<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ..................... to .......................
Commission file number 0-15392
Faircom Inc.
(Exact name of registrant as specified in its charter)
Delaware 87-0394057
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Glen Head Road, Old Brookville, New York 11545
(Address of principal executive offices)
(516) 676-2644
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of August 12, 1997:
Common Stock, par value $.01 7,378,199
(Title of each class) (Number of Shares)
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRCOM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
---------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross broadcasting
revenues $2,454,456 $2,407,877 $1,424,179 $1,365,058
Less: agency commissions (296,197) (265,110) (170,100) (158,244)
------------ ----------- ----------- -----------
Net broadcasting
revenues 2,158,259 2,142,767 1,254,079 1,206,814
---------- ----------- ----------- ----------
Programming and
technical expenses 616,961 608,138 323,105 319,027
Selling, general and
administrative expenses 864,459 826,019 428,000 411,349
Depreciation and
amortization 157,248 156,960 78,624 78,480
Corporate expenses 210,214 171,717 94,680 81,407
------------ ------------ ------------ ---------
Total operating expenses 1,848,882 1,762,834 924,409 890,263
---------- ----------- ----------- ---------
Income from operations 309,377 379,933 329,670 316,551
Interest expense (350,275) (353,901) (177,233) (167,471)
Other income 1,964 4,757 380 1,482
------------- ------------- ------------ ----------
Income (loss) before taxes on
income (38,934) 30,789 152,817 150,562
Taxes on income (33,542) (32,692) (17,542) (16,000)
------------ ------------ ----------- -----------
Income (loss) before extraordinary items (72,476) (1,903) 135,275 134,562
------------ -------- --------- -------
Extraordinary gain from debt extinguishment 370,060 - 370,060 -
Extraordinary loss from debt extinguishment (4,703,370) - (4,703,370) -
---------------- ----------------- ---------------- -------------
Extraordinary items (4,333,310) - (4,333,310) -
---------------- ----------------- ---------------- -------------
Net income (loss) $ (4,405,786) $ (1,903) $ (4,198,035) $ 134,562
=============== ============= ============= =========
Primary income
(loss) per share of
common stock-assuming no dilution:
Income (loss) before extraordinary items $ (.01) $ - $ .02 $ .02
Extraordinary items (.59) - (.59) -
-------- ------ ------- -------
Primary net income (loss)
per common share $ (.60) $ - $ (.57) $ .02
======= ====== ======= ======
Weighted average shares
outstanding-primary 7,378,199 7,378,199 7,378,199 7,378,199
========== ========== ========= =========
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRCOM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
---------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Fully diluted income (loss) per common
share-assuming full dilution:
Income (loss) before extraordinary items $ -- $ .01
Extraordinary items -- --
---- ----
Fully diluted net income (loss) per
common share $ -- $ .01
==== =====
Weighted average shares
outstanding-fully diluted 16,459,701 16,459,701
========== ==========
</TABLE>
3
<PAGE>
FAIRCOM INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 461,792 $ 123,221
Accounts receivable, less allowance
of $20,000 for possible losses in
1997 and 1996 933,666 1,169,772
Prepaid expenses 71,836 12,592
-------------- ------------
Total current assets 1,467,294 1,305,585
-------------- ------------
Property and equipment, at cost 9,434,671 6,344,519
Less accumulated depreciation and
amortization (5,256,200) (5,159,965)
-------------- -------------
Property and equipment, net 4,178,471 1,184,554
-------------- ------------
Intangible assets, net of accumulated
amortization of $542,310 in 1997 and
$515,670 in 1996 6,185,127 1,627,767
Other assets:
Deferred financing costs 1,006,470 167,222
Other 33,825 41,325
-------------- ------------
7,225,422 1,836,314
-------------- ------------
$ 12,871,187 $ 4,326,453
============== ============
LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
Accounts payable $ 62,228 $ 76,853
Accrued expenses and liabilities 110,158 199,054
Taxes payable 5,537 10,150
Current portion of interest payable - 226,417
Current portion of senior secured term notes 206,217 552,000
Current portion of obligations under
capital leases - 3,547
-------------- ------------
Total current liabilities 384,140 1,068,021
Long-term debt, less current portion:
Senior secured term notes 12,293,783 6,595,254
Convertible and exchangeable
subordinated promissory notes 10,000,000 681,630
Interest payable, less current portion - 350,494
Deferred rental income 84,991 101,995
Appraisal right liability - 1,015,000
-------------- ------------
Total liabilities 22,762,914 9,812,394
-------------- ------------
Capital deficit:
Common stock-$.01 par value, 35,000,000
shares authorized; 7,378,199 shares
issued and outstanding 73,782 73,782
Additional paid-in capital 2,605,813 2,605,813
Deficit (12,571,322) (8,165,536)
-------------- -------------
Total capital deficit (9,891,727) (5,485,941)
-------------- -------------
$ 12,871,187 $ 4,326,453
============== ============
</TABLE>
4
<PAGE>
FAIRCOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,405,786) $ (1,903)
------------ ----------
Adjustments to reconcile net
loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 157,248 156,960
Amortization of deferred
rental income (17,004) (17,000)
Extraordinary items 4,333,310 -
Increase (decrease) in cash flows
from changes in operating
assets and liabilities:
Accounts receivable 236,106 15,635
Prepaid expenses (59,244) (37,832)
Accounts payable (14,625) (3,925)
Accrued expenses and
liabilities (88,896) (4,441)
Taxes payable (4,613) (4,000)
Interest payable (206,851) (125,828)
------------ ---------
Total adjustments 4,335,431 (20,431)
------------ ---------
Net cash provided by (used in)
operating activities $ (70,355) $(22,334)
------------ ---------
</TABLE>
5
<PAGE>
FAIRCOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30, 1997 June 30, 1996
------------- -----------
<S> <C> <C>
Cash flows from investing activities:
Acquisition of radio stations $ (7,650,000) $ -
Capital expenditures (24,152) (12,173)
------------- -----------
Net cash used in
investing activities (7,674,152) (12,173)
------------- -----------
Cash flows from financing activities:
Payments for deferred financing costs (866,121) -
Principal payments on long-term debt (12,532,254) (247,249)
Payment of appraisal right liability (1,015,000) -
Principal payments under capital
lease obligations (3,547) (9,147)
Proceeds from long-term debt 22,500,000 -
------------- -----------
Net cash provided by (used in)
financing activities 8,083,078 (256,396)
------------- -----------
Net increase (decrease) in cash and cash
equivalents 338,571 (290,903)
Cash and cash equivalents,
beginning of period 123,221 363,532
------------- ----------
Cash and cash equivalents,
end of period $ 461,792 $ 72,629
============= ==========
</TABLE>
6
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all the information and footnotes required by generally accepted accounting
principles for completed financial statements. In the opinion of management,
the statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. The results of operations for any interim period are not necessarily
indicative of the results for a full year.
It is suggested that these consolidated financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996, as filed with the Commission.
2. Net Loss Per Common Share
Fully diluted net loss per common share for the six
months and the three months ended June 30, 1997 is not presented because the
effects of the assumed conversion of the Company's Convertible Subordinated
Promissory Notes and the Company's Subordinated Senior Convertible Note would
be antidilutive in those periods. The effects of the assumed exercise of
outstanding options were not dilutive and, accordingly, have been excluded
from both the primary and fully diluted per share calculations.
3. Acquisition of Radio Stations
As of June 30, 1997, the Company, through a
wholly-owned subsidiary, Faircom Mansfield Inc. ("Faircom Mansfield"),
acquired the assets and operations of two commercial radio stations, WMAN-AM
and WYHT-FM, both located in Mansfield, Ohio (the "Stations"), from Treasure
Radio Associates L.P. ("Treasure Radio") and its principals. The acquisition
was consummated pursuant to the terms of an Asset Purchase Agreement, made as
of May 20, 1997 (the "Agreement"), by and among the Company, Treasure Radio
and Harrison M. Fuerst, a principal of Treasure Radio. Under the terms of the
Agreement, Treasure Radio received aggregate consideration of $7,350,000 in
cash. In addition, the Company paid $300,000 in cash to Mr. Fuerst in
consideration of a five year non-compete agreement. The Stations were acquired
using a portion of the funds, aggregating $22,500,000, provided by the
financing activities of the Company described in Note 4 below.
4. Related Additional Financing and Refinancing
As of June 30, 1997, the Company completed the sale
of $10,000,000 aggregate principal amount of its convertible subordinated
promissory notes due July
7
<PAGE>
1, 2002 (the "Notes"). The Notes consist of Class A and Class B convertible
subordinated promissory notes, each in the aggregate principal amount of
$5,000,000. The Class A Notes are convertible into 11,242,500 shares of the
Company's common stock, $.01 par value (the "Common Stock"), and the Class B
Notes into 7,769,500 shares of Common Stock. The aggregate 19,012,000 of such
shares on full conversion of the Notes would represent 67.1% of the Company's
outstanding Common Stock on a fully diluted and adjusted basis. The Notes bear
interest at 7% per annum, compounded quarterly, payable at the maturity of the
Notes. The Notes have not been registered under the Securities Act of 1933, as
amended, and may not be offered or sold in the United States absent
registration under the Act or an applicable exemption from registration.
The proceeds from the sale of the Notes were used
(i) to purchase for $6,400,000 from Citicorp Venture Capital, Ltd.
("Citicorp") the Company's 8.65% Senior Convertible Note ("Convertible Note")
in the principal amount of $181,630 due December 1, 2004 and the Company's 10%
Senior Exchangeable Note ("Exchangeable Note") in the principal amount of
$500,000 due December 1, 2004, representing all of Citicorp's interests in the
Company, and (ii) to pay a portion of the purchase price for the acquisition
of the Stations and the legal and other fees and expenses of such acquisition.
The Convertible Note was convertible into 9,081,502 shares of Common Stock,
which would have represented 52.5% of the Company's fully diluted outstanding
Common Stock prior to the acquisition and the financing activities described
in this report. The Exchangeable Note gave Citicorp the right to request, at
any time after December 1, 1999, that $350,000 principal amount of such Note
be exchanged for a payment equal to 19.99% of the appraised value, as defined,
of the Company's subsidiary which owns and operates radio stations in Flint,
Michigan.
The Company also refinanced its existing senior
secured term loan credit facility with AT&T Commercial Finance Corporation
("AT&T"). As part of the refinancing, the Company increased its outstanding
debt to AT&T from $7,371,000 to $12,500,000. The additional borrowing was used
for the acquisition of the Stations and related expenses. The term loan
matures July 1, 2002 with optional renewal by the Company under certain
circumstances for an additional five years. Interest on the term loan
initially is at the rate of 4.50% over 90 day commercial paper rates.
5. Extraordinary Gain and Loss from Debt Extinguishment
In connection with the AT&T refinancing, certain
related accrued interest was extinguished, resulting in an extraordinary gain
of $370,060.
In connection with the purchase by the Company of
its $181,630 Convertible Note and its $500,000 Exchangeable Note for
$6,400,000 from Citicorp, the Company's appraisal right liability of
$1,015,000 was also extinguished, resulting in an extraordinary loss of
$4,703,370 from such debt extinguishment.
The related current income tax effect of these
extraordinary items was not material.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's net broadcasting revenues increased 0.7% to
$2,158,000 in the six months ended June 30, 1997 from $2,143,000 in the six
months ended June 30, 1996, and 3.9% to $1,254,000 in the three months ended
June 30, 1997 from $1,207,000 in the three months ended June 30, 1996. Net
revenues in the six months and three months ended June 30, 1997 as compared
with the 1996 periods increased primarily due to higher national advertising
activity in the Flint, Michigan radio market and resulting higher national
advertising revenues at the Company's Flint radio stations, offset, in part,
by lower local advertising revenues at the stations.
Operating expenses before depreciation, amortization and
corporate expenses increased by 3.3% to $1,481,000 in the six months ended
June 30, 1997 from $1,434,000 in the comparable 1996 period, and increased by
2.8% to $751,000 in the three months ended June 30, 1997 from $730,000 in the
three months ended June 30, 1996.
Net broadcasting revenues in excess of operating expenses
before depreciation, amortization and corporate expenses (broadcast cash flow)
decreased 4.5% to $677,000 in the six months ended June 30, 1997 from $709,000
in the comparable 1996 period, and increased 5.6% to $503,000 in the three
months ended June 30, 1997 from $476,000 in the 1996 period. These decreases
and increases resulted from the above-described net broadcasting revenue and
operating expense increases in the 1997 periods compared with 1996.
Corporate expenses increased by 22.4% to $210,000 in the six
months ended June 30, 1997 from $172,000 in the comparable 1996 period,
primarily as a result of higher employee compensation, professional fees and
travel expense in the 1997 period. A significant portion of such professional
fees and travel expense in the 1997 period related to the Company's
acquisition activities.
As a result principally of an extraordinary loss from debt
extinguishment of $4,703,000, offset in part by an extraordinary gain from
debt extinguishment of $370,000, net loss increased to $4,406,000 in the six
months ended June 30, 1997 from net loss of $1,900 in the first six months of
1996, and to a net loss of $4,198,000 in the three months ended June 30, 1997
from net income of $135,000 in the comparable period of 1996.
Liquidity and Capital Resources
In the six months ended June 30, 1997, net cash used in
operating activities was $70,000 compared with $22,000 used in operating
activities in the comparable 1996 period. Net increase in cash and cash
equivalents was $339,000 in 1997 compared with a net decrease of $291,000 in
1996.
9
<PAGE>
Historically, the Company's net cash provided by operating
activities is lower in its first and second quarters, and the Company expects
such net cash to increase in the balance of 1997.
Based upon current interest rates, the Company believes its
interest expense for the balance of 1997 will be approximately $520,000.
Scheduled debt principal payments are $158,000. Corporate expenses and capital
expenditures for the remainder of 1997 are estimated to be approximately
$190,000 and $100,000, respectively. The Company expects to be able to meet
such interest expense, debt repayment, corporate expenses and capital
expenditures, aggregating $968,000, from net cash provided by operations and
current cash balances.
The Company is currently negotiating with respect to
additional radio station acquisitions. Such acquisitions would require
additional debt and equity financing. In addition, the Company is engaged in
discussions regarding various forms of combinations with other group
broadcasters.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule
All other items of this Part are inapplicable.
11
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAIRCOM INC.
(Registrant)
/s/ Joel M. Fairman
---------------------------------
Joel M. Fairman
Chairman of the Board
President and Treasurer
(Principal Executive Officer
and Chief Financial Officer)
Date: August 12, 1997
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 461,792
<SECURITIES> 0
<RECEIVABLES> 953,666
<ALLOWANCES> 20,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,467,294
<PP&E> 9,434,671
<DEPRECIATION> 5,256,200
<TOTAL-ASSETS> 12,871,187
<CURRENT-LIABILITIES> 384,140
<BONDS> 22,293,783
0
0
<COMMON> 73,782
<OTHER-SE> (9,965,509)
<TOTAL-LIABILITY-AND-EQUITY> 12,871,187
<SALES> 0
<TOTAL-REVENUES> 2,454,456
<CGS> 0
<TOTAL-COSTS> 913,158
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 350,275
<INCOME-PRETAX> (38,934)
<INCOME-TAX> 33,542
<INCOME-CONTINUING> (72,476)
<DISCONTINUED> 0
<EXTRAORDINARY> (4,333,310)
<CHANGES> 0
<NET-INCOME> (4,405,786)
<EPS-PRIMARY> (.60)
<EPS-DILUTED> 0
</TABLE>
