After a subscriber terminates service or an MDU owner terminates access
rights, the regulations generally require the cable operator to offer its
inside wiring for sale to the subscriber or to the MDU owner at replacement
cost or a negotiated price. If the cable operator does not sell the inside
wiring within a specified period after termination of service or access rights,
then the cable operator must remove the wiring. If the cable operator neither
sells nor removes its wiring, the wiring is deemed abandoned. A competing
provider can then use the inside wiring to provide service to the individual
subscriber or to the MDU. For the Company and the cable industry generally,
these regulations increase the risk for cable operators that a competing
provider can gain access to existing inside wiring after termination of service
by a subscriber or termination of access rights by a MDU owner.
The FCC has also issued a Further Notice of Proposed Rulemaking on other
inside wiring issues including possible restrictions on exclusive MDU contracts
and the applicability of the inside wiring rules to all video providers, not
just cable operators. The Company cannot predict the ultimate outcome of this
rulemaking or its impact on the Company or the Company's business.
Ownership Limitations
Pursuant to the 1992 Act, the FCC adopted rules prescribing national
subscriber limits and limits on the number of channels that can be occupied on
a cable system by a video programmer in which the operator has an attributable
interest. The effectiveness of these FCC horizontal ownership limits has been
stayed because a federal district court found the statutory limitation to be
unconstitutional. An appeal of that decision has been consolidated with appeals
challenging the FCC's regulatory ownership restrictions and is pending. On June
26, 1998 the FCC released an Order on Reconsideration (the "Order") of its
horizontal ownership rules, although it did not lift its stay of those rules.
In that Order the FCC denied petitions requesting that it lower its horizontal
ownership limits. The 1996 Act eliminated the statutory prohibition on the
common ownership, operation or control of a cable system and a television
broadcast station in the same service area and directed the FCC to review its
broadcast/cable ownership restrictions to determine if they are necessary in
the public interest. Pursuant to the mandate of the 1996 Act, the FCC
eliminated its regulatory restriction on cross-ownership of cable systems and
national broadcasting networks. In addition, pursuant to the 1996 Act, the FCC
recently released a Notice of Inquiry seeking comment on all of the broadcast
ownership rules not already under review in other proceedings. This review
includes a television/cable television cross ownership rule. In a recently
released Notice of Proposed Rulemaking, the FCC is requesting comment on
whether to change the definition of ownership that constitutes a cognizable
interest in a cable system. The result of this proceeding could affect all
ownership prohibitions.
Competition with LECs
The 1996 Act made far-reaching changes in the regulation of LECs that
provide cable services. The 1996 Act eliminates the requirement that LECs
obtain FCC approval under Section 214 of the Communications Act before
providing video services in their telephone service areas and removes the
statutory telephone company/cable television cross-ownership prohibition,
thereby allowing LECs to offer video services in their telephone service areas.
LECs may provide service as traditional, franchised cable operators or they may
opt to provide their programming over unfranchised "open video systems,"
subject to certain conditions, including, but not limited to, making available
up to two-thirds of their channel capacity for use by unaffiliated program
distributors. The 1996 Act prohibits a LEC from acquiring an existing cable
system in its telephone service area except in limited circumstances. The 1996
Act removes barriers to entry into the local telephone exchange market by
preempting state and local laws that restrict competition and by requiring all
LECs to provide
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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 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
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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 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.
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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.
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.
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Any Proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the Shares represented by such Proxy are voted at
the Special Meeting by (i) by attending and voting in person at the Special
Meeting, (ii) by giving notice of revocation of the Proxy at the Special
Meeting, or (iii) delivering to the Secretary of the Company (a) a written
notice of revocation or (b) a duly executed Proxy relating to the same Shares
and matters to be considered at the Special Meeting, bearing a date later than
the Proxy previously executed. Attendance at the Special Meeting will not in
and of itself constitute a revocation of a Proxy. All written notices of
revocation and other communications with respect to revocation of proxies
should be addressed as follows: Mercom, Inc., 800 Third Avenue, Suite 3100, New
York, 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
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Avalon (Avalon Cable of New England LLC, a Delaware limited liability company,
and Avalon Cable Finance, Inc., a Delaware corporation) (collectively, the
"Borrowers"). The Avalon Credit Facility was provided to the Borrowers by the
Avalon Senior Lenders for which LCPI acts as administrative agent (the
"Administrative Agent"). The Avalon Credit Facility provides for (i) term loan
borrowings (the "Tranche A Term Loan") under the Tranche A term loan facility
(the "Tranche A Term Loan Facility"), (ii) term loan borrowings (the "Tranche B
Term Loan") under the Tranche B term loan facility (the "Tranche B Loan
Facility" and together with the Tranche A Term Loan Facility, the "Senior Term
Loan Facilities"), and (iii) revolving credit borrowings of up to $30,000,000
(the "Revolving Credit Loans") under a revolving credit facility (the
"Revolving Credit Facility"). In addition, prior to November 6, 2001, subject
to the approval of the Administrative Agent and, in certain instances, to the
approval of the Required Lenders (as defined in the Avalon Credit Facility),
the Borrowers may request that incremental term loan facilities of up to
$75,000,000 be established in accordance with the terms of the Avalon Credit
Facility. As of March 1, 1999, there were approximately $14,240,400 million of
Tranche A Loans outstanding, approximately $129,635,100 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.
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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.
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.
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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 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)
57
<PAGE>
consents and approvals, no breaches or violations as a result of the Merger
Agreement and related transactions, and the authorization, execution, delivery,
performance and enforceability of the Merger Agreement and related matters; (c)
accuracy of information supplied by Buyer and its subsidiaries in connection
with this Proxy Statement and the Schedule 13E-3; (d) brokers' fees and
expenses; (e) financing commitments in connection with the Merger; and (f)
ownership of Shares by Buyer.
Certain Pre-Closing Covenants
Pursuant to the Merger Agreement, the Company has agreed that prior to the
Effective Time, the Company and its Subsidiaries shall conduct their business
in the ordinary course consistent with past practice in all material respects
and shall use their best efforts to preserve intact their business
organizations and relationships with third parties and to keep available the
services of their present officers and employees in all material respects.
Until the Effective Time, and subject to certain exceptions, the Company will
not, and will not permit any subsidiary of the Company to: (a) adopt or propose
any change in its certificate of incorporation or bylaws; (b) merge or
consolidate with any other Person or acquire assets from any other Person in
excess of $375,000; (c) sell, lease, license or otherwise dispose of any
material assets or property except (i) pursuant to existing contracts or
commitments or (ii) not in excess of $375,000; (d) make any capital expenditure
in excess of $375,000; (e) enter into or amend in any material respect any
agreement which is material to the Company and the Company's subsidiaries taken
as a whole, or which involves payments of more than $375,000, or which
restricts the Company and its affiliates from engaging in any business or which
involves the purchase of programming by the Company; (f) take certain other
actions in connection with the Company and its subsidiaries; (g) commit to do
any of the foregoing; or (h) take or agree or commit to take any action that
would make any representation and warranty of the Company under the Merger
Agreement inaccurate in any respect at the Effective Time.
Until the Effective Time, the Company has agreed to give Buyer, its counsel,
financial advisors, auditors, and other authorized representatives full access
to the offices, properties, books and records of the Company and its
subsidiaries, will furnish to Buyer, its counsel, financial advisors, auditors
and other authorized representatives such financial and operating data and
other information as such persons may reasonably request and will instruct the
Company's employees, counsel, and financial advisors to cooperate with Buyer in
its investigation of the business of the Company and its subsidiaries; provided
that no such investigation shall affect any representation or warranty given by
the Company to Buyer under the Merger Agreement.
Indemnification and Insurance
Pursuant to the terms of the Merger Agreement, for a period of 6 years
following the Effective Time, Buyer will, and will cause the Surviving
Corporation to, (i) indemnify and hold harmless the present and former
officers, directors and employees of the Company in respect of acts or
omissions occurring prior to the Effective Time (including, without limitation,
in respect of acts or omissions in connection with the Merger Agreement and the
transactions contemplated thereby) to the fullest extent permitted under the
Company's Certificate of Incorporation and Bylaws and (ii) to the fullest
extent permitted under applicable law, advance to such persons expenses
incurred in defending any action or suit with respect to which indemnity may be
available under the Company's Certificate of Incorporation or Bylaws upon
receipt from each such person to whom expenses are advanced of an undertaking
reasonably satisfactory to Buyer to repay such advances if it is ultimately
determined that such person is not entitled to indemnification. Any
determination required to be made with respect to whether any of the foregoing
persons is entitled to indemnification or advancement of expenses under the
Merger Agreement shall be made by independent legal counsel selected mutually
by such person and Buyer.
For six years after the Effective Time, Buyer will use its best efforts to
provide officers' and directors' liability insurance and fiduciary liability
insurance in respect of acts or omissions occurring on or prior to the
Effective Time covering each such Person currently covered by the Company's
officers' and directors' liability
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insurance policy and fiduciary liability insurance policy on terms with respect
to coverage and amount no less favorable in any material respect than those of
such policies in effect on September 10, 1998; provided that Buyer shall not be
obligated to pay annual premiums in excess of $78,748 (which is approximately
200% of the current annual premiums allocated to the Company as of the date of
the Merger Agreement); and provided further that if the premiums would exceed
such amount in a given year, Buyer shall use its best efforts to purchase
coverage that in the reasonable opinion of Buyer is the best available for such
amount per year. Buyer may satisfy such obligation by purchasing officers' and
directors' liability and fiduciary liability run-off coverage for such six-year
period.
Best Efforts; Certain Filings
The Company and Buyer have agreed to use their best efforts to take, or
cause to be taken, all appropriate action, and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by the Merger
Agreement in the most expeditious manner practicable, including but not limited
to the satisfaction of all conditions to the Merger and seeking to remove
promptly any injunction or other legal barrier that may prevent or delay such
consummation.
The Company and Buyer agreed to promptly prepare and file with the SEC and
thereafter mail to the stockholders of the Company as promptly as practicable
the Schedule 13E-3 and this Proxy Statement.
Conditions to the Consummation of the Merger
The respective obligations of the Company and Cable Michigan to consummate
the Merger are subject to the satisfaction of the following conditions: (a) the
Merger Agreement shall have been adopted by the shareholders of the Company in
accordance with the DGCL; (b) no provision of any applicable law or regulation
and no judgment, injunction, order or decree shall prohibit the consummation of
the Merger; and (c) (i) no federal, state or foreign court, arbitrator or
governmental body, agency, or official shall have issued any order, and there
shall not have been adopted or promulgated any statute, rule or regulation,
prohibiting the consummation of the Merger, or, except for orders, statutes,
rules and regulations of general effect, limiting or restricting Buyer's
conduct or operation of the business of the Company after the Merger in a
manner that would have a Material Adverse Effect, and (ii) no proceeding
seeking to prohibit, alter, prevent or materially delay the Merger shall have
been instituted by any governmental agency or authority before any court,
arbitrator or governmental body, agency or official and be pending.
The obligations of Buyer and MergerSub to consummate the Merger are subject
to the satisfaction of the following further conditions: (a) (i) the Company
shall have performed in all material respects all of its obligations under the
Merger Agreement required to be performed by it at or prior to the Effective
Time and the representations and warranties of the Company contained in the
Merger Agreement shall be true (disregarding all exceptions therein for
materiality and Material Adverse Effect) at and as of the Effective Time as if
made at and as of such time (except for representations and warranties made as
of a specific date, which shall be true (disregarding all exceptions therein
for materiality and Material Adverse Effect) at and as of such date) with such
exceptions as would not, individually or in the aggregate, have a Material
Adverse Effect and (ii) Buyer shall have received a certificate signed by an
executive officer on behalf of the Company to the foregoing effect; (b) Buyer
shall have received all customary documents it may reasonably request relating
to the existence of the Company and the authority of the Company for the Merger
Agreement, all in form and substance reasonably satisfactory to Buyer; and (c)
120 days shall have elapsed after the date of the effective time of the Buyer
Merger shall have occurred. Since the effective time of the Buyer Merger
occurred on November 6, 1998, this condition will have been satisfied as of the
date of the Special Meeting. Subject to the satisfaction or waiver of other
applicable conditions, Buyer intends to complete the Merger promptly after the
Special Meeting.
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The obligations of the Company to consummate the Merger are subject to the
satisfaction of the following further conditions: (a)(i) each of Buyer and
MergerSub shall have performed in all material respects all of its obligations
under the Merger Agreement required to be performed by it at or prior to the
Effective Time and the representations and warranties of Buyer and MergerSub
contained in the Merger Agreement shall be true (disregarding all exceptions
therein for materiality and Buyer MAE) at and as of the Effective Time as if
made at and as of such time (except for representations and warranties made as
of a specific date, which shall be true (disregarding all exceptions therein
for materiality and Buyer MAE) at and as of such date) with such exceptions as
would not, individually or in the aggregate, have a Buyer MAE, (ii) the Company
shall have received a certificate signed by an executive officer on behalf of
Buyer to the foregoing effect; (b) the Company shall have received all
customary documents that the Company shall reasonably request relating to the
existence of Buyer and MergerSub and the authority of Buyer and MergerSub to
enter into the Merger Agreement, all in form and substance reasonably
satisfactory to the Company; and (c) the fairness opinion delivered by CIBC
Oppenheimer shall not have been withdrawn or modified in any materially adverse
respect.
Termination
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time (notwithstanding any approval of the
Merger Agreement by the shareholders of the Company):
(a) by mutual written consent of the Company and Buyer;
(b) by either the Company or Buyer, if the Merger has not been
consummated by March 31, 1999; provided that no party that has materially
breached its obligations under the Merger Agreement shall be entitled to
terminate such agreement under this clause (b);
(c) by either the Company or Buyer (so long as such party has complied
in all material respects with its obligation to use its reasonable best
efforts to consummate and make effective the Merger), if there shall be any
law or regulation that makes consummation of the Merger illegal or if any
judgment, injunction, order or decree enjoining Buyer or the Company from
consummating the Merger is entered and such judgment, injunction, order or
decree shall become final and nonappealable;
(d) by the Company (provided that at the time Buyer would not be
entitled to terminate the Merger Agreement because the Company is in
material breach of one of its obligations under the Merger Agreement) if
Buyer or MergerSub is (i) in material breach of any of its obligations
thereunder or (ii) in breach of one or more of its representations and
warranties thereunder (disregarding any exceptions therein for materiality
or Buyer MAE) with such exceptions as would not, individually or in the
aggregate, have a Buyer MAE, and does not cure, or proceed in good faith to
cure, such breach within ten business days after the Company delivers
written notice thereof; or
(e) by Buyer (provided that at the time the Company would not be
entitled to terminate the Merger Agreement because Buyer or MergerSub is in
material breach of one of its obligations under the Merger Agreement) if
the Company is (i) in material breach of any of its obligations thereunder
or (ii) in breach of one or more of its representations or warranties
thereunder (disregarding any exceptions therein for materiality or Material
Adverse Effect) with such exceptions as would not, individually or in the
aggregate, have a Material Adverse Effect, and does not cure, or proceed in
good faith to cure, such breach within ten business days after notice by
Buyer thereof.
The party desiring to terminate the Merger Agreement pursuant to paragraphs
(b) through (e) above shall give written notice of such termination to the
other party.
If the Merger Agreement is terminated as described above, the Merger
Agreement shall become void and of no effect with no liability on the part of
any party thereto, except that the agreement that all costs and expenses
incurred in connection with the Merger Agreement shall be paid by the party
incurring such costs or expenses, shall survive the termination thereof.
The Company may not consent to or exercise any right to terminate the Merger
Agreement, unless such action is approved by the Special Committee.
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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.
Fees and Expenses
The Merger Agreement calls for all costs and expenses incurred in connection
with the Merger to be paid by the party incurring such cost or expense.
The following is an estimate of fees and expenses to be incurred in
connection with the Merger:
<TABLE>
<S> <C>
Legal Fees and Expenses....................................... $ 250,000
Accountants' Fees and Expenses................................ 85,000
Financing Costs and Fees...................................... 350,000
Financial Advisor to Special Committee........................ 325,000
Legal Fees and Expenses of Special Committee.................. 70,000
Special Committee Fees and Expenses........................... 24,000
Printing...................................................... 75,000
Filing Fees................................................... 4,380
Information/Transfer Agent.................................... 25,000
Mailing....................................................... 7,500
Miscellaneous................................................. 10,000
----------
Total......................................................... $1,225,880
</TABLE>
The Company currently expects that approximately $22.0 million will be
required to pay the Merger Consideration to the Public Shareholders (assuming
no holders exercise appraisal rights). For a description of the sources of such
funds, see "The Merger--Merger Financing."
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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.
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Interest expense for the nine month period ended September 30, 1998,
decreased by $94 or 11.6%, as compared to the same period in 1997. The decrease
in the average outstanding debt between the comparable period was the primary
reason for the decrease in interest expense. The Company's future interest
expense is subject to fluctuations in the market rate of interest, and
accordingly, there is no assurance that the Company's current level of interest
expense is indicative of future trends.
Gain on the sale of Mercom of Florida, Inc., for the nine month period ended
September 30, 1997 of approximately $2,600 resulted from the Company's sale of
its investment in Mercom of Florida.
For the nine month period ended September 30, 1998, income tax provision
increased by $150 as compared to the same period in 1997. The increase for the
nine month period is due to the utilization of net operating losses for the
period ended September 30, 1997, for which a valuation allowance had been
established and which was correspondingly reversed. For the period ended
September 30, 1998, no such valuation allowance existed.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
The Company's net income in 1997 increased $2,726 or $0.57 per average
Share. The Company had net income in 1997 of $4,198 or $0.88 per average Share
compared to a net income of $1,472 or $0.31 per average Share in 1996. The
increase from 1996 is primarily attributable to a gain of approximately $2,600
recorded from the sale of the investment of Mercom of Florida and an increase
in operating income before depreciation and amortization of $456.
The Company had operating income before depreciation and amortization of
$6,099 in 1997 compared to $5,643 in 1996. This represents an increase of $456
(8.1%) from 1996 to 1997. 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.
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The Company does not expect inflation to have a significant impact on its
future operations.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
The Company's net income in 1996 increased $923 or $0.15 per average Share.
The Company recorded net income in 1996 of $1,472 or $0.31 per average Share
compared to a net income of $549 or $0.16 per average Share in 1995. The
increase from 1995 is primarily attributable to an increase in operating income
before depreciation and amortization of $452 and a decline in interest expense
of $673.
The Company had operating income before depreciation and amortization of
$5,643 in 1996 compared to $5,191 in 1995. This represents an increase of $452
(8.7%) from 1995 to 1996.
Sales increased in 1996 by $1,631 (11.7%) from the previous year. This
increase is primarily due to increased basic service revenue of approximately
$1,500. Approximately $1,000 of the increase is a result of the rate increase
implemented in February 1996. The remaining $500 of the basic service revenue
increase is due to approximately 1,845 additional average basic subscribers per
month in 1996 over the prior year.
Programming, franchise and other variable costs increased by $775 (21.7%)
from 1995. This increase is directly related to costs associated with
subscriber growth, increased programming rates on existing channels and new
basic channels added during the year. Operating, marketing and other fixed
system costs increased by $423 (12.2%) in 1996. The increase is primarily due
to salaries and benefits, costs associated with maintaining a larger subscriber
base and a concentration on customer service initiatives.
Other expenses, including interest, decreased by $497 (30.6%). The decrease
is due primarily to a reduction in interest expense as described below
partially offset by the effect of the reversal in 1995 of a restructuring
accrual from prior years.
Higher average cash balances in 1996 resulted in higher interest income of
$44.
Interest expense decreased by $673 (35.4%) in 1996. The decrease from 1995
in the average outstanding debt of approximately $5,060 was the primary reason
for the decrease in interest expense. In addition, a reduction in the annual
weighted average effective interest rate from 7.8% in 1995 to 6.5% in 1996
contributed to the reduction in interest expense.
Liquidity and Capital Resources
Cash and temporary cash investments were $6,115, at September 30, 1998, as
compared to $4,829 at December 31, 1997. The increase in cash of $1,286 is
attributed to cash provided from operations of $3,921 offset by capital
expenditures for the nine month period of $2,635.
The Company expects to be able to continue to manage its costs and increase
its revenues through the offering of new products, the expansion of its
territories and when appropriate, rate increases. The 1998 rate increase,
implemented in May 1998, is expected to provide an estimated additional $775 in
annualized revenues based on the average number of subscribers forecasted for
1998. All rate increases are subject to a final decision by the FCC with
respect to these rate increases, of which no assurances can be given.
In September 1997, Cable Michigan assumed all of the bank's interest in the
Company Credit Agreement (Note 3). Immediately after the assumption of the
Company Credit Agreement by Cable Michigan, the Note Payable was amended and
restated. The Note Payable contains the same pricing and collateral provisions
as were previously in place with the Company Credit Agreement. The amendments
to the Note Payable provide for less restrictive financial covenants and the
elimination of mandatory principal repayments prior to December 31, 2002. The
Note Payable to Cable Michigan matures with a balloon payment on December 31,
2002. The Company's Note Payable to Cable Michigan at September 30, 1998, was
$14,151. The Company was in compliance with all of the terms of its Note
Payable at September 30, 1998.
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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.
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
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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 Beneficial Owner Beneficially Owned Outstanding Shares
- ------------------------ ------------------ ------------------
<S> <C> <C>
David W. Unger, Director, Assistant
Secretary.............................. -- --
Joel C. Cohen, Director, President,
Chief Executive Officer, Secretary..... -- --
Peter Polimino, Vice President.......... -- --
Peter Luscombe, Vice President.......... -- --
Mark Dineen, General Manager............ -- --
Jay M. Grossmann, Director, Vice
President, Assistant Secretary......... -- --
Peggy 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>
- --------
(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
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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 Percent of
Name of Beneficial Owner Beneficially Owned Outstanding Shares
- ------------------------ ------------------ ------------------
<S> <C> <C>
David W. Unger, Director, Assistant
Secretary.............................. -- --
Joel C. Cohen, Director, President,
Chief Executive Officer, Secretary..... -- --
Peter Polimino, Vice President.......... -- --
Peter Luscombe, Vice President.......... -- --
Mark Dineen, General Manager............ -- --
Jay M. Grossmann, Director, Vice
President, Assistant Secretary......... -- --
Peggy J. Koenig, Director, Vice
President, Assistant Secretary......... -- --
Royce Yudkoff, Director (1)............. 2,964,250 61.92%
All Directors and Executive Officers as
a Group ((8) persons).................. 2,964,250 61.92%
</TABLE>
- --------
(1) All such shares are held by Buyer. Mr. Yudkoff is the sole owner of the
equity interests of ABRY Inc., the general partner of AEI, which is the
general partner of ABRY III. ABRY III is the controlling member of Avalon
LLC, the sole owner of the equity interests of Avalon Holdings, which in
turn is the sole stockholder of Buyer. As a result, Mr. Yudkoff may be
deemed to beneficially own the shares owned by Buyer. The address of Mr.
Yudkoff is c/o ABRY Partners, Inc., 18 Newbury Street, Boston,
Massachusetts 02116.
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
the Avalon Filing Parties beneficially own Company Common Stock.
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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.
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
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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 LLC also provides cable television services to approximately
20,700 basic subscribers in western New England. ABRY III, a private equity
fund which invests in media businesses, is the controlling member of Avalon
LLC. The general partner of ABRY III is AEI. The general partner of AEI is ABRY
Inc. Royce Yudkoff, an individual resident of the state of Massachusetts, is
the controlling shareholder of ABRY Inc. The address of the principal executive
office of each of Avalon Holdings and Avalon LLC is 800 Third Avenue, Suite
3100, New York, New York 10022 and their telephone number is (212) 421-0600.
The address and the principal executive offices of each of ABRY III, AEI and
ABRY Inc. is 18 Newbury Street, Boston, Massachusetts 02116 and their telephone
number is (617) 859-2959. For additional information see Annex D.
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
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constitute a waiver of the stockholder's right of appraisal and will nullify
any written demand for appraisal submitted by the stockholder.
A demand for appraisal must be executed by or on behalf of the stockholder
of record, fully and correctly, as such stockholder's name appears on the
certificate or certificates representing the shares of Company Common Stock. A
person having a beneficial interest in shares of Company Common Stock that are
held of record in the name of another person, such as a broker, fiduciary or
other nominee, must act promptly to cause the record holder to follow the steps
summarized herein properly and in a timely manner to perfect any appraisal
rights. If the shares of Company Common Stock are owned of record by a person
other than the beneficial owner, including a broker, fiduciary (such as a
trustee, guardian or custodian) or other nominee, such demand must be executed
by or for the record owner. If the shares of Company Common Stock are owned of
record by more than one person, as in a joint tenancy or tenancy in common,
such demand must be executed by or for all such joint owners. An authorized
agent, including an agent for two or more joint owners, may execute the demand
for appraisal for a stockholder of record; however, the agent must identify the
record owner and expressly disclose the fact that, in exercising the demand,
such person is acting as agent for the record owner. A record owner, such as a
broker, fiduciary or other nominee, who holds shares of Company Common Stock as
a nominee for others, may exercise appraisal rights with respect to the shares
held for all or less than all beneficial owners of shares as to which such
person is the record owner. In such case, the written demand must set forth the
number of shares covered by such demand. Where the number of shares is not
expressly stated, the demand will be presumed to cover all shares of Company
Common Stock outstanding in the name of such record owner. A stockholder who
elects to exercise appraisal rights should mail or deliver his or her written
demand to: Mercom, Inc., 800 Third Avenue, Suite 3100, New York, New York
10022, Attention: Corporate Secretary. The written demand for appraisal should
specify the stockholder's name and mailing address, the number of shares of
Company Common Stock owned, and that the stockholder is thereby demanding
appraisal of his or her shares. A proxy or vote against the Merger will not
constitute such a demand.
Within ten days after the Effective Time, the Surviving Corporation must
provide notice of the Effective Time to all stockholders who have complied with
Section 262. Within 120 days after the Effective Time, either the Surviving
Corporation or any stockholder who has complied with the required conditions of
Section 262 may file a petition in the Delaware Court, with a copy served on
the Surviving Corporation in the case of a petition filed by a stockholder,
demanding a determination of the fair value of the shares of all dissenting
stockholders. The Surviving Corporation does not currently intend to file an
appraisal petition and stockholders seeking to exercise appraisal rights should
not assume that the Surviving Corporation will file such a petition or that the
Surviving Corporation will initiate any negotiations with respect to the fair
value of such shares. Accordingly, stockholders who desire to have their shares
appraised should initiate any petitions necessary for the perfection of their
appraisal rights within the time periods and in the manner prescribed in
Section 262. Within 120 days after the Effective Time, any stockholder who has
theretofore complied with the applicable provisions of Section 262 will be
entitled, upon written request, to receive from the Surviving Corporation a
statement setting forth the aggregate number of shares of Company Common Stock
not voted in favor of the Merger and with respect to which demands for
appraisal were received by the Company and the number of holders of such
shares. Such statement must be mailed within 10 days after the written request
therefor has been received by the Surviving Corporation or within 10 days after
expiration of the time for delivery of demands for appraisal under Section 262,
whichever is later.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine which stockholders are entitled to
appraisal rights and will appraise the shares of Company Common Stock owned by
such stockholders, determining the fair value of such shares exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest, if any, to be paid upon the amount
determined to be the fair value. In determining fair value, the Delaware Court
is to take into account all relevant factors. In Weinberger v. UOP, Inc., the
Delaware Supreme Court discussed the factors that could be considered in
determining fair value in an appraisal proceeding, stating that "proof of
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value by any techniques or methods which are generally considered acceptable in
the financial community and otherwise admissible in court" should be
considered, and that, "fair price obviously requires consideration of all
relevant factors involving the value of a company." The Delaware Supreme Court
stated that in making this determination of fair value the court must consider
market value, asset value, dividends, earnings prospects, the nature of the
enterprise and any other facts which are known or which can be ascertained as
of the date of the merger and which throw any light on future prospects of the
merged corporation. In Weinberger, the Delaware Supreme Court stated that
"elements of future value, including the nature of the enterprise, which are
known or susceptible of proof as of the date of the merger and not the product
of speculation, may be considered." Section 262, however, provides that fair
value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger."
Stockholders considering seeking appraisal should recognize that the fair
value of their shares as determined under Section 262 could be more than, the
same as or less than the Merger Consideration to be received if they do not
seek appraisal of their shares. The cost of the appraisal proceeding may be
determined by the Delaware Court and taxed against the parties as the Delaware
Court deems equitable in the circumstances. Upon application of a dissenting
stockholder of the Company, the Delaware Court may order that all or a portion
of the expenses incurred by any dissenting stockholder in connection with the
appraisal proceeding, including without limitation, reasonable attorneys' fees
and the fees and expenses of experts, be charged pro rata against the value of
all shares of stock entitled to appraisal.
Any holder of shares of Company Common Stock who has duly demanded appraisal
in compliance with Section 262 will not, after the Effective Time, be entitled
to vote for any purpose any Shares subject to such demand or to receive payment
of dividends or other distributions on such Shares, except for dividends or
distributions payable to stockholders of record at a date prior to the
Effective Time.
At any time within 60 days after the Effective Time, any stockholder will
have the right to withdraw such demand for appraisal and to accept the terms
offered in the Merger; after this period, the stockholder may withdraw such
demand for appraisal only with the consent of the Surviving Corporation. If no
petition for appraisal is filed with the Delaware Court within 120 days after
the Effective Time, stockholders' rights to appraisal will cease, and all
holders of shares of Company Common Stock will be entitled to receive the
Merger Consideration. Inasmuch as the Surviving Corporation has no obligation
to file such a petition, and has no present intention to do so, any holder of
shares of Company Common Stock who desires such a petition to be filed is
advised to file it on a timely basis.
Failure to take any required step in connection with the exercise of
appraisal rights may result in termination of such rights. In view of the
complexity of these provisions of the DGCL, stockholders who are considering
exercising their rights under Section 262 should consult with their legal
advisors.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of the Company as of December 31, 1997
and 1996 and for the years ended December 31, 1997, 1996 and 1995, appearing in
this Proxy Statement have been audited by PricewaterhouseCoopers LLP,
independent accountants, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
72
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
</TABLE>
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 & Par Paid-In Accumulated Shareholders'
Outstanding 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>
MERCOM, INC. AND SUBSIDIARIES
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>
F-8
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Per Share Data)
Amortization expense charged to operations in 1997, 1996 and 1995 was $291,
$287 and $309, respectively.
During 1997, due to the sale of its investment in Mercom of Florida,
intangible assets which had an original cost of $147 and associated accumulated
amortization of $75 were removed from the Company's balance sheet.
4. Income Taxes
The income tax provision (benefit) consists of the following:
<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.
F-9
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Per Share Data)
The net change in the valuation allowance for deferred tax assets during
1997 was a decrease of $1,262, of which $72 related to Mercom of Florida.
The provision (benefit) for income taxes is different from the amounts
computed by applying the U.S. statutory federal tax rate of 34%. The
differences are as follows:
<TABLE>
<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 carry forwards
available:
<TABLE>
<CAPTION>
Tax Net Expiration
Year Operating Losses 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.
F-10
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Per Share Data)
On September 29, 1997, Cable Michigan purchased and assumed all of the
bank's interest in the term credit agreement and the note issued thereunder. As
of such date, $14,151 of principal was outstanding. Immediately after the
purchase, the term credit agreement was amended in order to, among other
things, provide for less restrictive financial covenants, eliminate mandatory
amortization of principal and provide for a bullet maturity of principal on
December 31, 2002, and remove the change of control event of default. The
Company's borrowings under the term credit agreement contain pricing and
security provisions substantially the same as those in place prior to the
purchase of the loan. The borrowings are secured by a pledge of the stock of
the Company's subsidiaries and a first lien on certain of the assets of the
Company and its subsidiaries, including inventory, equipment and receivables.
Cable Michigan has the ability, under Cable Michigan's Credit Agreement, to
lend additional funds, approximately $6,000, up to an aggregate of $20,000, to
the Company to meet additional investment and liquidity needs. At December 31,
1997, the Company was in compliance with all covenants associated with the Note
Payable.
The weighted average effective interest rates for all debt at December 31,
1997 and 1996, were 6.7% and 6.5%, respectively. Interest on the Note Payable
is paid based on LIBOR plus 1%.
6. Common Stock
On August 10, 1995, the Company completed the issuance of 2,393,530 shares
of Company Common Stock through a rights offering, resulting in net proceeds,
after deducting issuance costs, of approximately $8,200. Shareholders of record
at the close of business on July 20, 1995 were entitled to one non-transferable
right for every share of Company Common Stock held. Right holders were able to
purchase, for a price of $3.60 per share, one share of Company Common Stock for
each right held.
The Company utilized a portion of the proceeds received from the Rights
Offering to repay $5,070 of outstanding indebtedness to its lender and repay
$2,287 of outstanding indebtedness to C-TEC under two demand notes. The
remaining proceeds were used for general corporate purposes, including capital
expenditures.
7. Employee Benefit Plans
The Company adopted a 401(k) savings plan on January 1, 1995 covering
substantially all employees. Contributions made by the Company to the 401(k)
plan are based on a specified percentage of employee contributions.
Contributions charged to expense were $39 and $26 in 1997 and 1996,
respectively.
Beginning in 1996, the Company provides short-term disability salary
continuance benefits to former or inactive employees who are not retirees. The
Company accounts for these benefits under Statement of Financial Accounting
Standards No. 112--"Employers Accounting for Postemployment Benefits" ("SFAS
112"). SFAS 112 requires the Company to accrue the cost of postemployment
benefits over employees' service lives. The Company uses the services of an
enrolled actuary to calculate the expense. The net periodic cost for
postemployment benefits was $34 and $36 in 1997 and 1996, respectively.
8. Commitments and Contingencies
a. Total rental expense, primarily office space and pole rental, was $283,
$248 and $250 for 1997, 1996 and 1995, respectively. At December 31, 1997,
rental commitments under noncancellable leases, excluding
F-11
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars In Thousands, Except Per Share Data)
annual pole rental commitments of approximately $181 that are expected to
continue indefinitely, are as follows:
<TABLE>
<S> <C>
1998................................ $ 91
1999................................ 78
2000................................ 78
2001................................ 23
2002................................ 13
Thereafter.......................... 252
</TABLE>
b. The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992 and the Telecommunications Act of 1996.
The Company has either settled challenges or accrued for anticipated exposures
related to rate regulation; however, there is no assurance that there will not
be further additional challenges to its rates. The statement of operations for
1997 and 1996 included charges totaling approximately $17 and $170,
respectively, relating to cable rate regulation exposures.
c. The Company entered into the Management Agreement on January 1, 1997
pursuant to which Cable Michigan operates and manages the Company's cable
properties. The Management Agreement provides that the Company will pay Cable
Michigan: (a) an annual fee equal to the greater of: (i) $500 or (ii) a
percentage of the Company's annual revenues (ranging from 5% of $10,000 of
revenues, as defined, to 4% of revenues in excess of $20,000); and (b) an
annual incentive bonus equal to twenty-five percent (25%) of the Company's
earnings before interest, taxes, depreciation and amortization ("EBITDA") as
adjusted, during the applicable fiscal year less the base EBITDA of $5,000. See
Note 9 (Affiliate and Related Party Transactions) to Audited Financial
Statements.
9. Affiliate and Related Party Transactions
The Company entered into the CCS Management Agreement in 1992, pursuant to
which CCS would manage the Company's cable television systems' operations
through 1996. The Company was charged $1,398 and $1,204 for this management
service in 1996 and 1995, respectively. In 1995, the Company incurred interest
of $29 on outstanding management fee obligations owed to C-TEC. Effective
January 1, 1997, the Company entered into a management agreement with Cable
Michigan. The Company was charged $1,204 in 1997 based on the agreement
approved by the Board. RCN and its subsidiaries also supplied other services
not covered by the management agreements for approximately $27, $92 and $121 in
1997, 1996 and 1995, respectively.
In the first quarter of 1995, C-TEC loaned $887 to the Company to enable it
to make a principal payment on its Credit Agreement of $887 scheduled for March
31, 1995. C-TEC also loaned the Company $1,400 in June 1995 to meet its
scheduled payment under the Lahey settlement agreement. The Company paid
interest in 1995 of $39 to C-TEC in connection with these two demand notes.
These demand notes were repaid in August 1995.
The Company sold approximately $81 and $2 of inventory to a C-TEC subsidiary
in 1996 and 1995, respectively.
The Company had accounts payable to RCN of $18 and $783 (primarily
management fees) at December 31, 1997 and 1996, respectively.
F-12
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
(Dollars In Thousands, Except Per Share Data)
The Company had accounts payable to Cable Michigan of $521 (primarily
management fees) and $1 at December 31, 1997 and 1996, respectively.
On September 29, 1997, Cable Michigan assumed all of the bank's interest in
the Term Credit Agreement as discussed in Note 5.
10. Off Balance Sheet Risk and Concentration of Credit Risk
The Company places its cash and temporary cash investments with high credit
quality financial institutions. The Company does, however, maintain unsecured
cash and temporary cash investment balances in excess of federally insured
limits.
Concentrations of credit risk with respect to receivables are limited due
to a large customer base throughout Michigan.
11. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
a. Cash and temporary cash investments
The carrying amount approximates fair value because of the short
maturity of these instruments.
b. Long-term debt
The fair value of floating rate long-term debt is considered to be
equal to carrying value since the debt reprices at least every six
months and the Company believes that its credit risk has not changed
from the time the floating rate debt was borrowed and therefore, it
would obtain similar rates in the current market.
The estimated fair value of the Company's financial instruments are as
follows at December 31:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and temporary cash
investments.................. $ 4,829 $ 4,829 $ 3,054 $ 3,054
Financial liabilities:
Floating rate long-term debt:
Note Payable, Affiliate..... $14,151 $14,151 $ -- $ --
Term Credit Agreement....... $ -- $ -- $17,430 $17,430
</TABLE>
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>
- --------
* 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."
See accompanying Notes to Condensed Consolidated Financial Statements.
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 1,743
-------- --------
Total Assets.................................... $ 22,084 $ 20,719
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable, trade........................... $ 1,525 $ 980
Accounts payable, affiliate and related parties... 850 539
Other liabilities................................. 1,614 1,694
Accrued litigation costs.......................... 750 1,450
Deferred income taxes............................. 1,140 626
Note payable, affiliate........................... 14,151 14,151
-------- --------
Total Liabilities............................... 20,030 19,440
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, $100 par value, 150,000 shares
authorized, none issued and outstanding at
September 30, 1998, and December 31, 1997........ -- --
Common stock, $1 par value, 5,000,000 shares
authorized, 4,787,060, issued and outstanding at
September 30, 1998, and December 31, 1997........ 4,787 4,787
Additional paid-in capital........................ 11,374 11,374
Accumulated deficit............................... (14,107) (14,882)
-------- --------
Total Shareholders' Equity...................... 2,054 1,279
-------- --------
Total Liabilities & Shareholders' Equity........ $ 22,084 $ 20,719
======== ========
</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:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Note Payable, Affiliate.............. $14,151 $14,151
======= =======
</TABLE>
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.
F-17
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(Dollars In Thousands, Except Per Share Data)
At September 30, 1998, the Company was in compliance with all covenants
associated with the Note Payable.
The effective interest rate for debt at September 30, 1998 and December 31,
1997, was 6.7%. Interest on the Note Payable is paid based on LIBOR plus 1%.
4. Income Taxes
The provision for income taxes is different from the amounts computed by
applying the U.S. statutory federal tax rate of 34% primarily due to the effect
of non-deductible goodwill amortization and non-deductible expenses associated
with the potential acquisition of the minority shares of the Company.
5. Affiliate and Related Party Transactions
The Company had amounts due to Cable Michigan of $843 and $521 at September
30, 1998, and December 31, 1997, respectively, primarily related to management
services and interest on the Note Payable. The Company entered into a
management agreement with Cable Michigan, in January 1997, pursuant to which
Cable Michigan manages the Company's cable television systems' operations. The
management agreement was approved by the independent directors on the Board.
The Company had amounts due to RCN of $6 and $16 at September 30, 1998 and
December 31, 1997, respectively, primarily for billing and customer service
related expenses.
6. Earnings Per Share
Basic earnings (loss) per share amounts are computed based on net income
(loss) divided by the weighted average number of shares of common stock
outstanding during the period.
Diluted earnings (loss) per share amounts are computed based on net income
(loss) divided by the weighted average number of shares of common stock
outstanding during the period after giving effect to convertible securities
considered to be dilutive common stock equivalents. The Company does not
currently have any convertible securities.
7. Buyer Merger Agreement
On November 6, 1998 the Buyer Merger was consummated.
In accordance with the terms of the Buyer Merger Agreement, each share of
common stock, par value $1.00 per share, of Cable Michigan outstanding prior to
the effective time of the Buyer Merger (other than treasury stock, shares owned
by Avalon Holdings or its subsidiaries, or shares as to which dissenters'
rights have been exercised) was converted into the right to receive $40.50 in
cash.
On June 4, 1998, Cable Michigan made a proposal to the Board to acquire the
outstanding Shares of the Company that Cable Michigan does not already own at a
price of $11.00 per share. The Company established the Special Committee to
evaluate the proposal.
On August 12, 1998, Amendment No. 2 was entered into, which authorized Cable
Michigan to increase to $12.00 per share, the price of the Cable Michigan
proposal for the acquisition of the outstanding shares of the Company that
Cable Michigan does not already own.
F-18
<PAGE>
MERCOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
(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 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
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)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1--THE MERGER
Section 1.01. The Merger ................................................ 1
Section 1.02. Conversion of Shares....................................... 1
Section 1.03. Surrender and Payment...................................... 2
Section 1.04. Dissenting Shares.......................................... 3
ARTICLE 2--THE SURVIVING CORPORATION
Section 2.01. Certificate of Incorporation............................... 3
Section 2.02. Bylaws .................................................... 3
Section 2.03. Directors and Officers..................................... 3
ARTICLE 3--REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 3.01. Corporate Existence and Power.............................. 3
Section 3.02. Corporate Authorization; Approval of the Board............. 3
Section 3.03. Governmental Authorization................................. 4
Section 3.04. Non-contravention.......................................... 4
Section 3.05. Capitalization............................................. 4
Section 3.06. Subsidiaries............................................... 5
Section 3.07. SEC Filings ............................................... 5
Section 3.08. Financial Statements....................................... 6
Section 3.09. Proxy Statement; Schedule 13E-3............................ 6
Section 3.10. Absence of Certain Changes................................. 6
Section 3.11. Litigation ................................................ 7
Section 3.12. No Undisclosed Material Liabilities........................ 7
Section 3.13. Compliance with Laws....................................... 7
Section 3.14. Finders' Fees.............................................. 7
Section 3.15. Taxes ..................................................... 7
Section 3.16. Employee Benefits.......................................... 8
Section 3.17. Environmental Matters...................................... 9
Section 3.18. Systems, Franchises and Material Agreements................ 9
Section 3.19. Title to Properties; Encumbrances.......................... 10
ARTICLE 4--REPRESENTATIONS AND WARRANTIES OF BUYER
Section 4.01. Corporate Existence and Power.............................. 10
Section 4.02. Corporate Authorization.................................... 10
Section 4.03. Governmental Authorization................................. 11
Section 4.04. Non-contravention.......................................... 11
Section 4.05. Proxy Statement; Schedule 13E-3............................ 11
Section 4.06. Finders' Fees.............................................. 11
Section 4.07. Financing ................................................. 11
Section 4.08. Ownership of Shares........................................ 11
ARTICLE 5--COVENANTS OF THE COMPANY
Section 5.01. Conduct of the Company..................................... 12
Section 5.02. Stockholder Meeting; Proxy Material........................ 12
Section 5.03. Access to Information...................................... 12
</TABLE>
- --------
(1) The Table of Contents is not a part of this Agreement.
A-i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 6--COVENANTS OF BUYER
Section 6.01. Obligations of Merger Subsidiary.......................... 13
Section 6.02. Voting of Shares.......................................... 13
Section 6.03. Director and Officer Liability............................ 13
Section 6.04. Absence of Actions Causing Breach......................... 13
ARTICLE 7--COVENANTS OF BUYER AND THE COMPANY
Section 7.01. Best Efforts; SEC Filings................................. 13
Section 7.02. Public Announcements...................................... 14
Section 7.03. Further Assurances........................................ 14
Section 7.04. Notices of Certain Events................................. 14
ARTICLE 8--CLOSING; CONDITIONS TO THE MERGER
Section 8.01. Closing .................................................. 14
Section 8.02. Conditions to the Obligations of Each Party............... 14
Section 8.03. Conditions to the Obligations of Buyer and Merger
Subsidiary............................................................. 14
Section 8.04. Conditions to the Obligations of the Company.............. 14
ARTICLE 9--TERMINATION
Section 9.01. Termination .............................................. 15
Section 9.02. Effect of Termination..................................... 16
ARTICLE 10--MISCELLANEOUS
Section 10.01. Notices ................................................. 17
Section 10.02. Survival ................................................ 17
Section 10.03. Amendments; No Waivers................................... 17
Section 10.04. Expenses ................................................ 18
Section 10.05. Successors and Assigns................................... 18
Section 10.06. Governing Law............................................ 18
Section 10.07. Counterparts; Effectiveness.............................. 18
Section 10.08. Parties in Interest...................................... 18
Section 10.09. No Personal Liability.................................... 18
Section 10.10. Jurisdiction............................................. 18
Section 10.11. Interpretation........................................... 18
Section 10.12. Specific Performance..................................... 19
Section 10.13. Entire Agreement; Schedules.............................. 19
Section 10.14. Severability............................................. 19
</TABLE>
A-ii
<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").
(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").
A-1
<PAGE>
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).
(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
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.
A-2
<PAGE>
(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.
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
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hereby are within the Company's corporate powers and, except for any required
approval by the Company's stockholders in connection with the consummation of
the Merger, have been duly authorized by all necessary corporate action of the
Company. This Agreement constitutes a valid and binding agreement of the
Company enforceable against the Company in accordance with its terms, except
(x) as the same may be Limited by applicable bankruptcy, insolvency, moratorium
or similar laws of general application relating to or affecting creditors'
rights, and (y) for the limitations imposed by general principles of equity.
The foregoing exceptions (x) and (y) are hereinafter referred to as the
"Enforceability Exceptions." The Board of Directors of the Company has, by
resolutions duly adopted at a meeting duly called and held, unanimously
approved this Agreement, the Merger and the other transactions contemplated
hereby on the material terms and conditions set forth herein. The Special
Committee has, by resolutions duly adopted at a meeting duly called and held,
unanimously approved this Agreement, the Merger and the other transactions
contemplated hereby on the material terms and conditions set forth herein. The
Special Committee has received the opinion as of the date of this Agreement of
CIBC Oppenheimer Corp. ("Oppenheimer"), as financial advisor to the Special
Committee, that the consideration to be received by the Company's stockholders
(other than Buyer and its Subsidiaries) in the Merger is fair to such
stockholders from a financial point of view.
Section 3.03. 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 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
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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).
(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
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.
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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);
(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;
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(i) any (A) grant of any severance or termination pay to any director,
officer or employee of the Company or any of the Company Subsidiaries, (B)
entering into of any employment, deferred compensation or other similar
agreement (or any amendment to any such existing agreement) with any
director, officer or employee of the Company or any of the Company
Subsidiaries, (C) increase in benefits payable under any existing severance
or termination pay policies or (D) increase in compensation, bonus or other
benefits payable to directors or officers (who are not employees) of the
Company or any of the Company Subsidiaries, or, other than in the ordinary
course of business consistent with past practice, to employees (including
officers who are employees) of the Company or any of the Company
Subsidiaries; or
(j) any damage, destruction or other casualty loss (to the extent not
covered by insurance) affecting the business or assets of the Company or
any Company Subsidiary in excess of $375,000;
For purposes of this Agreement, "Permitted Liens" means (i) materialmen's,
mechanics', carriers', workmen's, warehousemen's, repairmen's, and other like
Liens arising in the ordinary course of business for payments which are not
material in amount, and deposits to obtain the release of such Liens; (ii)
Liens for current taxes not yet due and payable or which are being contested in
good faith by appropriate proceedings and for which appropriate reserves have
been established and (iii) other Liens or minor imperfections of title that,
taken in the aggregate, do not materially impair the conduct of the Company's
and the Company Subsidiaries' business or the use of any material assets.
Section 3.11. Litigation. Except as set forth in Schedule 3.11, there is no
action, suit, investigation or proceeding pending against, or to the knowledge
of the Company threatened against, the Company or any Company Subsidiary or any
of their respective properties before any court or arbitrator or any
governmental body, agency or official which would reasonably be expected to
have a Material Adverse Effect.
Section 3.12. No Undisclosed Material Liabilities. Neither the Company nor
any of the Company Subsidiaries has any indebtedness, liability or obligation
of any type, whether or not required by GAAP to be reflected on a balance sheet
and whether or not due, except (i) liabilities reflected or reserved against in
the balance sheet set forth in the Form 10-Q, or otherwise disclosed in the
Form 10-K or the Form 10-Q, (ii) liabilities incurred in the ordinary course of
business since June 30, 1998, (iii) for other liabilities which do not and will
not have, and would not reasonably be expected to have, a Material Adverse
Effect and (iv) as set forth on any Schedule hereto or any contract or
agreement set forth thereon (other than for breach thereof).
Section 3.13. Compliance with Laws. Except as set forth on Schedule 3.13,
the Company and the Company Subsidiaries hold all licenses, franchises,
certificates, consents, permits, qualifications and authorizations from all
governmental authorities necessary for the lawful conduct of their businesses,
except where the failure to hold any of the foregoing would not have, and would
not reasonably be expected to have, a Material Adverse Effect. To the Company's
knowledge, neither the Company nor any of its Subsidiaries has violated, or is
in violation of, any such licenses, franchises, certificates, consents,
permits, qualifications or authorizations or any applicable statutes, laws,
ordinances, rules and regulations (including, without limitation, any of the
foregoing related to occupational safety, storage, disposal, discharge into the
environment of hazardous wastes, environmental protection, conservation, unfair
competition, labor practices or corrupt practices) of any governmental
authorities, except where such violations do not have, and would not reasonably
be expected to have, a Material Adverse Effect.
Section 3.14. Finders' Fees. Except for Oppenheimer, the terms of whose
engagement are set forth in the engagement letter provided to Buyer, there is
no investment banker, broker, finder or other intermediary which has been
retained by or is authorized to act on behalf, of the Company or any Company
Subsidiary who might be entitled to any fee or commission from Buyer or any of
its affiliates upon consummation of the transactions contemplated by this
Agreement.
Section 3.15. Taxes. Except as set forth on Schedule 3.15 and except as to
any items that would not, individually or in the aggregate, have a Material
Adverse Effect: (a) the Company and each of the Company
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Subsidiaries has (i) timely paid all taxes of any nature whatsoever (together
with any related penalties and interest) (any of the foregoing, a "Tax")
required to be paid by it and (ii) timely filed all federal, state, local and
foreign income and other Tax returns or reports (including declarations of
estimated Tax) required to be filed by it and all such returns have been
completed in accordance with applicable law and are true and correct; (b) there
are no claims or assessments pending against the Company or any of the Company
Subsidiaries for any alleged deficiency in Tax, and the Company does not know
of any threatened Tax claims or assessments against the Company or any of the
Company Subsidiaries; (c) the Company and each of the Company Subsidiaries has
established adequate accruals for Taxes and for any liability for deferred
Taxes in accordance with GAAP; (d) there are no Liens for Taxes (other than for
current Taxes not yet due and payable) on the assets of the Company or any of
the Company's Subsidiaries; and (e) from December 31, 1997, there have not been
any Tax elections, any settlements or compromises of any income Tax liabilities
or any changes in Tax attributes (except that net operating losses are being
used to offset current taxable income).
Section 3.16. Employee Benefits. Except as set forth on Schedule 3.16:
(a) The Company does not maintain, contribute to or have any material
liability (whether direct or indirect, including, without limitation, as a
result of an indemnification obligation) under, or with respect to, and no
ERISA Affiliate has any liability which has or will create any material
obligation by, or result in any material liability to, Buyer with respect
to or under, any Employee Benefit Plan. No material liability (whether
direct or indirect, including, without limitation, as a result of an
indemnification obligation) with respect to any Employee Benefit Plan has
been or is reasonably expected to be incurred by the Company or any ERISA
Affiliate under or pursuant to Title I or Title IV of ERISA or the penalty,
excise tax or joint and several liability provisions of the Code relating
to employees, employee compensation or employee benefit plans that could,
following the Effective Time, become or remain a material liability of
Buyer or of any Employee Benefit Plan established or contributed to by
Buyer, and no event, transaction or condition has occurred or exists that
could result in any such liability to their operations or, following the
Effective Time, Buyer's.
(b) Neither the execution and delivery by the Company of this Agreement
nor the consummation of the transactions contemplated by this Agreement
will result in the acceleration or creation of any rights of any person to
benefits under any Employee Benefit Plan (including, without limitation,
the acceleration of the accrual or vesting under any Employee Benefit Plan
or the acceleration or creation under any severance, parachute or change of
control agreement) which could result in a material liability to Buyer.
(c) To the knowledge of the Company, there is no action, order, writ,
injunction, judgment or decree outstanding or claim, suit, litigation,
proceeding arbitration, governmental audit or investigation relating to or
seeking material benefits under any Employee Benefit Plan that is pending
or threatened or anticipated against the Company, any ERISA Affiliate or
any Employee Benefit Plan, other than claims for benefits in the ordinary
course.
(d) Except as set forth in the Form 10-K or the Form 10-Q, no provision
of any Employee Benefit Plan or any contract (whether or not written), nor
any transaction, condition or other event exists or has occurred that would
require Buyer to provide any material compensation, payments or benefits
(including, without limitation, severance payments) to or on behalf of any
former or current employee of the Company or any ERISA Affiliate.
(e) As used herein, the term "Employee Benefit Plan" means any pension,
retirement, profit-sharing, deferred compensation, bonus, incentive,
performance, stock option, phantom stock, stock purchase, restricted stock,
premium conversion, medical, hospitalization, vision, dental or other
health, life, disability, severance, termination or other employee benefit
plan, program, arrangement, agreement or policy, whether written or
unwritten, to which the Company or any Company Subsidiary contributes, is
obligated to contribute to, is a party to or is otherwise bound, or with
respect to which the Company or any Company Subsidiary may have any
liabilities. As used herein, the term "ERISA Affiliate" means (i) a member
of any "controlled group" (as defined in Section 414(b) of the Code) of
which the Company is a member, (ii) a trade or business, whether or not
incorporated, under common control (within the
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meaning of Section 414(c) of the Code) with the Company, or (iii) a member
of any affiliated service group (within the meaning of Section 414(m) of
the Code) of which the Company is a member.
Section 3.17. Environmental Matters. There are no material Environmental
Liabilities (as defined below) of the Company or any of the Company
Subsidiaries. The Company and the Company Subsidiaries are in compliance and
have been in compliance, in all material respects, with all Environmental Laws.
There has been no report regarding any material environmental assessment,
investigation, study, audit, test, review or other analysis conducted of which
the Company has knowledge in relation to the current or prior business of the
Company or the Company Subsidiaries or any property or facility now or
previously owned by the Company or the Company Subsidiaries which has not been
delivered to Buyer. For purposes of this Agreement, "Environmental Liabilities"
means any and all liabilities of the named entity, which (i) arise under or
relate to matters covered by Environmental Laws and (ii) relate to actions
occurring or conditions existing on or prior to the Effective Time, and
includes but is not limited to fines, penalties, and costs of correcting any
compliance deficiencies, and obligations for site cleanup or investigation or
cleanup resulting from the disposal, release or threatened release of hazardous
substances, pollutants, contaminants, or wastes. "Environmental Laws" means any
federal, state, and local laws, judicial decisions, regulations, rules,
judgments, orders, decrees, permits, licenses, agreements and governmental
restrictions, relating to human health, the environment or to emissions,
discharges or releases of pollutants, contaminants or other hazardous
substances or wastes into the environment, including without limitation ambient
air, surface water, ground water or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or other hazardous substances
or wastes or the clean-up or other remediation thereof.
Section 3.18. Systems, Franchises and Material Agreements. (a) As of June
30, 1998, the cable television systems owned by the Company and the Company
Subsidiaries (the "Systems") (i) had approximately 41,504 Basic Subscribers,
(ii) passed approximately 65,886 residential dwelling units and (iii) included
approximately 211 underground plant miles and approximately 1,133 aerial plant
miles. For purposes hereof, "Basic Subscriber" means a customer of the Company
or any of the Company Subsidiaries who as of the relevant date satisfies all of
the following requirements:
(i) such customer is connected to and receiving Basic Service from the
Company or any of the Company Subsidiaries;
(ii) such customer is being charged for the services received at the
rate that the Company or the relevant Company Subsidiary generally charges
to its customers in that location;
(iii) such customer has paid to the applicable provider the applicable
rate for all services received for one month (or more) of service prior to
the relevant date;
(iv) such customer does not have any outstanding bill or any service
charges more than sixty (60) days delinquent from the due date therefore in
excess of $10.00; and
(v) provided that a hotel, motel or other multiple dwelling unit
customer which pays less per dwelling unit than the rates charged in the
relevant area by the applicable provider for detached single family homes
shall be considered to be that number of Basic Subscribers which is equal
to revenues from Basic Service generated by such hotel, motel or other
customer for the month ending on the relevant date (or if such date is not
the end of a month, the month ending immediately prior to such date)
(without regard to non-recurring revenues from ancillary services such as
installation fees) divided by the full rate charged to detached single
family homes for such service in the relevant area by the applicable
provider.
For purposes hereof, "Basic Service" means, for any given Franchise (as defined
below) area the cable television service tier or tiers provided by the Company
or the relevant Company Subsidiary in such Franchise area which include the
retransmission of local off air television broadcast signals.
(b) Except for (i) those contracts listed on Schedule 3.18(B) (the "Material
Agreements"), and (ii) the Company Franchises (as defined below), neither the
Company nor any of the Company Subsidiaries is a party to or is bound by a
contract, commitment or agreement which is material to the Company and the
Company
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Subsidiaries taken as a whole or which involves payments of more than $375,000
in the aggregate or which restricts the Company and its affiliates from
engaging in any business or which involves the purchase of programming by the
Company. Schedule 3.18(B) sets forth a list, complete in all material respects,
of the Franchises of the Company or any of the Company Subsidiaries (the
"Company Franchises"). Each Company Franchise and each Material Agreement is in
all material respects the validly existing, legally enforceable obligation of
the Company or one of the Company Subsidiaries, as the case may be, and, to the
knowledge of the Company, of the other parties thereto, subject to the
Enforceability Exceptions. The Company and the Company Subsidiaries are validly
and lawfully operating in all material respects under the Company Franchises
and the Material Agreements to which they are a party. The Company and the
Company Subsidiaries have duly complied in all material respects with all of
the terms and conditions of each of the Company Franchises and Material
Agreement to which they are a party. Except as set forth on Schedule 3.18(B),
each System operates pursuant to a Franchise.
(c) Except as set forth on Schedule 3.18(C) and subject to such other
exceptions as would not have a Material Adverse Effect, no Person (including
any governmental authority) has any right to acquire any interest in any System
or any assets of the Company or any of the Company Subsidiaries (including any
right of first refusal or similar right) upon an assignment or transfer of
control of a Company Franchise, other than rights of condemnation or eminent
domain afforded by law.
(d) Neither the Company nor any of the Company Subsidiaries has made or is
bound by any material written commitments to any state, municipal, local or
other governmental commission, agency or body with respect to the operation and
construction of the Systems which are not fully reflected in a Company
Franchise or a Material Agreement.
Section 3.19. Title to Properties; Encumbrances. Except as set forth on
Schedule 3.19, the Company and each of the Company Subsidiaries has good and
marketable title to (or in the case of leased assets, valid and existing
leasehold interests in) the material assets set forth on the balance sheet
included in the Form 10-Q (other than those disposed of in the ordinary course
of business since the June 30, 1998), free and clear of all Liens other than
Permitted Liens. Except as set forth on Schedule 3.19, the Company and each of
the Company Subsidiaries owns or has the lawful right to use all assets,
properties, operating rights, easements, contracts, leases, and other
instruments necessary to operate its business as presently conducted in all
material respects. Schedule 3.19 sets forth a list of all real property which
is owned or leased by the Company or any of the Company Subsidiaries. Except as
set forth in Schedule 3.19 and with such other exceptions as would not have a
Material Adverse Effect, all buildings, improvements, central receiving
apparatus, distribution equipment, cables, converters, origination equipment
and other operating assets of the Company and the Company Subsidiaries are in
good working order and condition, normal wear and tear excepted.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to the Company that:
Section 4.01. 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
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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 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
(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.
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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.
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.
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
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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:
(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 authority
before any court, arbitrator or governmental body, agency or official and
be pending.
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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 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;
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(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;
(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.
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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,
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
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
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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.
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
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way the meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this Agreement they shall be
deemed to be followed by the words "without limitation". The phrases "the date
of this Agreement", "the date hereof", and terms of similar import, unless the
context otherwise requires, shall be deemed to refer to September 10, 1998.
Section 10.12. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions of this Agreement in any
federal court located in the State of Delaware or any Delaware state court
sitting in Wilmington, in addition to any other remedy to which they are
entitled at law or in equity.
Section 10.13. Entire Agreement; Schedules. This Agreement constitutes the
entire agreement among the parties with respect to the subject matter hereof
and supersedes all prior written and oral and all contemporaneous oral
agreements and understandings with respect to the subject matter hereof. Each
party acknowledges and agrees that no other party hereto makes any
representations or warranties, whether express or implied, other than the
express representations and warranties contained herein or in the certificates
to be delivered at the Effective Time. The fact that any item of information is
disclosed in any Schedule to this Agreement shall not be construed to mean that
such information is required to be disclosed by this Agreement. Such
information and the dollar thresholds set forth herein shall not be used as a
basis for interpreting the terms "material" or "Material Adverse Effect" or
other similar terms in this Agreement. A matter set forth in one section of the
Schedules need not be set forth in any other section or Schedule so long as its
relevance to the latter section or Schedule is reasonably clear.
Section 10.14. Severability. If any term or other provision of this
Agreement is determined to be invalid, illegal or incapable of being enforced
by any rule of law, or public policy, all other conditions and provisions of
this Agreement shall nevertheless remain in full force and effect so long as
the economic or legal substance of the transactions contemplated herein is not
affected in any manner materially adverse to any party hereto. Upon such
determination that any term or other provision is invalid, illegal or incapable
of being enforced, the parties hereto shall negotiate in good faith to modify
this Agreement so as to effect the original intent of the parties as closely as
possible in a mutually acceptable manner.
In Witness Whereof, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.
Mercom, Inc.
/s/ Mark Haverkate
By: _________________________________
Mark Haverkate
President and Chief Executive
Officer
Cable Michigan, Inc.
/s/ David C. McCourt
By: _________________________________
David C. McCourt
Chairman, Chief Executive Officer
Mercom Acquisition, Inc.
/s/ David C. McCourt
By: _________________________________
David C. McCourt
Chairman, Chief Executive Officer
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ANNEX B
September 10, 1998
The Special Committee of the Board of Directors
The Board of Directors
Mercom, Inc.
105 Carnegie Center
Princeton, NJ 08540 6215
Dear Members of the Special Committee and Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of shares of Common Stock, par value $1.00 per share
(the "Mercom Common Stock"), of Mercom, Inc. ("Mercom" or the "Company") other
than Cable Michigan, Inc. ("Cable Michigan") of the consideration to be
received by such holders (the "Unaffiliated Holders") pursuant to the
Agreement and Plan of Merger (the "Merger") by and among the Company, Cable
Michigan and Mercom Acquisition, Inc. ("MAI"), dated as of September 10, 1998
(the "Merger Agreement"). Pursuant to the Merger Agreement, among other
things, MAI shall be merged into the Company (the "Merger") and holders of
each outstanding share of Mercom Common Stock (other than shares of Mercom
Common Stock owned by the Company as treasury stock or by Cable Michigan or
any wholly owned subsidiary of Cable Michigan and shares as to which
dissenters' rights have been validly exercised) shall receive as consideration
$12.00 in cash, without interest, (the "Consideration") for each share of
Mercom Common Stock.
In connection with the rendering of this opinion, we have:
(i) reviewed the terms and conditions of the Merger Agreement and the
financial terms of the Merger, all as set forth in the Merger Agreement;
(ii) analyzed certain historical business and financial information
relating to the Company;
(iii) reviewed certain financial forecasts and other data provided to us
by the Company, relating to the businesses of the Company, including the
most recent business plans for the Company, prepared by senior management
of Mercom responsible for day to day management of the Company pursuant to
a management agreement dated January 1, 1997, in the form furnished to us;
(iv) conducted discussions with members of the senior management of the
Company and Cable Michigan with respect to the historical operations,
businesses and prospects of the Company, the strategic objectives of the
Company and possible benefits which might be realized following the Merger;
(v) reviewed public information with respect to certain other companies
in lines of businesses we believe to be generally comparable in whole or in
part to the businesses of the Company and Cable Michigan and reviewed the
financial terms of certain other acquisitions involving companies in lines
of businesses we believe to be generally comparable in whole or in part to
businesses of the Company and Cable Michigan that have recently been
effected;
(vi) analyzed the offer price for the acquisition of each share of
common stock of Cable Michigan by Avalon Cable of Michigan, Inc., on a
stand-alone basis (excluding the value of Mercom Common Stock held by Cable
Michigan or its wholly owned subsidiaries);
(vii) reviewed the historical stock prices and trading volumes of the
Mercom Common Stock and the common stock of other companies which we
believe to be generally comparable with the Company and Cable Michigan; and
(viii) conducted such other financial studies, analyses and
investigations, as we deemed appropriate.
We have relied upon the accuracy and completeness of the foregoing
financial and other information and have not assumed responsibility for
independent verification of such information or conducted any independent
valuation or appraisal of any of the assets of the Company, nor have we been
furnished with any such appraisals. With respect to financial forecasts, we
have assumed that they have been reasonably prepared on a
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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.
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,
B-2
<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.
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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
C-2
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include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Sections 252, 254, 257, 258, 263 or 264 of this
title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that
C-3
<PAGE>
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been
received and the
C-4
<PAGE>
aggregate number of holders of such shares. Such written statement shall be
mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings
until it is finally determined that he is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
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<PAGE>
(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.
(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.
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<PAGE>
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 or
entity who is a director, executive officer or general partner of the Company
and each of the Avalon Filing Parties, as of February 22, 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.
DIRECTORS OF AVALON CABLE OF MICHIGAN, INC.
<TABLE>
<CAPTION>
Name Age Address Office Held Principal Occupations
---- --- ------------------ ------------- -------------------------
<C> <C> <C> <C> <S>
David W. Unger 42 800 Third Avenue, Chairman of David W. Unger is the
Suite 3100 the Board and Chairman of the Board and
New York, New York Assistant Assistant Secretary of
10022 Secretary Avalon, Cable Michigan
since 1998 and Mercom and co-founded
Avalon in 1997. Since
1995, Mr. Unger has
invested in, operated and
sold communications
businesses. Prior to
1995, Mr. Unger worked
for Communications Equity
Associates, Teleprompter
Corp., TKR Cable Co. and
as an investment banker.
In addition to his duties
to Avalon, Mr. Unger
serves as Vice President
of Audio Communications
Network LLC ("ACN"), a
provider of commercial
background and foreground
music. ABRY is the
principal investor in
ACN. Mr. Unger is a
director of the Company
and ACN.
Joel C. Cohen 53 800 Third Avenue, President, Joel C. Cohen is the
Suite 3100 Chief President, Chief
New York, New York Executive Executive Officer and
10022 Officer, Secretary of Avalon,
Director and Cable Michigan, Mercom.
Secretary He is also a Manager of
since 1998 Avalon. Mr. Cohen co-
founded Avalon in 1997.
From 1996 to 1997, Mr.
Cohen served as the Chief
Financial Officer of
Patient Education Media,
Inc. ("PEMI") and as a
consultant to various
cable companies. From
1995 to 1996 Mr. Cohen
served as a director and
as both Chief Operating
Officer and Chief
Financial Officer for
Harron Communications
Corp., a cable and
broadcast television
operator with more than
</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
Name Age Address Office Held Principal Occupations
---- --- --------------------- ------------- ------------------------
<C> <C> <C> <C> <S>
200,000 cable
subscribers. Prior to
1992, Mr. Cohen was
Senior Vice President of
United Artists
Entertainment Company
and President of its
international division.
Mr. Cohen also served in
various executive
positions at Group W
Cable and Teleprompter
Corp. Mr. Cohen is a
director of the Company.
As stated above, Mr.
Cohen served as the
Chief Financial Officer
of PEMI from June 1996
through December 1997.
Prior to June 1996, PEMI
did not employ a Chief
Financial Officer. PEMI
was formed in 1994 to
create and market
patient educational
videos and other
products under the
trademark TIME-LIFE
MEDICAL. PEMI ceased
producing education
video tapes in September
1996 and ceased all
operations on December
20, 1996. Thereafter,
PEMI proceeded to
liquidate the majority
of its assets. On March
14, 1997, PEMI filed a
petition under Chapter
11 of the United States
Bankruptcy Code. In
January 1998, Mr. Cohen
was appointed by the
Bankruptcy Court for the
Southern District of New
York to act as
disbursing agent in
relation to the
liquidation of PEMI.
Jay M. Grossman 39 18 Newbury Street Vice Jay M. Grossman is a
Boston, Massachusetts President and Vice President and
02116 Assistant Assistant Secretary of
Secretary, Cable Michigan, Mercom
Director and Avalon. He is also
since 1998 Manager of Avalon and a
partner in ABRY. Prior
to joining ABRY in 1996,
Mr. Grossman was
managing director and
co-head of Prudential
Securities' media and
entertainment investment
banking group. From 1986
to 1994, Mr. Grossman
served in various
positions, ultimately as
a senior vice president,
in the corporate finance
department of Kidder,
Peabody & Co.
Incorporated. Mr.
Grossman is a director
(or the equivalent) of
various companies
including Nexstar
Broadcasting Group, LLC,
Network Music Holdings
LLC, Connoisseur
Communications Partners,
L.P., DirecTel
International, LLC and
the Company.
Peggy J. Koenig 41 18 Newbury Street Vice Peggy J. Koenig is a
Boston, Massachusetts President and Vice President and
02116 Assistant Assistant Secretary of
Secretary, Cable Michigan, Avalon
Director and Mercom. She is also
since 1998 Manager of Avalon and a
partner in ABRY. Ms.
Koenig joined ABRY in
1993. From 1988 to 1992,
Ms. Koenig was a Vice
President, partner and
member of the Board of
Directors of Sillerman
Communications
Management Corporation,
a merchant bank, which
made investments
principally in the radio
industry. Ms. Koenig was
the Director of Finance
from 1986 to 1988 for
Magera Management, an
independent motion
picture financing
company. She is
presently a director (or
the equivalent) of
Connoisseur
Communications Partners,
L.P., Pinnacle Holdings
Inc., Network Music
Holdings LLC and the
Company.
Royce Yudkoff 43 18 Newbury Street Director Royce Yudkoff is a
Boston, Massachusetts since 1998 Manager of Avalon and
02116 President and Managing
Partner of ABRY. Prior
to joining ABRY, Mr.
Yudkoff was affiliated
with Bain & Company, an
international management
consulting firm. At
Bain, where he was a
partner from 1985
through 1988, he shared
significant
responsibility for the
firm's media practice.
Mr. Yudkoff is presently
a director (or the
equivalent) of various
companies including
Quorum Broadcast
Holdings Inc., Nexstar
Broadcasting Group, LLC,
Metrocall and Pinnacle
Holdings, Inc.
</TABLE>
D-2
<PAGE>
EXECUTIVE OFFICERS OF AVALON CABLE OF MICHIGAN, INC.
<TABLE>
<CAPTION>
Name Age Address Office Held Principal Occupations
---- --- --------------------- ------------- ------------------------
<C> <C> <C> <C> <S>
Joel C. Cohen 53 800 Third Avenue Director, Please see "Directors of
Suite 3100 President, Avalon Cable of
New York, New York Chief Michigan, Inc."
10022 Executive
Officer,
Secretary
Peter Polimino 41 800 Third Avenue Vice Peter Polimino is the
Suite 3100 President, Vice President of
New York, New York Finance Finance of Cable
10022 Michigan, Mercom, and
Avalon. 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 Peter Luscombe is the
Suite 3100 President, Vice President of
New York, New York Engineering Engineering of Cable
10022 Michigan, Mercom and
Avalon. Prior to joining
Avalon in August 1998,
Mr. Luscombe was
Executive Director of
Engineering for the 3.1
million subscriber
Atlantic Division of
Telecommunications, Inc.
("TCI"). His
responsibilities
included engineering
strategy and technical
operations for a variety
of cable systems,
including both smaller
traditional systems and
larger, more
technologically
aggressive cable systems
with cable modem and
compressed digital video
operations. From 1982
through 1997, Mr.
Luscombe was Vice
President of Engineering
for TKR Cable Company,
an 800,000 subscriber
MSO. Mr. Luscombe has
been a director of the
National Society of
Cable Telecommunications
Engineers ("SCTE") and a
member of the technical
advisory committee of
the Cable Television
Laboratories, Inc. Mr.
Luscombe maintains an
active membership in the
SCTE.
Mark Dineen 34 800 Third Avenue General Mark Dineen is the
Suite 3100 Manager of General Manager of
New York, New York Michigan Avalon's Michigan
10022 Operations operations. He is Vice
President of Cable
Michigan's Michigan
Cluster and Vice
President of Mercom. Mr.
Dineen joined Avalon
upon the consummation of
the Buyer Merger and
will oversee Avalon's
operations in Michigan.
Mr. Dineen has been
employed by Cable
Michigan in various
corporate and field
positions, including as
Corporate Director of
Marketing, since 1992.
From 1987 to 1992, Mr.
Dineen held marketing
and sales management
positions with Bresnan
Communications and
Harron Communications in
their Michigan cable
systems.
Jay M. Grossman 39 18 Newbury Street Director, Please see "Directors of
Boston, Massachusetts Vice Avalon Cable of
02116 President and Michigan, Inc."
Assistant
Secretary
Peggy J. Koenig 41 18 Newbury Street Director, Please see "Directors of
Boston, Massachusetts Vice Avalon Cable of
02116 President and Michigan, Inc."
Assistant
Secretary
</TABLE>
D-3
<PAGE>
DIRECTORS OF MERCOM, INC.
<TABLE>
<CAPTION>
Name Age Address Office Held Principal Occupations
---- --- -------------------------- ------------------- ------------------------
<C> <C> <C> <C> <S>
David W. Unger 42 800 Third Avenue Chairman of the Please see "Directors of
Suite 3100 Board and Assistant Avalon Cable of
New York, New York 10022 Secretary since Michigan, Inc."
1998
Joel C. Cohen 53 800 Third Avenue President, Chief Please see "Directors of
Suite 3100 Executive Officer, Avalon Cable of
New York, New York 10022 Secretary and Michigan, Inc."
Director since 1998
Jay M. Grossman 39 18 Newbury Street Vice President and Please see "Directors of
Boston, Massachusetts Assistant Avalon Cable of
02116 Secretary, Director Michigan, Inc."
since 1998
Peggy J. Koenig 41 18 Newbury Street Vice President and Please see "Directors of
Boston, Massachusetts Assistant Avalon Cable of
02116 Secretary, Director Michigan, Inc."
since 1998
Clifford L. Jones 70 548 Dogwood Drive Director since 1991 President, Capital
Messiah Village Region Economic
Mechanicsburg, Development Corporation
Pennsylvania 17055 from September 1992 to
February 1994. He also
served as President,
Pennsylvania Chamber of
Business & Industry from
1983 to 1991. Mr. Jones
is a Director of
Pennsylvania Power &
Light, Delta Development
Group, Inc. and Benatec
Associates.
Harold J. Rose, Jr. 62 P.O. Box 89 Director since 1991 Chairman of the Board of
Dallas, Pennsylvania 18612 Pennsylvania 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
13th Floor PaineWebber, Inc. since
New York, New York 10019 January 1987.
EXECUTIVE OFFICERS OF MERCOM, INC.
<CAPTION>
Name Age Address Office Held Principal Occupations
---- --- -------------------------- ------------------- ------------------------
<C> <C> <C> <C> <S>
Joel C. Cohen 53 800 Third Avenue President, Chief Please see "Directors of
Suite 3100 Executive Officer, Avalon Cable of
New York, New York 10022 Secretary Michigan, Inc."
Peter Polimino 41 800 Third Avenue Vice President, Please see "Executive
Suite 3100 Finance Officers of Avalon Cable
New York, New York 10022 of Michigan, Inc."
Peter Luscombe 41 800 Third Avenue Vice President, Please see "Executive
Suite 3100 Engineering Officers of Avalon Cable
New York, New York 10022 of Michigan, Inc."
Mark Dineen 34 800 Third Avenue General Manager Please see "Executive
Suite 3100 Michigan Operations Officers of Avalon Cable
New York, New York 10022 of Michigan, Inc."
Jay M. Grossman 39 18 Newbury Street Vice President and Please see "Directors of
Boston, Massachusetts Assistant Secretary Avalon Cable of
02116 Michigan, Inc."
David W. Unger 42 800 Third Avenue Chairman of the Please see "Directors of
Suite 3100 Board and Assistant Avalon Cable of
New York, New York 10022 Secretary since Michigan, Inc."
1998
Peggy J. Koenig 41 18 Newbury Street Vice President and Please see "Directors of
Boston, Massachusetts Assistant Secretary Avalon Cable of
02116 Michigan, Inc."
</TABLE>
D-4
<PAGE>
DIRECTORS OF MERCOM ACQUISITION, INC.
<TABLE>
<CAPTION>
Name Age Address Office Held Principal Occupations
---- --- ------------------------ ------------- ------------------------
<C> <C> <C> <C> <S>
Joel C. Cohen 53 800 Third Avenue Director Please see "Directors of
Suite 3100 Avalon Cable of
New York, New York 10022 Michigan, Inc."
EXECUTIVE OFFICERS OF MERCOM ACQUISITION, INC.
<CAPTION>
Name Age Address Office Held Principal Occupations
---- --- ------------------------ ------------- ------------------------
<C> <C> <C> <C> <S>
Joel C. Cohen 53 800 Third Avenue President, Please see "Directors of
Suite 3100 Chief Avalon Cable of
New York, New York 10022 Executive Michigan, Inc."
Officer,
Secretary and
Director
since 1998
Peter Polimino 41 800 Third Avenue Vice Please see "Executive
Suite 3100 President, Officers of Avalon Cable
New York, New York 10022 Finance of Michigan, Inc."
Peter Luscombe 41 800 Third Avenue Vice Please see "Executive
Suite 3100 President, Officers of Avalon Cable
New York, New York 10022 Engineering of Michigan, Inc."
Mark Dineen 34 800 Third Avenue General Please see "Executive
Suite 3100 Manager Officers of Avalon Cable
New York, New York 10022 Michigan of Michigan, Inc."
Operations
Jay M. Grossman 39 18 Newbury Street Vice Please see "Directors of
Boston, Massachusetts President and Avalon Cable of
02116 Assistant Michigan, Inc."
Secretary
David W. Unger 42 800 Third Avenue Chairman of Please see "Directors of
Suite 3100 the Board and Avalon Cable of
New York, New York 10022 Assistant Michigan, Inc."
Secretary
since 1998
Peggy J. Koenig 41 18 Newbury Street Vice Please see "Directors of
Boston, Massachusetts President and Avalon Cable of
02116 Assistant Michigan, Inc."
Secretary
DIRECTORS OF AVALON CABLE OF MICHIGAN HOLDINGS, INC.
<CAPTION>
Name Age Address Office Held Principal Occupations
---- --- ------------------------ ------------- ------------------------
<C> <C> <C> <C> <S>
David W. Unger 42 800 Third Avenue Chairman of Please see "Directors of
Suite 3100 the Board and Avalon Cable of
New York, New York 10022 Assistant Michigan, Inc."
Secretary
since 1998
Joel C. Cohen 53 800 Third Avenue President, Please see "Directors of
Suite 3100 Chief Avalon Cable of
New York, New York 10022 Executive Michigan, Inc."
Officer,
Director and
Secretary
since 1998
Jay M. Grossman 39 18 Newbury Street Vice Please see "Directors of
Boston, Massachusetts President and Avalon Cable of
02116 Assistant Michigan, Inc."
Secretary,
Director
since 1998
Peggy J. Koenig 41 18 Newbury Street Vice Please see "Directors of
Boston, Massachusetts President and Avalon Cable of
02116 Assistant Michigan, Inc."
Secretary,
Director
since 1998
Royce Yudkoff 43 18 Newbury Street Director Please see "Directors of
Boston, Massachusetts since1998 Avalon Cable of
02116 Michigan, Inc."
</TABLE>
D-5
<PAGE>
EXECUTIVE OFFICERS OF AVALON CABLE OF MICHIGAN HOLDINGS, INC.
<TABLE>
<CAPTION>
Name Age Address Office Held Principal Occupations
---- --- ------------------------ ------------- ------------------------
<C> <C> <C> <C> <S>
Joel C. Cohen 53 800 Third Avenue Director, Please see "Directors of
Suite 3100 President, Avalon Cable of
New York, New York 10022 Chief Michigan, Inc."
Executive
Officer,
Secretary
Peter Polimino 41 800 Third Avenue Vice Please see "Executive
Suite 3100 President, Officers of Avalon Cable
New York, New York 10022 Finance of Michigan, Inc."
Peter Luscombe 41 800 Third Avenue Vice Please see "Executive
Suite 3100 President, Officers of Avalon Cable
New York, New York 10022 Engineering of Michigan, Inc."
Jay M. Grossman 39 18 Newbury Street Director, Please see "Directors of
Boston, Massachusetts Vice Avalon Cable of
02116 President and Michigan, Inc."
Assistant
Secretary
Peggy J. Koenig 41 18 Newbury Street Director, Please see "Directors of
Boston, Massachusetts Vice Avalon Cable of
02116 President and Michigan, Inc."
Assistant
Secretary
</TABLE>
MANAGING MEMBER OF AVALON CABLE HOLDINGS, LLC
<TABLE>
<CAPTION>
Name Address Office Held
- ---- --------------------------- ---------------
<S> <C> <C>
ABRY Broadcast Partners III, L.P. c/o ABRY Partners, Inc. Managing Member
18 Newbury Street
Boston, Massachusetts 02116
</TABLE>
EXECUTIVE OFFICERS OF AVALON CABLE HOLDINGS, LLC
<TABLE>
<CAPTION>
Name Age Address Office Held Principal Occupations
---- --- ------------------------ ------------- ------------------------
<C> <C> <C> <C> <S>
Joel C. Cohen 53 800 Third Avenue President, Please see "Directors of
Suite 3100 Chief Avalon Cable of
New York, New York 10022 Executive Michigan, Inc."
Officer,
Secretary
Peter Polimino 41 800 Third Avenue Vice Please see "Executive
Suite 3100 President, Officers of Avalon Cable
New York, New York 10022 Finance of Michigan, Inc."
Peter Luscombe 41 800 Third Avenue Vice Please see "Executive
Suite 3100 President, Officers of Avalon Cable
New York, New York 10022 Engineering of Michigan, Inc."
Jay M. Grossman 39 18 Newbury Street Vice Please see "Directors of
Boston, Massachusetts President and Avalon Cable of
02116 Assistant Michigan, Inc."
Secretary
Peggy J. Koenig 41 18 Newbury Street Vice Please see "Directors of
Boston, Massachusetts President and Avalon Cable of
02116 Assistant Michigan, Inc."
Secretary
</TABLE>
GENERAL PARTNER OF ABRY BROADCAST PARTNERS III, L.P.
<TABLE>
<CAPTION>
Name Address Office Held
- ---- --------------------------- ---------------
<S> <C> <C>
ABRY Equity Investors, L.P. c/o ABRY Partners, Inc. General Partner
18 Newbury Street
Boston, Massachusetts 02116
</TABLE>
D-6
<PAGE>
GENERAL PARTNER OF ABRY EQUITY INVESTORS, L.P.
<TABLE>
<CAPTION>
Name Address Office Held
- ---- --------------------------- ---------------
<S> <C> <C>
ABRY Holdings III, Inc. c/o ABRY Partners, Inc. General Partner
18 Newbury Street
Boston, Massachusetts 02116
</TABLE>
DIRECTOR OF ABRY HOLDINGS III, INC.
<TABLE>
<CAPTION>
Name Age Address Office Held Principal Occupations
---- --- --------------------- ------------- ------------------------
<C> <C> <C> <C> <S>
Royce Yudkoff 43 18 Newbury Street Director, Please see "Directors of
Boston, Massachusetts President and Avalon Cable of
02116 Treasurer Michigan, Inc."
</TABLE>
EXECUTIVE OFFICERS OF ABRY HOLDINGS III, INC.
<TABLE>
<CAPTION>
Name Age Address Office Held Principal Occupations
---- --- --------------------- ------------- ------------------------
<C> <C> <C> <C> <S>
Royce Yudkoff 43 18 Newbury Street Director, Please see "Directors of
Boston, Massachusetts President and Avalon Cable of
02116 Treasurer Michigan, Inc."
Penny Garber 35 18 Newbury Street Secretary Penny Garber is the
Boston, Massachusetts Secretary of ABRY
02116 Holdings III, Inc. She
is also a principal and
Secretary of ABRY. She
joined ABRY in 1990 from
Price Waterhouse, where
she served as Senior
Accountant in the Audit
Division from 1985 to
1990. Ms. Garber is
presently a director (or
the equivalent) of
Nexstar Broadcasting
Group LLC, Network Music
Holdings LLC, Quorum
Broadcast Holdings Inc.
and Pinnacle Towers Inc.
Ms. Garber graduated
summa cum laude from
Bryant College.
</TABLE>
D-7
