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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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, N.Y. 11545
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 676-2644
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, $.01 Par Value Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
NONE
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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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 20, 1998, the aggregate market value of the registrant's
voting stock held by non-affiliates was approximately $5,294,000.
The number of outstanding shares of Common Stock as of March 20, 1998
was 7,378,199.
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PART I
ITEM 1. BUSINESS
The Company
Faircom Inc., a Delaware corporation ("Faircom" or the
"Company"), owns and operates six radio stations, WFNT(AM) and WCRZ(FM) in
Flint, Michigan; WWBN(FM) in Tuscola, Michigan, a community north of Flint;
WMAN(AM) and WYHT(FM) in Mansfield, Ohio, and WSWR(FM) in Shelby, Ohio
adjoining Mansfield.
Faircom was founded by Joel M. Fairman in April 1984 and
began operations with the objective of acquiring broadcasting properties at
prices considered attractive by Faircom, financing them on terms satisfactory
to Faircom, managing them in accordance with Faircom's operating strategy and
building a broadcasting group. Faircom has sought to acquire radio properties
which have a history of growing revenues and broadcast cash flow, have capable
operating management and are in communities with good growth prospects or
which have attractive competitive environments. Faircom focuses its
acquisition efforts on medium and smaller radio markets, particularly where
there may be an opportunity to achieve a significant cluster of stations in
the market or to add additional stations in surrounding communities. Faircom
has not purchased, and does not foresee purchasing in the near future,
properties with negative cash flows, or so-called "under-performing" or
"turnaround" properties, unless they complement or can be combined with the
operations of positive cash flow properties in a market or regional cluster.
Faircom's strategy is to have at least $1,000,000 in broadcast cash flow and
be among the top three operators in each of its markets.
In June 1997, Faircom, through its wholly-owned subsidiary,
Faircom Mansfield Inc. ("Faircom Mansfield"), purchased substantially all of
the assets of WMAN(AM) and WYHT(FM) for total cash consideration of
$7,650,000. Faircom also negotiated the refinancing of all its existing
indebtedness, increased such indebtedness and obtained additional equity
capital in connection with the acquisition.
In January 1998, Faircom purchased substantially all of the
assets and operations of radio station WSWR(FM) in Shelby, Ohio for $1,125,000
in cash. The acquisition was financed with internal funds and a loan to
Faircom of $1,100,000 from Blue Chip Capital Fund II Limited. This loan is
expected to be refinanced from term loans to Regent Communications Inc.
("Regent") at the closing of the pending merger of Faircom and Regent
discussed below. The loan is in the form of a subordinated note, matures on
the first to occur of April 1, 1999 or the closing of the merger and bears
accrued interest at 14% per annum, payable at maturity.
Faircom continuously reviews radio properties for possible
acquisition, and several acquisitions are currently being actively pursued. No
assurance can be given that Faircom will successfully consummate any of such
acquisitions.
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Faircom's executive offices are located at 333 Glen Head
Road, Suite 220, Old Brookville, New York 11545 and its telephone number is
(516) 676-2644. All of Faircom's properties are owned and operated through
subsidiary corporations and references to the term "Faircom" or the "Company"
herein include such subsidiaries unless the context requires otherwise.
Pending Merger
On December 5, 1997, Faircom signed an agreement to merge
with Regent Communications, Inc. ("Regent"), another group radio broadcaster.
Under the terms of the agreement, Faircom will merge with and into a
subsidiary of Regent. The shareholders of Faircom will receive shares of
Regent Series C Convertible Preferred Stock, par value $.01 per share ("Series
C Preferred Stock").
The Series C Preferred Stock has full voting rights,
provides for annual cumulative dividends of 7%, and is convertible on a
one-for-one basis (subject to adjustment in certain events) into the common
stock, $.01 par value per share, of Regent. The Series C Preferred Stock is
subject to mandatory conversion under certain circumstances. In the event of a
liquidation of Regent, the Series C Preferred Stock has a preference in the
amount of its stated value of $5.00 per share, together with accrued and
unpaid dividends.
In the merger, the outstanding shares of Faircom Common
Stock will be exchanged for fully paid and nonassessable shares of Series C
Preferred Stock, and each outstanding Faircom option will be converted into a
Regent option entitling the holder to acquire, on equivalent terms, the same
number of shares of Series C Preferred Stock as the holder would have been
entitled to receive in the merger if such Faircom option had been exercised in
full prior to the date of the merger. The number of shares of Series C
Preferred Stock to be issued in the merger and issuable pursuant to Regent
options to be received in exchange for Faircom options in the merger will be
based upon an aggregate liquidation preference amount of $33,162,000, adjusted
by the amount of Faircom's net working capital and decreased by its senior
debt and by one-half of the prepayment premium on such senior debt to be paid
at the closing of the merger, all as computed as of the last day of the month
immediately preceding the closing date of the merger.
Faircom anticipates a closing of the merger in the second
quarter of 1998. The closing of the merger is subject to the effectiveness of
a registration statement and delivery of a related proxy statement to
Faircom's stockholders, satisfaction of the conditions of the merger agreement
and the approval of Faircom's stockholders.
Operating Strategy
Faircom's strategy has been to purchase radio properties
that exhibit growing revenues and broadcast cash flow, and have experienced,
in-place operating personnel. After acquiring a radio station, Faircom reviews
the station's operations and
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attempts to realize economies associated with ownership of multiple stations
by centralizing such functions as accounting and other administrative
activities. A minimal staff is maintained at the corporate level reflecting
Faircom's strategy of minimizing corporate expenses while giving considerable
autonomy to its station managers.
Faircom relies on experienced station managers who are given
the authority for decision making at the station level, subject to guidance by
Faircom's management. Faircom's station managers are partially compensated on
the basis of their ability to meet or exceed budgeted operating results.
Consequently, operating personnel can benefit by meeting the revenue and
expense objectives of Faircom.
Each station targets specific demographic groups based upon
advertiser demand, the format of the station and the competition in the
market. Through program selection, promotion, advertising and the use of
selected on-air personnel, each station attempts to attract a target audience
that it believes is attractive to advertisers. Faircom retains consultants to
assist its programming personnel by evaluating and suggesting improvements for
programming. Faircom also conducts research through outside consultants to
evaluate and improve its programming and also uses its own personnel for such
research.
The Radio Broadcasting Industry
At December 31, 1997, there were 4,762 commercial AM and
5,542 commercial FM stations authorized and operating in the United States. An
increasing number of persons listen to FM radio because of clearer sound
characteristics and stereo transmission. In the spring of 1997, FM
listenership was about 78% of total radio audience.
Operations
Radio station revenue is derived predominantly from local
and regional advertising and to a lesser extent from national advertising.
Network compensation also provides some revenue. For example, in 1997,
approximately 77% of Faircom's consolidated station advertising revenues were
from local and regional sales, 22% from national sales and about 1% from
network or syndication compensation. Local and regional sales generally are
made by a station's sales staff. National sales generally are made by
"national rep" firms, specializing in radio advertising sales on the national
level. These firms are compensated on a commission-only basis. Local and
regional sales are made primarily to businesses in the market covered by a
station's broadcast signal and to some extent to businesses in contiguous or
nearby markets. Such businesses include auto dealers, soft drink, beer and
wine distributors, fast food outlets and financial institutions. National
sales are made to larger, nationwide advertisers, such as soft drink
producers, automobile manufacturers and airlines. Most advertising contracts
are short-term, generally running only for a few weeks. Advertising rates
charged by a radio station are based primarily on the station's ability to
attract
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audiences in the demographic groups which advertisers wish to reach and on the
number of stations competing in the market area. Rating service surveys
quantify the number of listeners tuned to the station at various times. Rates
are generally highest during morning and evening drive-time hours. Faircom's
stations' advertising sales are made by their sales staffs under the direction
of a general manager or sales managers. Television, billboard, newspaper and
direct mail advertising, as well as special events and promotions, can be used
to supplement direct contact by the sales staff in developing advertising
clients.
The primary costs incurred in operating a radio station are
salaries, programming, promotion and advertising expenditures, occupancy costs
of premises for studios and offices, transmitting and other equipment expenses
and music license royalty fees.
Radio broadcasting revenues are spread over the calendar
year. The first quarter generally reflects the lowest and the third and fourth
quarters the highest revenues for the year, due in part to increases in retail
advertising in the summer and in the fall in preparation for the holiday
season and, in election years, to political advertising.
The radio industry is continually faced with technological
changes and innovations, the possible rise in popularity of competing
entertainment and communications media, changes in labor conditions,
governmental restrictions and actions of federal regulatory bodies, including
the FCC, any of which could have a material effect on Faircom's business.
However, broadcasting stations have generally enjoyed growth in listeners and
value within the past several decades. Population increases and greater
availability of radios, particularly car and portable radios, have contributed
to this growth.
Competition
The radio broadcasting industry is a highly competitive
business. Faircom's radio broadcasting stations compete for audience share and
revenue directly with the other AM and FM radio stations in their respective
market areas, as well as with other advertising media such as newspapers,
television, magazines, outdoor advertising, transit advertising and mail
marketing. Competition within the radio broadcasting industry occurs primarily
in the individual market areas so that a station in one market does not
generally compete with stations in other market areas. In addition to
management experience, factors which are material to competitive position
include the station's ratings in its market, rates charged for advertising
time, broadcast signal coverage, assigned frequency, audience characteristics,
the ability to create and execute promotional campaigns for clients and for
the station, local program acceptance and the number and characteristics of
other stations in the market area. Faircom attempts to improve its competitive
position by reviewing programming and the programming of competitors,
upgrading technical facilities where appropriate, attempting to expand sales
to existing advertising clients and developing new client
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relationships, and by promotional campaigns aimed at the demographic groups
targeted by its stations.
In order to provide additional opportunity for persons
interested in obtaining radio broadcasting licenses, including minorities, the
FCC in 1984 proposed new licenses for new full service FM broadcast stations
in 684 communities. This FCC program is referred to as the "Docket 80-90"
proceeding. Where these stations have commenced commercial broadcasting, they
have increased competition in these markets. Also, it has been customary in
the industry for experienced operators to buy stations in markets they
consider attractive and attempt to improve the performance of these stations
by additional investment and better management, thus increasing competition in
these markets.
The FCC recently has allocated spectrum to a new technology,
digital audio broadcasting ("DAB"), to deliver satellite-based audio
programming to a national or regional audience and has adopted regulations for
a DAB service. DAB may provide a medium for the delivery by satellite or
terrestrial means of multiple new audio programming formats with compact disc
quality sound to local and national audiences. Another form of DAB, known as
In-Band On Channel ("IBOC"), could provide DAB in the present FM radio band.
It is not known at this time whether this technology also may be used in the
future by existing radio broadcast stations either on existing or alternate
broadcasting frequencies. In addition, three applications have been granted by
the FCC for authority to offer multiple channels of digital,
satellite-delivered S-Band aural services that could compete with conventional
terrestrial radio broadcasting. These satellite radio services use technology
that may permit higher sound quality than is possible with conventional AM and
FM terrestrial radio broadcasting. Implementation of DAB or IBOC would provide
an additional audio programming service that could compete with Faircom's
radio stations for listeners, but the effect upon Faircom cannot be predicted.
Implementation of DAB or IBOC would provide an additional audio programming
service that could compete with the Company's radio stations for listeners,
but the effect upon the Company cannot be predicted.
FCC Regulation
The FCC regulates radio stations under the Communications
Act of 1934, as amended (the "Communications Act") which, together with FCC
rules and policies promulgated thereunder, governs the issuance, renewal and
assignment of licenses, technical operations, employment practices and, to a
limited extent, business and program practices of radio stations and other
communications entities.
The rules also generally prohibit the acquisition of
ownership in, or control of, a television station and either an AM or a FM
radio station serving the same market. Such so-called "cross-ownership"
prohibition is subject to waiver for stations in the 25 largest television
markets under certain conditions. There are also prohibitions relating to
ownership in or control of a daily newspaper and a broadcast
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station in the same market and limitations on the extent to which aliens may
own an interest in broadcast stations.
Over the past five years, broadcasters such as Faircom have
entered into what have commonly been referred to as "Local Market Agreements,"
or "LMAs." While these agreements may take varying forms, under a typical LMA,
separately owned and licensed radio stations agree to enter into cooperative
arrangements of varying sorts, subject to compliance with the requirements of
antitrust laws and with the FCC's rules and policies. Under these types of
arrangements, separately owned stations could agree to function cooperatively
in terms of programming, advertising sales, etc., subject to the licensee of
each station maintaining independent control over the programming and station
operations of its own station. One typical type of LMA is a programming
agreement among two separately owned radio stations serving a common service
area, whereby the licensee of one station programs substantial portions of the
broadcast day on the other licensee's station, subject to ultimate editorial
and other controls being exercised by the latter licensee, and sells
advertising time during such program segments. Such arrangements are an
extension of the concept of "time brokerage" agreements, under which a
licensee of a station sells blocks of time on its station to an entity or
entities which program the blocks of time and which sell their own commercial
advertising announcements during the time periods in question.
In the past, the FCC has determined that issues of joint
advertising sales should be left to antitrust enforcement and has specifically
revised its so-called "cross- interest" policy to make that policy
inapplicable to time brokerage arrangements. Under the cross-interest policy,
the FCC may prohibit one party from acquiring certain economic interests in
two broadcast stations in the same market. Furthermore, the staff of the FCC's
Mass Media Bureau has, over the past five years, held that LMAs are not
contrary to the Communications Act provided that the licensee of the station
which is being substantially programmed by another entity maintains complete
responsibility for and control over operations of its broadcast station and
assures compliance with applicable FCC rules and policies. However, LMAs in
which one station programs more than 15% of the weekly broadcast time of
another local radio station are prohibited under FCC rules if the programming
station could not own the programmed station under the FCC's so-called
"multiple ownership" rules.
On February 8, 1996, the President signed into law the
Telecommunications Act of 1996. This legislation (a) permits foreign nationals
to serve as officers and directors of broadcast licensees and their parent
companies, (b) directs the FCC to eliminate its national ownership limits on
radio station ownership, (c) requires the FCC to relax its numerical
restrictions on local radio ownership, (d) extends the FCC's radio and
television cross ownership waiver policy to the top 50 markets, (e) extends
the license renewal period for radio and television stations to eight years
and (f) affords renewal applicants significant new projections from competing
applications for their broadcast licenses.
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The Telecommunications Act's provisions regarding local
radio ownership limits create a sliding scale of permissible ownership,
depending on market size. In radio markets with 45 or more commercial radio
stations, a license may own up to eight stations, no more than five of which
can be in a single radio service (i.e. no more than five AM or five FM). In
radio markets with 30 to 44 commercial radio stations, a license may own up to
seven stations, no more than four of which are in a single radio service. In
radio markets having 15 to 29 commercial radio stations, a licensee may own up
to six radio stations, no more than four of which are in a single radio
service. Finally, with respect to radio markets having 14 or fewer commercial
radio stations, a licensee may own up to five radio stations, no more than
three of which are in the same service; provided that the licensee may not own
more than one half of the radio stations in the market.
The Telecommunications Act affords renewal applicants
additional protection from renewal challenges by (a) changing the standard for
grant of license renewal and (b) precluding the FCC from considering the
relative merits of a competing applicant in connection with making its
determination on a licensee's renewal application. The new standard for
license renewal is that a station's license will be renewed if (x) the station
has served the public interest, convenience and necessity, (y) there have been
no serious violations of the Communications Act or FCC rules by the licensee
and (z) there have been no other violations of the Communications Act or FCC
rules which, taken together, would establish a pattern of abuse by the
licensee.
The Communications Act limits the ownership of broadcast
licenses by "aliens." Faircom's voting securities contain a legend which
states that the securities are subject to certain restrictions on transfer to
"aliens" (as defined in the Communications Act) as set forth in the By-laws of
Faircom. Faircom's By-laws provide that shares of voting securities held by
aliens which cause Faircom to be in violation of any provisions of the
Communications Act shall not be entitled to vote, to receive dividends or have
any other rights, and the holders of such securities will be required to
transfer them to Faircom or another person whose ownership of such shares
would not be in violation of the Communications Act.
The foregoing does not purport to be a complete summary of
all of the provisions of the Communications Act, the Telecommunications Act or
the regulations or policies of the FCC thereunder. Reference is made to such
Acts, regulations, and policies for further information.
Licenses
Faircom's license for its Tuscola station, WWBN(FM), was to
expire October 1, 1996, and was renewed for a term through October 1, 2003.
Pursuant to regulations adopted by the FCC in January 1997, as provided by the
Telecom Act, the license renewal term was extended to October 1, 2004, a
period of eight years. Faircom's licenses for its Flint stations, WCRZ(FM) and
WFNT(AM), also were to expire on October 1, 1996. Timely license renewal
applications for the stations were
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filed, and, as part of the FCC's review process, the Equal Employment
Opportunity ("EEO") Branch of the FCC's Mass Media Bureau requested additional
written information regarding Faircom's EEO recruitment efforts at these
stations. Such additional information was furnished, and on September 30,
1997, the FCC released a Memorandum Opinion and Order and Notice of Apparent
Liability. The Opinion found that there was no evidence that the licensee
engaged in employment discrimination, but that the overall EEO recruitment
effort was deficient because the licensee failed to recruit actively for some
of its vacancies and to engage in meaningful self-assessment of its EEO
program. The Order granted renewal of the stations' licenses for a term
expiring October 1, 2004, subject to an admonishment and reporting
requirements with respect to EEO recruitment performance for the 12 month
periods ending June 1, 1998, 1999 and 2000. A Notice of Apparent Liability was
issued in the amount of $11,000. The management of Faircom and its FCC counsel
believe that the factual assumptions on which the FCC Opinion, Order and
Notice are based are incorrect, and incomplete. On October 30, 1997, Faircom
filed with the FCC a Petition for Reconsideration in this matter, Faircom and
its FCC counsel are unable to predict the ultimate outcome of this matter,
but, in the opinion of both, a rejection a Faircom's Petition would not have a
material adverse effect on Faircom. The licenses of WMAN(AM) and WYHT(FM) in
Mansfield, Ohio, and WSWR(FM), in Shelby, Ohio, were renewed October 1, 1996
and expire October 1, 2004.
Employees
At the corporate level, Faircom employs its President and
Treasurer, Joel M. Fairman, and John E. Risher, its Senior Vice President, who
also utilize the services of consultants, a bookkeeping service and Faircom's
attorneys. Faircom's President and Senior Vice President assist the general
managers of Faircom's stations in developing strategies to increase the
profitability of Faircom's broadcasting properties and in the operation of the
stations. Faircom plans to continue its present policy of utilizing only a
small number of persons at the corporate level. Each market in which Faircom
owns and operates radio stations has its own complement of employees,
including a general manager, a sales manager, a business manager, advertising
sales staff, on-air personalities and engineering and operating personnel. In
the aggregate, Faircom's subsidiaries employ 64 people on a full-time basis
and 32 people on a part-time basis.
Faircom has never experienced a strike or work stoppage and
believes that its relations with its employees are good.
ITEM 2. PROPERTIES
Faircom leases approximately 780 square feet of office space
for its corporate offices in Old Brookville, New York. The lease expires
February 28, 2001. Annual rent is currently $22,200.
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The Flint stations occupy studio and office space in a
building of approximately 6,000 square feet located on 10 acres in
southeastern Flint, Michigan. The AM towers and antennas are also located on
this land. An FM tower, antenna and transmitter building and equipment are
located on 19 acres of land located nearby. The land, buildings, towers,
antennas and equipment are owned by a subsidiary of Faircom.
The Tuscola station occupies studio and office space in
leased premises in Frankenmuth, Michigan, at an annual rental of $1,800 under
a lease that expires in September 1998. The station's tower, antenna and
transmitter building and equipment are owned by a subsidiary of Faircom. Those
facilities are located on leased land in Millington, Michigan. The lease
expires in June 2002 and has renewal options through June 2042. Current rental
is $2,112 annually.
The Mansfield stations occupy studio and office space in a
building of approximately 6,600 square feet located on six acres in Mansfield,
Ohio. An auxiliary AM tower is located at this site. An adjoining property of
approximately 10 acres is the site of a building of approximately 6,000 square
feet that contains AM and FM transmitters and equipment and storage space. The
AM and FM towers and antenna are located on this property. The land,
buildings, towers, antennas and equipment are owned by a subsidiary of
Faircom.
All operations of WSWR(FM) in Shelby have been moved to the
Mansfield studio and office space. The tower, antenna and transmitter building
and equipment of WSWR(FM) are located on approximately one-half acre in
Plymouth Township, Ohio, northeast of Shelby. The tower site is leased through
September 2002 at a current rental of $1,200 annually, with four five-year
term renewal options, each at a 10% increase in annual rent over the prior
term. WSWR(FM) also leases approximately 1,000 square feet for office, sales,
and broadcast use in Willard, Ohio. The lease is at a current annual rental of
$3,600 and expires in August 2002. The lease contains an option to renew for
an additional five-year term at an annual rental of $4,200.
Faircom owns substantially all of its studio and general
office equipment. Faircom believes that its properties are in good condition
and are adequate for its operations, although opportunities to upgrade
facilities are constantly reviewed.
All the tangible and intangible property of the Company's
subsidiaries is pledged as security for senior debt of the subsidiaries. See
Notes 3 and 5 to the Company's 1997 Consolidated Financial Statements for a
description of encumbrances against the Company's properties and the Company's
rental obligations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any lawsuit or legal
proceeding that, in the opinion of the Company, is likely to have a material
adverse effect on the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market For Common Stock
The Company's common stock is quoted on the OTC Bulletin
Board under the symbol "FXCM" and is traded on the over-the-counter market.
The following table reflects the reported high and low bid
quotations for Faircom Common Stock on the OTC Bulletin Board for each quarter
during 1996 and 1997. Such quotations reflect interdealer prices, without
retail mark-up, markdown or commission and may not necessarily represent
actual transactions.
Fiscal Year High Low
1996
First Quarter....................... $.25 $.13
Second Quarter...................... $.25 $.13
Third Quarter....................... $.25 $.13
Fourth Quarter...................... $.19 $.13
1997
First Quarter....................... $.22 $.13
Second Quarter...................... $.28 $.22
Third Quarter....................... $.63 $.28
Fourth Quarter...................... $.94 $.56
On March 20, 1998, the bid and asked prices of the Company's
Common Stock on the OTC Bulletin Board were $.81 and $.94, respectively. There
were 329 holders of record of the Company's Common Stock on March 20, 1998.
Dividend Policy
The Company has never paid dividends on its Common Stock. It
is the Company's current policy to retain future earnings for the capital
requirements of its business. The Company and its subsidiaries are subject to
certain restrictions under existing agreements with their lenders which limit
dividends on their Common Stock. See Note 3 to the Company's 1997 Consolidated
Financial Statements.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net Broadcasting Revenues $ 5,993,291 $ 4,873,954 $ 5,113,582 $ 4,983,513 $ 5,015,265
Income from Operations 1,015,144 1,222,829 1,511,481 1,470,355 854,514
Income (Loss)
Before Extraordinary
Items (362,537) 278,840 244,816 992,079 (796,843)
Extraordinary Items (4,333,310) 787,201 3,216,605
Net Income (Loss) (4,695,847) 278,840 244,816 1,779,280 2,419,762
Basic Income (Loss)
Per Common Share:
Income (Loss)
Before Extraordinary
Items (.05) .04 .03 .13 (.11)
Extraordinary Items (.59) .11 .44
Basic Net Income (Loss)
Per Common Share (.64) .04 .03 .24 .33
Diluted Income (Loss)
Per Common Share:
Income (Loss)
Before Extraordinary
Items (.05) .02 .02 .06 (.11)
Extraordinary Items (.59) .05 .44
Diluted Net Income (Loss)
Per Common share (.64) .02 .02 .11 .33
BALANCE SHEET DATA
AT YEAR END:
Total Current Assets 1,919,232 1,305,585 1,311,916 1,246,104 1,771,069
Total Current Liabilities 859,631 1,068,021 1,037,239 1,150,537 2,771,126
Total Assets 13,010,554 4,326,453 4,546,508 4,488,913 4,515,236
Long-Term Debt and
Obligations Under
Capital Leases 21,911,661 7,276,884 7,828,883 8,367,345 6,010,018
Redeemable Preferred Stock
of Subsidiaries at
Liquidation Value 1,968,544
Total Capital Deficit (10,181,788) (5,485,941) (5,764,781) (6,009,597) (11,624,571)
</TABLE>
The Company has not declared or paid Common Stock cash dividends since
inception.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Year ended December 31, 1997 compared to year ended December
31, 1996
The results of the Company's operations for the year ended
December 31, 1997 compared to the year ended December 31, 1996 are not
comparable or necessarily indicative of results in the future due to the
significance of acquisitions.
As of June 30, 1997, the Company, through a wholly-owned
subsidiary, Faircom Mansfield Inc. ("Faircom Mansfield"), acquired the assets
and operations of two radio stations, WMAN-AM and WYHT-FM, both located in
Mansfield, Ohio (the "Mansfield Stations") for aggregate cash consideration of
$7,650,000. The acquisition has been accounted for as a purchase, and
accordingly the operating results of the Mansfield Stations have been included
in the Consolidated Statements of Operations from the acquisition date.
The increase in the Company's net broadcasting revenues in
1997 as compared with 1996 resulted principally from the ownership and
operation of the Mansfield Stations during 1997. Net broadcasting revenues
increased to $5,993,000 from $4,874,000, or 23.0%, in 1997 as compared with
1996.
Programming and technical expenses and selling, general and
administrative expenses increased in 1997 as compared with 1996, principally
as a result of the acquisition of the Mansfield Stations. Such increases were
to $1,591,000 from $1,218,000, or 30.6%, and to $2,270,000 from $1,775,000, or
27.9%, respectively.
Operating expenses before depreciation, amortization and
corporate expenses also increased in 1997 as compared with 1996, primarily as
a result of the acquisition of the Mansfield Stations. Such increase was to
$3,860,000 from $2,993,000, or 29.0%, in 1997 as compared with 1996.
Net broadcasting revenues in excess of operating expenses
before depreciation, amortization and corporate expenses ("broadcast cash
flow") increased 13.4% to $2,133,000 in 1997 from $1,881,000 in 1996. This
increase resulted from the acquisition of the Mansfield Stations as described
above, offset in part by lower broadcast cash flow from the Company's radio
stations in Flint, Michigan.
Depreciation and amortization and interest expense increased
in 1997 as compared with 1996 as a result of the addition of assets and debt
incurred in connection with the acquisition of the Mansfield Stations.
Taxes on income for both 1997 and 1996 related principally
to state income taxes. There were no current federal income taxes in 1997, as
a result of a taxable loss. Current federal income taxes in 1996 were offset
in full by the utilization
13
<PAGE>
of net operating loss carryforwards. The Company has provided valuation
allowances equal to its deferred tax assets because of uncertainty as to their
future utilization. The deferred tax assets relate principally to net
operating loss carryforwards. Although the Company was marginally profitable
in 1994 through 1996, the loss in 1997 along with substantial historical
losses caused management to conclude that it was still premature to reduce the
valuation allowance.
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 was $4,696,000 for 1997 compared to
net income of $279,000 in 1996.
Year ended December 31, 1996 compared to year ended December
31, 1995
The Company's net broadcasting revenues decreased 4.7% in
1996 compared to 1995 (to $4,874,000 from $5,114,000), primarily due to lower
regional and national advertising activity in the Flint, Michigan radio market
and resulting lower regional and national advertising revenues in the
Company's Flint radio stations.
Programming and technical expenses decreased by 0.9% in 1996
compared to 1995 (to $1,218,000 from $1,229,000) and selling, general and
administrative expenses increased by 3.4% (to $1,775,000 from $1,717,000).
Operating expenses before depreciation, amortization and
corporate expenses increased by 1.6% in 1996 compared to 1995 (to $2,993,000
from $2,946,000).
Net broadcasting revenues in excess of operating expenses
before depreciation, amortization and corporate expenses ("broadcast cash
flow") decreased 13.2% (to $1,881,000 from $2,167,000) in 1996 compared to
1995, principally as a result of the lower net broadcasting revenues in Flint.
Corporate expenses increased by 10.5% in 1996 from 1995 (to
$337,000 from $305,000) primarily as a result of higher employee compensation,
professional fees and related expense. Such employee compensation in 1996
included incentive payments indexed to 1995 operating results.
Interest expense decreased by 26.9% in 1996 from 1995 (to
$914,000 from $1,249,000) due to lower principal amounts of interest bearing
debt outstanding, lower interest rates during 1996 and a lower provision for
appraisal rights.
Taxes on income for both 1996 and 1995 related principally
to state income taxes. Current federal income taxes in 1996 and 1995 and a
portion of state income taxes in 1995 were offset by the utilization of net
operating loss carryforwards. The Company has provided valuation allowances
equal to its deferred tax assets because of uncertainty as to their future
utilization. The deferred tax assets relate principally to net operating loss
carryforwards. Although the Company was marginally
14
<PAGE>
profitable in 1994 through 1996, substantial historical losses caused
management to conclude that it was still premature to reduce the valuation
allowance.
As a result principally of lower provision for appraisal
rights and interest expense in 1996 compared with 1995, offset by lower income
from operations, net income increased to $279,000 in 1996 from $245,000.
Liquidity and Capital Resources
In 1997, net cash provided by operating activities was
$418,000 compared with $379,000 provided by operating activities in 1996. Net
increase in cash and cash equivalents was $412,000 in 1997 compared with a net
decrease of $240,000 in 1996.
In January 1998, Faircom Mansfield purchased substantially
all of the assets and operations of radio station WSWR-FM in Shelby, Ohio for
$1,125,000 in cash. The acquisition was financed with internal funds and a
loan to the Company of $1,100,000. The loan is in the form of a subordinated
note, matures on the first to occur of April 1, 1999 or the closing of the
merger with Regent Communications, Inc. ("Regent"), discussed below, and bears
accrued interest at 14% per annum, payable at maturity.
Based upon current interest rates, and assuming the merger
with Regent is not consummated, the Company believes its interest payments for
1998 will be approximately $1,213,000. Scheduled debt principal payments are
$430,000. Corporate expenses and capital expenditures for 1997 are estimated
to be approximately $410,000 and $200,000, respectively. The Company expects
to be able to meet such interest expense, debt repayment, corporate expenses
and capital expenditures, aggregating $2,253,000, from net cash provided by
operations and current cash balances. For the years 1999 through 2001,
currently scheduled debt principal payments average $685,000 yearly. Interest
payments, corporate expenses and capital expenditures are expected to be
approximately the same as projected for 1998, adjusted for inflation. The
Company expects to be able to meet such cash requirements from net cash
provided by operations and cash balances. The Company believes its $1,100,000
loan maturing April 1, 1999, and the balance of its long-term debt in the
amount of $19,858,000, maturing July 1, 2002, will be refinanced at their
respective maturity dates either from its current lenders or from other
sources, if still outstanding.
The terms of the Securities Purchase Agreement applicable to
the Company's Convertible Subordinated Promissory Class A and Class B Notes
(the "Notes"), as amended, provide that if the Company does not, on or before
April 1, 1999, consummate a merger of the Company with another corporation on
terms acceptable to the holders of the Notes, then upon notice from such
holders, the Company shall take all action necessary to liquidate the Company
and each of its subsidiaries on terms and conditions acceptable to such
holders, such approval not to be unreasonably withheld. As indicated below,
the Company expects to complete a merger with Regent in the second quarter of
1998. If, however, such merger should not occur, the Company
15
<PAGE>
believes there are a number of alternatives available to it which would be
acceptable to the holders of the Notes.
On December 5, 1997, the Company announced that it had
signed an agreement to merge with Regent, another group radio broadcaster. The
Company anticipates a closing of the merger in the second quarter of 1998. The
closing of the merger is subject to the effectiveness of a registration
statement and delivery of a related proxy statement to the Company's
stockholders, satisfaction of the conditions of the merger agreement and the
approval of the Company's stockholders. The Company estimates the fees and
expenses of this transaction, for which the Company is responsible, to be
approximately $543,000. Of this amount, approximately $233,000 is payable only
if the merger is consummated. Of the balance of $310,000, the Company expects
to pay such fees and expenses from net cash provided by operations and current
cash balances, and, with respect to the amount payable on consummation of the
merger, from such balances at the time of the closing of the merger.
Inflation
The Company does not believe the effects of inflation have
had a significant impact on its consolidated financial statements.
Compliance with Year 2000
Management has initiated a Company-wide program to prepare
the Company's computer systems and applications for year 2000 compliance. The
Company expects to incur internal staff costs as well as other expenses
necessary to prepare its systems for the year 2000. The Company expects to
both replace some systems and upgrade others. Maintenance or modification
costs will be expensed as incurred. The total cost of this effort is still
being evaluated, but is not expected to be material to the Company.
Cautionary Statement Concerning Forward-Looking Statements
This Form 10-K, including this Management's Discussion and
Analysis, includes or may include certain forward-looking statements with
respect to Faircom that involve risks and uncertainties. This Form 10-K
contains certain forward-looking statements concerning financial position,
business strategy, budgets, projected costs, and plans and objectives of
management for future operations, as well as other statements including words
such as "anticipate," "believe," "plan," "estimate," "expect," "intend,"
"project" and other similar expressions. Although Faircom believes its
expectations reflected in such forward-looking statements are based on
reasonable assumptions, readers are cautioned that no assurance can be given
that such expectations will prove correct and that actual results and
developments may differ materially from those conveyed in such forward-looking
statements. For these statements, Faircom claims the protections of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
16
<PAGE>
Important factors that could cause actual results to differ
materially from the expectations reflected in the forward-looking statements
herein include changes in general economic, business and market conditions, as
well as changes in such conditions that may affect the radio broadcast
industry or the markets in which Faircom operate, in particular, increased
competition for attractive radio properties and advertising dollars,
fluctuations in the costs of operating radio properties, and changes in the
regulatory climate affecting radio broadcast companies. Such forward-looking
statements speak only as of the date on which they are made, and Faircom
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date of this Form 10-K. If Faircom does
update or correct one or more forward-looking statements, readers should not
conclude that Faircom will make additional updates or corrections with respect
thereto or with respect to other forward-looking statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required
pursuant to this Item begin on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names of the directors and executive officers of Faircom
Inc. (the "Company") and certain information about them are set forth below:
<TABLE>
<CAPTION>
Principal Occupation
Name Age for Past Five Years
- ---- --- --------------------
<S> <C> <C>
Joel M. Fairman 69 Founder, President, Treasurer and
Chairman of the Board of the Company
since its inception in April 1984. From
September 1965 until June 1984, Mr.
Fairman was employed in an executive
capacity by investment banking firms.
Anthony Pantaleoni 58 Secretary and director of the Company
since its inception in April 1984. Mr.
Pantaleoni has been a partner in the
law firm of Fulbright & Jaworski L.L.P.
for more than five years. Mr.
Pantaleoni also currently serves as a
director of Universal Health Services,
Inc., AAON Inc. and Westwood
Corporation.
Stephen C. Eyre 75 Director of the Company since May
1984. From July 1985 to December
1997, Dr. Eyre was Executive Director
of The John A. Hartford Foundation.
From March 1983 through June 1985 he
was Distinguished Professor, Citicorp
Chair of Finance at Pace University,
New York City. Prior to March 1983,
Dr. Eyre was a director of Citibank,
N.A. (December 1981 - March 1983),
Senior Vice-President and Secretary
(1980 - 1983) and Comptroller (1973 -
1980) of Citibank and Citicorp. Dr.
Eyre currently serves as a director or
trustee of various Prudential Global
Equity and Money Market Funds.
John C. Jansing 72 Director of the Company since May
1984. From January 1975 to February
18
<PAGE>
1992, Mr. Jansing was Chairman of the
Board of Directors of The Independent
Election Corporation of America, a
proxy solicitation, tabulation and
services firm. Mr. Jansing also serves
as a director of Vestaur Securities,
Inc. and Alpine Group Corporation. In
addition, Mr. Jansing currently serves
as a director of the following
investment funds: Affiliated Fund,
Inc.; Lord Abbett Value Appreciation
Fund, Inc.; Lord Abbett Bond-Debenture
Fund, Inc.; Lord Abbett Cash Reserve
Fund, Inc.; Lord Abbett Development
Growth Fund, Inc.; Lord Abbett Income
Fund, Inc.; and the Lord Abbett Tax
Free Income Fund, Inc.
John H. Wyant 52 Director of the Company since
September 1997. Mr. Wyant has served
since its formation in 1992 as President
of Blue Chip Venture Company, a
venture capital investment firm which,
together with its affiliates, manages an
aggregate of approximately $180 million
of committed capital for investment in
privately held high growth companies.
From 1991 to 1992, Mr. Wyant served
as Executive Vice President, Corporate
Finance, of Gradison & Co., a financial
services firm, where his primary activity
was the development and formation of
Blue Chip Venture Company. Mr.
Wyant was initially trained in
marketing with The Proctor & Gamble
Company and served in marketing and
general management positions with Taft
Broadcasting Company. Subsequently,
he was Chief Executive Officer of Home
Entertainment Network and Nutrition
Technology Corporation, both venture
capital-backed companies. Mr. Wyant is
also a director of Zaring National
Corporation, Ciao Cucina Corporation
and a number of privately held
companies.
19
<PAGE>
John E. Risher 58 Senior Vice President of the Company
since January 1996 and Vice President
of the Company from July 1991 to
January 1996. Mr. Risher is also
President and General Manager, since
January 1996, of the Company's
subsidiary, Faircom Flint Inc. Prior to
January 1996, Mr. Risher was Vice
President and General Manager of the
subsidiary since its acquisition of the
Company's radio stations in Flint,
Michigan in December 1986. For 20
years prior to 1986, Mr. Risher was
employed in sales, sales management
and as a general manager for radio
stations.
</TABLE>
Directors of the Company are elected annually and hold
office until the Annual Meeting of stockholders or until their successors have
been elected and have duly qualified.
Executive officers of the Company are elected annually and
hold office until the first meeting of the Board of Directors following the
Annual Meeting of stockholders or until their successors have been elected and
have duly qualified.
Compensation Pursuant to Stock Option Plan
On September 18, 1984 the Board of Directors of the Company
adopted a stock option plan (the "Plan"), which was subsequently approved by
the stockholders of the Company on September 12, 1985. The Plan provides for
the granting of incentive stock options as well as options not qualifying as
incentive stock options (non-statutory stock options). Under the terms of the
Plan, the Company's right to grant additional incentive stock options
terminated September 18, 1994, ten years from the date the Plan was adopted by
the Company's Board of Directors.
The Plan was adopted for the purpose of advancing the
interests of the Company and furthering its growth and development by
encouraging and enabling directors, officers and key employees of the Company
and its subsidiaries and other persons, who are presently making and are
expected to continue to make substantial contributions to the successful
growth of the Company, to acquire an increased and proprietary interest in its
continued success and progress. Incentive stock options granted pursuant to
the Plan provide certain restrictions concerning to whom and upon what basis
the grant and exercise of options may be made and on the disposition of stock
issued upon exercise of options as required by the tax laws.
20
<PAGE>
An aggregate of 900,000 shares of the Common Stock, par
value $.01 per share, is available and reserved for issuance under the Plan.
Eligibility
Employees (either full or part-time), directors and
consultants to the Company and its subsidiaries, who are deemed to have the
potential to contribute to the future success of the Company, are eligible to
receive non-statutory stock options under the Plan. Until September 1994,
full-time and part-time employees (including employees who are also directors
of the Company or a subsidiary) and salaried directors, were eligible to
receive incentive stock options. Approximately 97 employees of the Company and
its subsidiaries are entitled to participate in the Plan.
Administration of the Plan
The Plan may be administered by the Board of Directors or by
a committee appointed by the Board of Directors of the Company (the
"Committee"). Currently, the Board of Directors is administering the Plan.
Subject to the provisions of the Plan, either the Board of Directors or the
Committee, whichever is then acting with respect to the Plan, possesses the
authority in its discretion (i) to determine, upon review of relevant
information, the fair market value of the Common Stock; (ii) to determine the
exercise price per share of stock options to be granted; (iii) to determine
the Eligible Participants to whom, and time or times at which, awards shall be
granted and the number of shares to be represented by each stock option; (iv)
to construe and interpret the Plan; (v) to prescribe, amend and rescind rules
and regulations relating to the Plan; (vi) to determine the terms and
provisions of each award (which need not be identical) and (vii) to make all
other determinations necessary to or advisable for the administration of the
Plan.
The Plan provides for the issuance of shares of Common Stock
for any nature of consideration, including a promissory note, as determined by
the Board of Directors or the Committee. The Board of Directors or the
Committee may also determine the conditions which it deems appropriate to
assure that such consideration will be received by, or accrued to, the
Company. The consideration may be different for different options.
Grants and Exercises under the Plan and Other Stock Options
During the fiscal year ended December 31, 1997, options to
purchase an aggregate of 69,000 shares of Common Stock at a weighted average
exercise price of $.53 per share were granted pursuant to the Plan. As of
March 20, 1998, no options granted pursuant to the Plan had been exercised. On
that date the bid and asked prices for the Common Stock as quoted on the OTC
Bulletin Board were $.81 and $.94, respectively.
At June 30, 1997, in connection with the issuance of its
Class A and Class B Convertible Subordinated Promissory Notes ("Notes"), the
Company issued options
21
<PAGE>
to purchase 958,886 and 159,814 shares of its common stock at an exercise
price of $.53 per share to its President and Senior Vice President,
respectively. These options are exercisable through July 1, 2002 to the extent
the Notes are converted to common stock. If less than all of the Notes are
ultimately converted, the number of options will be reduced proportionately.
22
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary of Cash and Certain Other Compensation
The following table sets forth certain summary information
concerning compensation paid or accrued by the Company and its subsidiaries
to, or on behalf of, the Company's Chief Executive Officer for the fiscal
years ended December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
Long Term Compensation
------------------------------------------------
Annual Compensation Awards Payouts
-------------------------------------------------- ------------------------------- -----------
Other Number of Long Term
Annual Restricted Securities Incentive
Name and Compen- Stock Underlying Plan
Principal Position Year Salary($) Bonus ($) sation ($) Award(s) ($) Options Payouts ($)
- ------------------ ---- --------- --------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Joel M. Fairman, 1997 $125,438 $28,000 $2,459(1) --- 958,886 ---
Chairman of the
Board, President and 1996 $102,672 $28,000 $2,024(1) --- 118,182 ---
Treasurer
1995 $90,000 $15,000 $1,040(1) --- 181,818 ---
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
All Other
Name and Compensa-
Principal Position tion ($)
- ------------------ --------
<S> <C>
Joel M. Fairman, 29,574(2)
Chairman of the
Board, President and 26,639(2)
Treasurer
28,960(2)
</TABLE>
(1) Represents tax "gross up" for use of motor vehicle.
(2) Represents tax "gross up" for premiums paid by the Company for a "key
man" life insurance policy owned by Mr. Fairman.
23
<PAGE>
The following table sets forth certain information
concerning stock options granted to Joel M. Fairman and John E. Risher in the
fiscal year ended December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of
Securities Percent of Total
Underlying Options Granted Exercise or Potential Realizable Value at
Name and Options to Employees in Base Expiration Assumed Annual Rates of Stock Price
Principal Position Granted Fiscal Year Price ($/Sh)(1) Date Appreciation for Option Term(2)
- ------------------ ---------- ---------------- --------------- ---------- -----------------------------------
5% ($) 10% ($)
------ -------
<S> <C> <C> <C> <C> <C> <C>
Joel M. Fairman, 958,886 83.5% .53 7/1/2002 $139,326 $307,994
Chairman of the
Board, President
and Treasurer
John E. Risher, 30,000 2.6% .53 7/1/2002 $4,359 $23,221
Senior Vice
President 159,214 17.9% .53 7/1/2002 $9,636 $51,332
</TABLE>
(1) The exercise price per share under each option was at least equal to
the fair market value of the Common Stock on the date of grant.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These
gains are based on assumed rates of stock appreciation of 5% and 10%
compounded annually from the date the respective options were granted
to their expiration date and are not presented to forecast possible
future appreciation, if any, in the price of the Common Stock. The
gains shown are net of the option exercise price, but do not include
deductions for taxes or other expenses associated with the exercise of
the options or the sale of the underlying shares. The actual gains, if
any, on the stock option exercises will depend on the future
performance of the Common Stock, the optionee's continued employment
through applicable vesting periods and the date on which the options
are exercised.
24
<PAGE>
The following table sets forth certain information concerning
unexercised stock options granted to Joel M. Fairman and John E. Risher:
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised In-
Number of Unexercised the-Money Options
Options FY-End at FY-End(1)
--------------------- ------------------------
Value Realized
Shares (Market Price at
Acquired on Exercise Less
Name Exercise Exercise Price) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------- ------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joel M. Fairman None --- 300,000 958,886 $204,670 $304,686
John E. Risher None --- 131,000 253,814 $78,645 $113,742
</TABLE>
(1) The "Value" set forth in this column is based on the difference between
the fair market value at December 31, 1997 ($.84 per share as quoted on
the OTC Bulletin Board), and the option exercise price, multiplied by
the number of shares underlying the option.
25
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of March 20, 1998, certain
information with respect to all stockholders known to Faircom to beneficially
own more than 5% of the Faircom Common Stock, and information with respect to
Faircom Common Stock beneficially owned by each director of Faircom, the
President of Faircom and all directors and executive officers of Faircom as a
group. Except as otherwise specified, the stockholders listed in the table
have sole voting and investment power with respect to Faircom Common Stock
owned by them.
<TABLE>
<CAPTION>
Name and Address of Number of Shares
Beneficial Owners Beneficially Owned(a) Percent of Class
------------------- --------------------- ----------------
<S> <C> <C>
Blue Chip Capital Fund II Limited.......................... 14,492,085(b) 66.3%
Partnership
2000 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
Miami Valley Venture Fund L.P.............................. 2,557,427(c) 25.7%
2000 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
John H. Wyant.............................................. 17,049,512(d) 69.8%
c/o Blue Chip Venture Company, Ltd.
2000 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
PNC Bank, National Association, Trustee.................... 1,962,488(e) 21.0%
201 East Fifth Street
Cincinnati, Ohio 45202
Joel M. Fairman............................................ 2,458,886(f) 28.5%
333 Glen Head Road
Old Brookville, New York 11545
Don G. Hoff and Sandra Hoff................................ 430,000 5.8%
1 Via Capistrano
Tiburon, California 94920
Ido Klear.................................................. 380,000 5.2%
111 Great Neck Road
Great Neck, New York 11021
Anthony Pantaleoni......................................... 110,000(g) 1.5%
666 Fifth Avenue
New York, New York 10103
Stephen C. Eyre............................................ 139,000(g) 1.9%
69 Dogwood Lane
Locust Valley, New York 11560
26
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Name and Address of Number of Shares
Beneficial Owners Beneficially Owned(a) Percent of Class
------------------- --------------------- ----------------
<S> <C> <C>
John C. Jansing............................................ 153,500(g) 2.1%
162 South Beach Road
Hobe Sound, Florida 33455
All officers and directors as a group (6 persons).......... 20,227,212(h) 77.0%
</TABLE>
- ------------------------
(a) The Securities and Exchange Commission has defined "beneficial
ownership" to include sole or shared voting or investment power with
respect to a security or the right to acquire beneficial ownership
within 60 days. The number of shares indicated are owned with sole
voting and investment power unless otherwise noted and includes certain
shares held in the name of affiliated companies as to which beneficial
ownership may be disclaimed.
(b) Represents: (A) 8,431,875 shares issuable upon conversion of Faircom's
Class A Convertible Subordinated Promissory Note held by Blue Chip
Capital Fund II Limited Partnership in the principal amount of
$3,750,000; and (b) 6,060,210 shares issuable upon conversion of
Faircom's Class B Convertible Subordinated Promissory Note held by Blue
Chip Capital Fund II Limited Partnership in the aggregate principal
amount of $3,900,000. See note (d) below.
(c) Represents: (A) 1,487,979 shares issuable upon conversion of Faircom's
Class A Convertible Subordinated Promissory Note held by Miami Valley
Venture Fund L.P., in the principal amount of $661,765; and (b)
1,069,448 shares issuable upon conversion of Faircom's Class B
Convertible Subordinated Promissory Note held by Miami Valley Venture
Fund L.P. in the principal amount of $688,235. See note (d) below.
(d) John H. Wyant, a director of Fairman, is a beneficial owner and manager
of Blue Chip Venture Company Ltd., which is the general partner of Blue
Chip Capital Fund II Limited Partnership, and Blue Chip Venture Company
of Dayton, Ltd., an investment manager for Miami Valley Venture Fund
L.P. Mr. Wyant disclaims beneficial ownership of the securities held by
Blue Chip Capital Fund II Limited Partnership and Miami Valley Venture
Fund L.P. See notes (b) and (c) above.
(e) Represents 1,322,646 shares issuable upon conversion of Faircom's Class
A Convertible Subordinated Promissory Notes held by PNC Bank, National
Association, Trustee in the principal amount of $588,235 and 639,842
shares issuable upon conversion of Faircom's Class B Convertible
Subordinated Promissory Notes held by PNC Bank, National Association,
Trustee in the principal amount of $411,765.
(f) Includes 1,258,886 shares issuable pursuant to stock options held by Mr.
Fairman, including options granted under Faircom's Stock Option Plan
(the "Plan") and outside the Plan.
27
<PAGE>
(g) Includes 100,000 shares issuable pursuant to stock options held by each
of Messrs. Pantaleoni, Eyre and Jansing under the Plan.
(h) Includes 1,849,700 shares issuable pursuant to stock options held by
officers and directors of Faircom, including options granted under the
Plan and outside the Plan, and 17,049,512 shares issuable upon
conversion of Faircom's Class A and Class B Convertible Subordinated
Promissory Notes held by Blue Chip Capital Fund II Limited Partnership
and Miami Valley Fund L.P. See note (d) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended December 31, 1997, Anthony
Pantaleoni, Secretary and a Director of the Company, was a partner in the law
firm of Fulbright & Jaworski L.L.P., which firm was retained by the Company
during such fiscal year.
As of June 30, 1997, the Company sold $10,000,000 aggregate
principal amount of its convertible subordinated notes to Blue Chip Capital
Fund II Limited Partnership ("Blue Chip") and Miami Valley Fund L.P. ("Miami
Valley"). John H. Wyant, who was elected a director of Faircom on September
16, 1997, is a beneficial owner and manager of Blue Chip Venture Company Ltd.,
which is the general partner of Blue Chip, and Blue Chip Venture Company of
Dayton, Ltd., an investment manager for Miami Valley.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) 1 and 2. Index to financial statements and related schedules.
See the Index to Consolidated Financial Statements and
Consolidated Financial Statement Schedules beginning on page F-1 of this
report.
(a) 3. Exhibits.
* 3.1 Certificate of Incorporation, as amended.
* 3.2 By-Laws of the Company.
* 21 Subsidiaries of the registrant.
27 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the period October 1, 1997
through December 31, 1997.
- --------
* Previously filed as an exhibit to the Company's registration of
securities on Form 10, dated February 12, 1987, pursuant to Section
12(g) of the Securities Exchange Act of 1934.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ Joel M. Fairman
-------------------
Joel M. Fairman
President
March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
By /s/ Joel M. Fairman President, Treasurer March 30, 1998
----------------------- and Chairman of the Board
Joel M. Fairman (Chief Executive, Financial
and Accounting Officer)
By /s/ Anthony Pantaleoni Secretary and Director March 30, 1998
-----------------------
Anthony Pantaleoni
By /s/ Stephen C. Eyre Director March 30, 1998
----------------------
Stephen C. Eyre
By ---------------------- Director March , 1998
John C. Jansing
By /s/ John H. Wyant Director March 30, 1998
----------------------
John H. Wyant
30
<PAGE>
FAIRCOM INC.
CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-K - ITEM 8 AND ITEMS 14 (A) (1) AND (2)
YEAR ENDED DECEMBER 31, 1997
F-1
<PAGE>
FAIRCOM INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
CONSOLIDATED BALANCE SHEETS:
December 31, 1997 and 1996 F-4
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS ENDED DECEMBER 31, 1997:
Statements of operations F-5
Statements of capital deficit F-6
Statements of cash flows F-7
SUMMARY OF ACCOUNTING POLICIES F-8 - F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-12 - F-27
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Faircom Inc.
We have audited the consolidated balance sheets of Faircom Inc. as of December
31, 1997 and 1996 and the related consolidated statements of operations,
capital 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 presentation of
the financial statements. 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 financial position of Faircom Inc. at
December 31, 1997 and 1996 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
Mitchel Field, New York /s/ BDO Seidman, LLP
January 21, 1998 ---------------------
BDO Seidman, LLP
F-3
<PAGE>
FAIRCOM INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (NOTE 3)
CURRENT ASSETS:
Cash and cash equivalents $ 535,312 $ 123,221
Accounts receivable, less allowance of $32,000 and $20,000
for possible losses 1,358,002 1,169,772
Prepaid expenses 25,918 12,592
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,919,232 1,305,585
- ---------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, less accumulated depreciation and
amortization (Note 1) 2,156,244 1,184,554
- ---------------------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS, net of accumulated amortization of $784,791
and $515,670 (Note 2) 7,701,341 1,627,767
OTHER ASSETS:
Deferred financing costs 837,411 167,222
Escrow deposit for purchase of radio station (Note 13) 100,000 -
Other 296,326 41,325
- ---------------------------------------------------------------------------------------------------------------------
8,935,078 1,836,314
- ---------------------------------------------------------------------------------------------------------------------
$13,010,554 $4,326,453
=====================================================================================================================
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 87,280 $ 76,853
Accrued expenses and liabilities 163,805 199,054
Taxes payable 70,150 10,150
Current portion of interest payable (Note 3 (a)) 108,391 226,417
Current portion of long-term debt (Note 3) 430,005 552,000
Current portion of obligations under capital leases - 3,547
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 859,631 1,068,021
LONG-TERM DEBT, less current portion (including $10,000,000 to
a related party in 1997) (Note 3) 21,911,661 7,276,884
INTEREST PAYABLE, less current portion (Note 3 (a)) 353,063 350,494
DEFERRED RENTAL INCOME (Note 4) 67,987 101,995
APPRAISAL RIGHT LIABILITY (Note 3 (b)) - 1,015,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 23,192,342 9,812,394
- ---------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 3 (b) and 5)
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
CAPITAL DEFICIT (Notes 3 (b), 7 and 8):
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 (12,861,383) (8,165,536)
- ----------------------------------------------------------------------------------------------------------
TOTAL CAPITAL DEFICIT (10,181,788) (5,485,941)
- ----------------------------------------------------------------------------------------------------------
$ 13,010,554 $ 4,326,453
==========================================================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-5
<PAGE>
FAIRCOM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BROADCASTING REVENUES:
Gross broadcasting revenues $ 6,696,564 $5,517,586 $5,785,963
Less: agency commissions (703,273) (643,632) (672,381)
- -----------------------------------------------------------------------------------------------------------------------------------
NET BROADCASTING REVENUES 5,993,291 4,873,954 5,113,582
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Programming and technical expenses 1,590,531 1,218,160 1,229,333
Selling, general and administrative expenses 2,269,800 1,775,059 1,716,858
Depreciation and amortization 726,564 321,263 351,257
Corporate expenses 391,252 336,643 304,653
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 4,978,147 3,651,125 3,602,101
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 1,015,144 1,222,829 1,511,481
Interest expense (including provision for appraisal rights of
$215,000 in 1996 and $438,000 in 1995 (Note 3(b)) (1,330,676) (913,643) (1,249,298)
Other income 24,537 7,346 10,633
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE TAXES ON INCOME AND EXTRAORDINARY ITEMS (290,995) 316,532 272,816
TAXES ON INCOME (Note 9) 71,542 37,692 28,000
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS (362,537) 278,840 244,816
- -----------------------------------------------------------------------------------------------------------------------------------
EXTRAORDINARY ITEMS:
Gain from debt extinguishment (Note 3(a)) 370,060 - -
Loss from debt extinguishment (Note 3(b)) (4,703,370) - -
- -----------------------------------------------------------------------------------------------------------------------------------
Extraordinary items - net (4,333,310) - -
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(4,695,847) $ 278,840 $ 244,816
===================================================================================================================================
BASIC INCOME (LOSS) PER SHARE OF COMMON STOCK - ASSUMING NO
DILUTION (Note 10):
Income (loss) before extraordinary items $(.05) $.04 $.03
Extraordinary items (.59) - -
- -----------------------------------------------------------------------------------------------------------------------------------
BASIC NET INCOME (LOSS) PER COMMON SHARE $(.64) $.04 $.03
===================================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 7,378,199 7,378,199 7,378,199
===================================================================================================================================
DILUTED INCOME (LOSS) PER COMMON SHARE - ASSUMING ISSUANCE OF ALL DILUTIVE
CONTINGENT SHARES (Note 10):
Income (loss) before extraordinary items $(.05) $.02 $.02
Extraordinary items (.59) - -
- -----------------------------------------------------------------------------------------------------------------------------------
DILUTED NET INCOME (LOSS) PER COMMON SHARE $(.64) $.02 $.02
===================================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 7,378,199 16,459,701 16,459,701
===================================================================================================================================
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-6
<PAGE>
FAIRCOM INC.
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Common Stock
---------------------------------
Additional
Shares Amount paid-in capital Deficit Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1994 7,378,199 $73,782 $2,605,813 $(8,689,192) $(6,009,597)
Net income for the year
ended December 31,
1995 - - - 244,816 244,816
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31,
1995 7,378,199 73,782 2,605,813 (8,444,376) (5,764,781)
Net income for the year
ended December 31,
1996 - - - 278,840 278,840
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31,
1996 7,378,199 73,782 2,605,813 (8,165,536) (5,485,941)
NET LOSS FOR THE
YEAR ENDED
DECEMBER 31,1997 - - - (4,695,847) (4,695,847)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
1997 7,378,199 $73,782 $2,605,813 $(12,861,383) $(10,181,788)
===================================================================================================================================
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-7
<PAGE>
FAIRCOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 12)
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,695,847) $278,840 $244,816
- -------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 726,564 323,474 351,257
Amortization of deferred rental income (34,008) (34,005) (34,000)
Provision for doubtful accounts 46,308 23,449 16,428
Provision for appraisal rights - 215,000 438,000
Net loss from debt extinguishments 4,333,310 - -
Increase (decrease) in cash flows from changes in
operating assets and liabilities, net of effects of
purchase of radio stations:
Accounts receivable (234,538) (250,620) (2,708)
Prepaid expenses (13,326) (6,809) 31,724
Other assets - (1,325) -
Accounts payable 10,427 17,907 13,907
Accrued expenses and liabilities (35,249) (9,581) (77,016)
Taxes payable 60,000 (10,000) (100,918)
Interest payable 254,603 (167,714) (61,978)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 5,114,091 99,776 574,696
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 418,244 378,616 819,512
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Assets related to purchase of radio stations (7,650,000) - -
Capital expenditures (131,701) (63,440) (172,805)
Acquisition of intangible assets (81,180) - -
Escrow deposit for purchase of radio station (100,000) - -
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (7,962,881) (63,440) (172,805)
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment for deferred financing costs (834,137) (44,985) (235)
Proceeds from long-term debt 23,000,000 - -
Principal payments on long-term debt (7,805,588) (493,249) (515,556)
Purchase of convertible and exchangeable debt (5,385,000) - -
Payment of appraisal right liability (1,015,000) - -
Principal payments under capital lease obligations (3,547) (17,253) (19,660)
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 7,956,728 (555,487) (535,451)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 412,091 (240,311) 111,256
CASH AND CASH EQUIVALENTS, beginning of year 123,221 363,532 252,276
F-8
<PAGE>
Year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 535,312 $123,221 $363,532
===============================================================================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-9
<PAGE>
FAIRCOM INC.
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION AND Faircom Inc. (the "Company") owns and operates
BUSINESS radio stations through its wholly-owned
subsidiaries in Flint, Michigan and, effective
June 30, 1997, in Mansfield, Ohio.
PRINCIPLES OF The consolidated financial statements of the
CONSOLIDATION Company include the accounts of Faircom Inc.
and its subsidiaries, Faircom Flint Inc.
("Flint"), and Faircom Mansfield Inc.
("Mansfield"), all of whose common stock is
owned by the Company. All intercompany
accounts and transactions are eliminated.
Prior to January 1997, Mansfield was named
Faircom Evansville Inc. and was inactive.
USE OF ESTIMATES In preparing financial statements in conformity
with generally accepted accounting principles,
management is required to make estimates and
assumptions that may affect the reported
amounts of assets and liabilities and
the disclosure of contingent assets and
liabilities at the date of the financial
statements and revenues and expenses during
the reporting period. Actual results could
differ from those estimates.
CASH AND CASH For purposes of the statement of cash flows,
EQUIVALENTS the Company considers all highly liquid
financial instruments purchased with an
original maturity of three months or less to
be cash equivalents. The carrying amount
reported in the consolidated balance sheets
for cash and cash equivalents approximates its
fair value.
PROPERTY AND Property and equipment are stated at cost.
EQUIPMENT For financial reporting purposes, depreciation
is determined using the straight-line method
based upon the estimated useful lives of the
various classes of assets, ranging from three
to fifteen years. Leasehold improvements are
amortized over the shorter of their useful
lives or the terms of the related leases. Both
straight-line and accelerated methods are used
for federal and state income tax purposes.
F-10
<PAGE>
FAIRCOM INC.
SUMMARY OF ACCOUNTING POLICIES
INTANGIBLE ASSETS Intangible assets consist principally of the
excess of the purchase price (including
related acquisition costs) over the fair value
of tangible assets of acquired radio stations,
a substantial portion of which represents the
value of Federal Communications Commission
licenses. These assets are amortized on a
straight-line basis over lives ranging from
15 to 40 years. Management evaluates the
continuing realizability of the intangible
assets by assessing projected future
undiscounted cash flows of its radio stations.
LONG-LIVED ASSETS The Company follows 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
No. 121"). SFAS No. 121 requires, among other
things, that losses resulting from impairment
of assets expected to be held, and gains or
losses from assets expected to be disposed of,
be included as a component of income from
continuing operations before taxes on income.
DEFERRED FINANCING Deferred financing costs are amortized on a
COSTS AND OTHER straight-line basis over the term of the
ASSETS related debt. Non-compete agreements,
comprising substantially all of the category
"other assets", are amortized over the terms
of the related agreements.
APPRAISAL RIGHT The value of the appraisal right given to
Citicorp Venture Capital, Ltd. ("CVC") in
connection with its subordinated exchangeable
note (see Note 3 (b)) was accrued at a
discounted amount, based on the interest rate
of the related note and the date on which the
appraisal right was to become exercisable.
Adjustments were made to this accrual based on
the passage of time and changes in appraisal
values. The appraisal right liability was
extinguished as of June 30, 1997, the time
that the related underlying debt was purchased
(see Note 3(b)).
TAXES ON INCOME Income taxes are calculated using the
liability method specified by Statement
of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes".
F-11
<PAGE>
FAIRCOM INC.
SUMMARY OF ACCOUNTING POLICIES
REVENUE Revenue from radio advertisements, including
RECOGNITION barter transactions (advertising provided in
exchange for goods and services), is recognized
as income when the advertisements are
broadcast. Revenue from barter transactions is
recorded based on the estimated fair value of
the goods and services received. The
merchandise or services received as barter for
advertising are charged to expense when used
or provided. Any merchandise or services
received prior to the broadcast of the related
advertisements are recorded as a liability; if
the advertisement is broadcast first, a
receivable is recorded. Barter liabilities and
receivables were not material at December 31,
1997 and 1996.
STOCK-BASED In 1996, the Company adopted the disclosure
COMPENSATION provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123").
SFAS No. 123 establishes a fair value method
of accounting for stock-based compensation,
through either recognition or disclosure.
The disclosure provisions require the Company
to disclose pro forma information regarding
net income (loss) and net income (loss) per
share as if compensation cost for stock
options granted by the Company had been
determined in accordance with the fair value
method prescribed by SFAS No. 123.
ADVERTISING COSTS Advertising costs are charged to expense
as incurred and amounted to $75,858, $68,345
and $149,469 for the years ended December 31,
1997, 1996 and 1995, respectively.
NET INCOME (LOSS) In February 1997, the Financial Accounting
PER COMMON SHARE Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." SFAS No. 128
establishes a different method of computing
earnings per share than was previously
required under the provisions of Accounting
Principles Board Opinion No. 15 ("APB 15").
Under SFAS No. 128, the Company is required to
report both basic net income (loss) per common
share and diluted net income (loss) per common
share for all periods presented. The adoption
of SFAS No. 128 had no effect on the per share
amounts previously reported by the Company
under APB 15.
F-12
<PAGE>
FAIRCOM INC.
SUMMARY OF ACCOUNTING POLICIES
Net income (loss) per common share is based on
the weighted average number of shares of
common stock outstanding during each period.
The effects of the assumed conversion of
convertible debt on per share data have been
reflected in the diluted calculation only for
1996 and 1995; such effects were not dilutive
for 1997 (see Note 3 (b)). The effects of the
assumed exercise of outstanding options were
not dilutive and, accordingly, have been
excluded from the diluted per share
calculations (see Notes 7 and 8).
RECENT ACCOUNTING In June 1997, the FASB issued SFAS No. 130,
PRONOUNCEMENTS "Reporting Comprehensive Income." This
Statement establishes standards for reporting
and displaying comprehensive income and its
components in the financial statements. It
does not, however, require a specific format
for the statement, but requires the Company to
display an amount representing total
comprehensive income for the period of the
financial statement. The Company is in the
process of determining its preferred format.
This Statement is effective for fiscal years
beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No.
131, "Disclosures about Segments of an
Enterprise and Related Information." The
Statement establishes standards for the manner
in which public business enterprises report
information about operating segments in annual
financial statements and requires those
enterprises to report selected information
about operating segments in interim financial
reports issued to stockholders. This Statement
is effective for financial statements for
periods beginning after December 15, 1997, and
the Company has not yet determined the impact,
if any, of the Statement on its financial
reporting.
<TABLE>
<CAPTION>
1. PROPERTY AND Property and equipment consist of the following:
EQUIPMENT
1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 285,000 $ 116,000
Buildings and improvements 958,583 636,581
Towers and antenna systems 1,457,564 1,182,526
Studio, technical and transmitting
equipment 3,819,910 3,467,747
Office equipment, furniture and fixtures 1,043,648 941,665
F-13
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------
7,564,705 6,344,519
Less: accumulated depreciation and
amortization (5,408,461) (5,159,965)
- -----------------------------------------------------------------------------------------
Net property and equipment $2,156,244 $1,184,554
=========================================================================================
</TABLE>
2. INTANGIBLE ASSETS Intangible assets consist of the
following:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Excess of purchase price over fair value of
tangible assets of acquired radio stations
(substantially related to the value of
Federal Communications Commission
licenses) $8,255,940 $1,994,425
Related acquisition costs 216,209 135,029
Other 13,983 13,983
- -----------------------------------------------------------------------------------------
8,486,132 2,143,437
Less: accumulated amortization (784,791) (515,670)
- -----------------------------------------------------------------------------------------
$7,701,341 $1,627,767
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
3. LONG-TERM DEBT Long-term debt consists of the following:
AND FAIR VALUE
DISCLOSURES
1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Senior secured term and time notes
(see (a) below) $12,341,666 $7,147,254
Convertible and exchangeable
subordinated promissory notes (see
(b) below) 10,000,000 681,630
- ---------------------------------------------------------------------------------------
22,341,666 7,828,884
Less: Current portion of long-term
debt (430,005) (552,000)
F-14
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------
$21,911,661 $7,276,884
=======================================================================================
</TABLE>
(a) Senior secured term and time notes
In connection with the June 1997 Mansfield
acquisition described in Note 12, the Company
repaid its outstanding senior secured term
and time notes, which had an aggregate
principal balance of $7,371,000 at that time,
and borrowed $12,500,000 from the same lender
under an amended and restated loan agreement
(the "1997 loan agreement"). The term notes
under the 1997 loan agreement mature July 1,
2002 with optional renewal by the Company
under certain circumstances for an additional
five years. The principal balance is payable
in varying monthly installments, ranging from
$31,667 to $72,500, from August 1, 1997
through June 1, 2002, with the balance due on
the maturity date. Interest on the term notes
initially is at the rate of 4.50% over 30 day
commercial paper rates.
The borrowings are secured by all tangible
and intangible property of Flint and
Mansfield and all outstanding Flint and
Mansfield common stock held by the Company,
and are guaranteed by the Company.
F-15
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 1997 loan agreement contains certain
financial and restrictive covenants,
including maintenance of minimum operating
income levels and debt coverage ratios, and
limitations on capital expenditures,
corporate expenses, additional indebtedness,
mergers and dividend payments.
As of the date that the Company entered into
the 1997 loan agreement, certain accrued
interest was extinguished, resulting in an
extraordinary gain of $370,060.
(b) Convertible and exchangeable subordinated
promissory notes
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 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, 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 terms of the Securities Purchase
Agreement applicable to the Class A and Class
B Notes, as amended, provide that if the
Company does not, on or before April 1, 1999,
consummate a merger of the Company with
another corporation on terms acceptable to
the holders of the Notes, then upon notice
from such holders, the Company shall take all
action necessary to liquidate the Company and
each of its subsidiaries on terms and
conditions acceptable to such holders, such
approval not to be unreasonably withheld.
Subsequent to the sale of the Notes, an
individual who is a beneficial owner and
manager of the general partner of one of the
holders of the Notes and of the investment
manager of the other holder of the Notes
became a director of the Company.
F-16
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Mansfield acquisition,
described in Note 12, 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 herein. 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.
In connection with the purchase for
$6,400,000 of the Citicorp notes, which had a
principal amount aggregating $681,630, the
Company's appraisal right liability of
$1,015,000 was also extinguished. This debt
extinguishment resulted in an extraordinary
loss of $4,703,370.
Minimum annual maturities of the Company's
long-term debt for the next five years are
approximately as follows: 1998 - $430,000;
1999 - $554,000; 2000 - $688,000; 2001 -
$812,000; and 2002 - $19,858,000.
F-17
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company estimates that the carrying
amounts of its senior secured term and time
notes, $12,341,666 and $7,147,254 at December
31, 1997 and 1996, respectively, approximated
their fair values at those dates, based on
rates available to the Company for debt with
similar terms and remaining maturities. The
fair values of the convertible and
exchangeable subordinated promissory notes
are not readily determinable. Such debt was
carried at $10,000,000 at December 31, 1997
and $1,696,630 (including a related appraisal
right liability of $1,015,000) at December
31, 1996. The 1997 debt is convertible into
common stock with a market value of
approximately $16,000,000 at December 31,
1997. The 1996 debt was convertible into
common stock with a market value of
approximately $1,540,000 at December 31,
1996, and $350,000 of the debt was
exchangeable into the aforementioned
appraisal right. The Company believes that an
undetermined discount for lack of liquidity
would be appropriate due to the large amounts
of stock that would be issuable upon
conversion.
4. DEFERRED RENTAL Effective January 1995, Flint, as lessor,
INCOME entered into an operating lease agreement
with a telecommunications company. The
lessee agreed to arrange for the construction
of a new radio tower and antenna at one
of Flint's tower sites, at lessee's expense,
and transfer title to those assets to
Flint, in exchange for the right to use a
portion of the new tower and related building
facilities in its operations on a rent-free
basis for five years. The lessee has three
successive five-year renewal options,
providing for no rent in the sixth year, a
total of $18,000 rent in the seventh year,
and annual increases of 4% beginning with the
eighth year.
Flint has recorded as an advance minimum
lease payment an amount equal to the fair
value of the tower and antenna constructed
for its benefit, based on the lessee's
construction costs, aggregating approximately
$170,000. The assets received were
capitalized, the advance lease payment is
being amortized as rental income on a
straight-line basis over the five year
initial lease term, and the unamortized
portion of the lease payment is recorded as
deferred rental income.
F-18
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. COMMITMENTS The Company has entered into an operating
lease agreement for office space.
The following is a schedule of approximate
future minimum lease payments required under
this lease:
1998 $22,200
1999 22,200
2000 22,200
2001 3,700
-------------------------------------------
$70,300
===========================================
Rent expense was approximately $56,000,
$46,000 and $32,000 for the years ended
December 31, 1997, 1996 and 1995,
respectively.
6. RETIREMENT PLANS Effective January 1, 1995, the Company
established a qualified salary reduction plan
under Section 401(k) of the Internal Revenue
Code for eligible employees. Under the plan,
the Company may, but is not required to, make
matching and discretionary contributions to
participants' accounts. Matching
contributions charged against operations
amounted to $6,800 and $4,600 for the years
ended December 31, 1996 and 1995,
respectively. No matching contributions were
made for the year ended December 31, 1997.
F-19
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK OPTION PLAN The Company has a stock option plan (the
AND OTHER STOCK "Plan") under which 900,000 shares of common
OPTIONS stock have been reserved for issuance. Under
this Plan, the Company may grant options to
purchase up to 900,000 shares of common stock
in the form of either nonqualified stock
options or incentive stock options ("ISOs").
The Plan provides that the option price for
the nonqualified options be determined by the
Board of Directors at or prior to the time
the option is granted (but in no event at a
price below par value of the common stock)
and for ISOs, at a price not less than 100%
of the fair market value of the common stock
at the date the option is granted, except for
those individuals possessing more than 10% of
the total combined voting power of all
classes of stock of the Company or its
subsidiaries, for whom the price is not less
than 110% of the fair market value of the
common stock.
The term of each option granted shall be
determined by the Board of Directors,
provided that the term for each ISO granted
under the Plan not be more than 10 years from
the date of the grant and the term for each
option granted to an individual owning more
than 10% of the combined voting power, as
described above, not be more than five years.
Under the terms of the Plan, the Company's
right to grant additional ISOs terminated
September 18, 1994, 10 years from the date
the Plan was adopted by the Company's Board
of Directors.
The Company applies APB Opinion 25,
"Accounting for Stock Issued to Employees",
and related Interpretations in accounting for
the Plan. Under APB 25, for options granted
to employees at exercise prices equal to the
fair market value of the underlying common
stock at the date of grant, no compensation
cost is recognized.
F-20
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 1997, in connection with the
issuance of its Class A and Class B
Convertible Subordinated Notes ("Notes"), the
Company issued options to purchase 958,886
and 159,814 shares of its common stock at an
exercise price of $.53 per share to its
President and Senior Vice President,
respectively. These options are exercisable
through July 1, 2002 to the extent the Notes
are converted to common stock. If less than
all of the Notes are ultimately converted,
the number of options will be reduced
proportionately. At the time when any portion
of the Notes is converted and the
proportionate number of options become
exercisable, the Company will record a
nonrecurring charge to operations based on
the difference between the exercise price and
the market value of the Company's common
stock at that time. If all of the Notes had
been converted and all of the options had
been exercised at December 31, 1997, the
charge to operations would have been
approximately $355,000.
Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") requires the
Company to provide, beginning with 1995
grants, pro forma information regarding net
income and net income per common share as if
compensation costs for the Company's stock
option plans had been determined in
accordance with the fair value based method
prescribed in SFAS No. 123. Such pro forma
information is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income
(loss) $(4,865,688) $257,255 $220,071
Pro forma basic net
income (loss) per
common share $(.66) $.03 $.03
- -----------------------------------------------------------------------------------------
</TABLE>
F-21
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average fair value per share for
options granted was $.08, $.09 and $.08 in
1997, 1996 and 1995, respectively. The fair
value of each option grant is estimated on
the date of grant using the Black-Scholes
option-pricing model with the following
assumptions for 1997, 1996 and 1995 grants:
Dividends: None
Volatility: 46.5%
Risk-free interest rate: Ranging from
6.28% to 6.38%
Expected term: 5 years
Transactions involving options are summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 825,000 $.16 800,000 $.14 533,882 $.11
Granted 1,187,700 .53 234,182 .19 309,318 .16
Cancelled 69,000 .13 209,182 .13 43,200 .31
F-22
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------------------
Outstanding, December 31 1,943,700 $.37 825,000 $.16 800,000 $.14
===============================================================================================================
Exercisable, December 31 721,000 $.20 676,000 $.16 661,000 $.14
===============================================================================================================
</TABLE>
F-23
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about
stock options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ----------------------
Weighted-
Number Average Weighted- Weighted-
Outstanding Remaining Average Number Average
Exercise at Contractual Exercise Exercisable Exercise
Price 12/31/97 Life (years) Price at 12/31/97 Price
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
.13 112,500 .5 $.13 105,000 $.13
.16 409,318 2.1 .16 352,818 .16
.17 139,182 3.9 .17 139,182 .17
.22 95,000 3.2 .22 55,000 .22
.53 1,187,700 4.5 .53 69,000 .53
- -------------------------------------------------------------------------------------------------
1,943,700 2.8 $.37 721,000 $.20
=================================================================================================
</TABLE>
Of the 1,943,700 options outstanding at December 31, 1997,
1,866,200 are nonqualified options and 77,500 are ISOs.
8. COMMON STOCK At December 31, 1997, shares of the Company's
SHARES RESERVED authorized and unissued common stock were
reserved for issuance upon conversion of
convertible subordinated promissory notes and
exercise of options, as follows:
Convertible subordinated promissory notes (Note 3 (b)) 19,012,000
Stock options (Note 7) 1,943,700
- -----------------------------------------------------------------------------
20,955,700
=============================================================================
F-24
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
9. TAXES ON INCOME The provision for federal and state income
taxes consists of the following:
1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $152,000 $157,000
State 71,542 37,692 70,000
- --------------------------------------------------------------------------------------
71,542 189,692 227,000
Benefits of net operating loss
carryforwards - 152,000 199,000
- --------------------------------------------------------------------------------------
$71,542 $ 37,692 $ 28,000
======================================================================================
</TABLE>
The net deferred tax asset consists of the
following:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Gross deferred asset for:
Net operating loss carryforwards $2,448,000 $2,311,000
Excess gain on debt restructuring for tax
reporting purposes - 186,000
Alternative minimum tax credit
carryforwards 35,000 35,000
- ----------------------------------------------------------------------------------------
Subtotal 2,483,000 2,532,000
Less: valuation allowance (2,483,000) (2,532,000)
- ----------------------------------------------------------------------------------------
Net $ - $ -
- ----------------------------------------------------------------------------------------
</TABLE>
The Company has provided valuation allowances
equal to its deferred tax assets because of
the uncertainty as to future utilization.
The Company and its subsidiaries file
consolidated federal and separate state
income tax returns. At December 31, 1997,
consolidated net operating loss carryforwards
("NOLs") for income tax purposes were
approximately $6,800,000. Such NOLs may be
limited as to use upon a significant change
in the Company's ownership. The tax NOLs
expire during the years 2002 to 2012.
F-25
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The difference between the Company's effective tax rate on income before taxes
on income and the federal statutory tax rate arises from the following:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal tax expense at
statutory rate 34.0% 34.0% 34.0%
Federal taxes, based on
alternative minimum
calculation - - 1.8
Loss from debt
extinguishment - non-deductible (34.6) - -
Amortization of
intangibles and other
non-deductible
expenses (1.0) 31.9 47.6
Benefit of net operating
losses - (48.0) (72.8)
Changes in valuation
allowance 1.1 (13.9) -
State taxes, net of
federal benefit (1.0) 7.9 16.9
Prior year's federal tax
overaccrual - - (17.2)
- -----------------------------------------------------------------------------------------
Effective tax rate (1.5)% 11.9% 10.3%
=========================================================================================
</TABLE>
There was no material income tax effect related to the extraordinary items
described in Note 3.
F-26
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. NET INCOME (LOSS) PER
COMMON SHARE The following table sets forth the
computation of basic and diluted net income (loss) per common
share:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NUMERATOR:
Income (loss) before extraordinary items -
basic $(362,537) $278,840 $244,816
Addback:
Interest from subordinated senior
convertible note (net of tax effect) - 13,840 14,093
- --------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS -
DILUTED $(362,537) $292,680 $258,909
==========================================================================================================================
EXTRAORDINARY ITEMS - BASIC AND DILUTED $(4,333,310) $ - $ -
==========================================================================================================================
DENOMINATOR:
Weighted average shares outstanding
Common stock - basic 7,378,199 7,378,199 7,378,199
Shares issuable upon assumed conversion of
subordinated senior convertible note - 9,081,502 9,081,502
- --------------------------------------------------------------------------------------------------------------------------
Common shares - diluted 7,378,199 16,459,701 16,459,701
==========================================================================================================================
BASIC INCOME (LOSS) PER SHARE OF COMMON
STOCK - ASSUMING NO DILUTION:
Income (loss) before extraordinary items $(.05) $.04 $.03
Extraordinary items (.59) - -
- --------------------------------------------------------------------------------------------------------------------------
BASIC NET INCOME (LOSS) PER COMMON
SHARE $(.64) $.04 $.03
==========================================================================================================================
DILUTED INCOME (LOSS) PER COMMON SHARE ASSUMING ISSUANCE OF ALL DILUTIVE
CONTINGENT SHARES:
Income (loss) before extraordinary items $(.05) $.02 $.02
Extraordinary items (.59) - -
- --------------------------------------------------------------------------------------------------------------------------
DILUTED NET INCOME (LOSS) PER COMMON
SHARE $(.64) $.02 $.02
==========================================================================================================================
</TABLE>
Note: The effects of the assumed exercise of outstanding options were not
dilutive and, accordingly, have been
F-27
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
excluded from the diluted per share calculations. The effects of the
assumed conversion of convertible debt were not dilutive for 1997.
F-28
<PAGE>
<TABLE>
<CAPTION>
11. SUPPLEMENTAL CASH (a) Supplemental disclosure of cash flow information:
FLOW INFORMATION
Year ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid during the year $1,076,073 $ 866,357 $ 873,276
=========================================================================================
Income taxes paid during
the year $ 71,542 $ 43,592 $ 133,257
=========================================================================================
</TABLE>
(b) Supplemental disclosures of
non-cash investing and financing
activities:
In January 1995, Flint received a
tower and antenna, valued at
$170,000, as an advance lease
payment under the terms of an
operating lease agreement (see
Note 4).
In June 1997, certain accrued
interest was extinguished,
resulting in an extraordinary
gain of $370,060 (see Note 3
(a)).
12. ACQUISITION OF RADIO As of June 30, 1997, Mansfield
STATIONS acquired the assets and operations
of two commercial radio stations
located in Mansfield, Ohio (the
"Stations"), from an unrelated
company and its principals, pursuant
to the terms of an Asset Purchase
Agreement, made as of May 20, 1997
(the "Agreement"). Under the terms
of the Agreement, the selling
company received aggregate
consideration of $7,350,000 in cash,
which included $1 in consideration
of a five-year non-compete
agreement. In addition, the Company
paid $300,000 in cash to one of the
selling company's principals in
consideration of a five year
non-compete agreement. A substantial
portion of the purchase price for
the Stations was allocated to
intangible assets, representing
principally the value of the Federal
Communications Commission licenses
acquired. The acquisition of the
Stations has been accounted for by
the purchase method of accounting
and, accordingly, the operating
results of the Stations are included
in the Company's consolidated
results of operations from June 30,
1997, the date of acquisition.
F-29
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following are the Company's estimates of selected pro forma unaudited
consolidated results as if the Stations had been acquired as of the beginning
of 1996:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
($000s except per share
amounts)
Net broadcasting revenues $7,154 $7,152
=====================================================================================
Loss before extraordinary
items $ (570) $ (168)
=====================================================================================
Basic loss before
extraordinary items, per
common share $ (.08) $ (.02)
=====================================================================================
</TABLE>
13. SUBSEQUENT (a) On September 25, 1997, Mansfield filed an
ACQUISITION AND application with the Federal Communications
PENDING MERGER Commission ("FCC") to acquire the assets
and operations of radio station WSWR-FM,
Shelby, Ohio, for $1,125,000. The net
broadcasting revenues and results of
operations of the Shelby station for 1997
were not material in relation to the
Company's comparable amounts. Mansfield
deposited $100,000 in escrow pursuant to
the contract to acquire the Shelby station.
The closing of this acquisition occurred in
January 1998. In connection with the
closing, the Company borrowed $1,100,000
from a holder of the Class A and Class B
convertible subordinated promissory notes
described in Note 3(b). To evidence this
loan, the Company issued its Class C
Subordinated Promissory Note, which bears
interest at a rate of 14% per annum payable
at maturity, and is payable on the earlier
of April 1, 1999 or the closing of the
merger described in the following
paragraph.
F-30
<PAGE>
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) On December 5,1997, the Company signed an
agreement to merge with Regent
Communications, Inc., another group radio
broadcaster. Under the terms of the
agreement, Faircom will merge with and into
a subsidiary of Regent. The shareholders of
Faircom will receive shares of Regent
Series C Convertible Preferred Stock, par
value $.01 per share ("Series C Preferred
Stock"). The Series C Preferred Stock has
full voting rights, provides for annual
cumulative dividends of 7%, and is
convertible on a one-for-one basis (subject
to adjustment in certain events) into the
common stock, $.01 par value per share, of
Regent. The Series C Preferred Stock is
subject to mandatory conversion under
certain circumstances. In the event of a
liquidation of Regent, the Series C
Preferred Stock has a preference in the
amount of its stated value of $5.00 per
share, together with accrued and unpaid
dividends. In the merger, the outstanding
shares of Faircom Common Stock will be
exchanged for fully paid and nonassessable
shares of Series C Preferred Stock, and
each outstanding Faircom option will be
converted into a Regent option entitling
the holder to acquire, on equivalent terms,
the same number of shares of Series C
Preferred Stock as the holder would have
been entitled to receive in the merger if
such Faircom option had been exercised in
full prior to the date of the merger. The
number of shares of Series C Preferred
Stock to be issued in the merger and
issuable pursuant to Regent options to be
received in exchange for Faircom options in
the merger will be based upon an aggregate
liquidation preference amount of
$33,162,000, adjusted by the amount of
Faircom's net working capital and decreased
by its senior debt and by one-half of the
prepayment premium on such senior debt to
be paid at the closing of the merger, all
as computed as of the last day of the month
immediately preceding the closing date of
the merger.
As of the date of issuance of this report,
the closing of the merger is still pending,
subject to shareholder approval and
satisfaction of certain other conditions.
F-31
<PAGE>
FAIRCOM INC.
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
FORM 10-K - ITEM 14 (D)
DECEMBER 31, 1997
S-1
<PAGE>
FAIRCOM INC.
INDEX TO CONSOLIDATED FINANCIAL
STATEMENT SCHEDULES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS S-3
Consolidated financial statement schedules:
Schedule I - Condensed financial information of registrant S-4 - S-7
Schedule II - Valuation and qualifying accounts S-8
S-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors and Stockholders
Faircom Inc.
The audits referred to in our report dated January 21, 1998, relating to the
consolidated financial statements of Faircom Inc., which is contained in Item 8
of this Form 10-K, included the audit of the financial statement schedules
listed in the accompanying index. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based upon our audits.
In our opinion such financial statement schedules present fairly, in all
material respects, the information set forth therein.
/s/BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Mitchel Field, New York
January 21, 1998
S-3
<PAGE>
FAIRCOM INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS (COMPANY ONLY)
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,478 $ 7,014
Other current assets - 4,155
Interest receivable from subsidiary 92,944 29,004
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 104,422 40,173
OFFICE EQUIPMENT, FURNITURE AND FIXTURES - NET 630 630
NOTES RECEIVABLE FROM SUBSIDIARIES (NOTE 2) 3,673,000 1,243,000
OTHER ASSETS, INCLUDING DEFERRED FINANCING COSTS OF
$629,403 AND $6,016 630,728 7,341
- ---------------------------------------------------------------------------------------------------------------------------
$ 4,408,780 $ 1,291,144
===========================================================================================================================
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES:
Accrued expenses and liabilities $ 30,033 $ 132,747
Taxes payable 150 150
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 30,183 132,897
LONG-TERM DEBT 10,000,000 681,630
INTEREST PAYABLE 353,063 -
APPRAISAL RIGHT LIABILITY - 1,015,000
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 10,383,246 1,829,527
- ---------------------------------------------------------------------------------------------------------------------------
EXCESS OF LOSSES AND PREFERRED STOCK DIVIDENDS OF
SUBSIDIARIES OVER COST (NOTE 1) 4,207,322 4,947,558
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL DEFICIT:
Common stock 73,782 73,782
Additional paid-in capital 2,605,813 2,605,813
Deficit (12,861,383) (8,165,536)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL DEFICIT (10,181,788) (5,485,941)
- ---------------------------------------------------------------------------------------------------------------------------
$ 4,408,780 $ 1,291,144
===========================================================================================================================
</TABLE>
S-4
<PAGE>
FAIRCOM INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS (COMPANY ONLY)
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME:
Corporate overhead from subsidiaries
(Note 3) $ 172,000 $ 226,498 $ 354,328
Interest 245,653 174,024 174,024
Other 319 - 367
- ---------------------------------------------------------------------------------------------------------------------------
417,972 400,522 528,719
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Depreciation and amortization 72,514 3,035 3,035
General and administrative 391,252 336,643 304,653
Interest (including provision for appraisal
rights of $215,000 in 1996 and $438,000
in 1995) 385,919 280,711 503,873
- ---------------------------------------------------------------------------------------------------------------------------
849,685 620,389 811,561
- ---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EQUITY IN INCOME AND
EXTRAORDINARY GAIN OF SUBSIDIARIES; TAXES ON
INCOME; AND EXTRAORDINARY LOSS (431,713) (219,867) (282,842)
EQUITY IN INCOME AND EXTRAORDINARY GAIN OF
SUBSIDIARIES (NOTE 1) 439,236 500,399 527,658
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME AND
EXTRAORDINARY LOSS 7,523 280,532 244,816
TAXES ON INCOME - 1,692 -
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY LOSS 7,523 278,840 244,816
EXTRAORDINARY LOSS FROM DEBT EXTINGUISHMENT (4,703,370) - -
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(4,695,847) $ 278,840 $ 244,816
===========================================================================================================================
</TABLE>
S-5
<PAGE>
FAIRCOM INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS (COMPANY ONLY)
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(4,695,847) $ 278,840 $ 244,816
- ---------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 72,514 3,035 3,035
Provision for appraisal right - 215,000 438,000
Equity in income and extraordinary gain
of subsidiaries (439,236) (500,399) (527,658)
Extraordinary loss from debt
extinguishment 4,703,370 - -
Increase (decrease) in cash flows from
changes in operating assets and
liabilities:
Other current assets 4,155 (1,745) (2,410)
Other assets - (1,325) -
Interest receivable from subsidiary (63,940) (14,502) (14,502)
Accrued expenses and liabilities and
taxes payable (102,714) - (79,519)
Interest payable 353,063 - (1,663)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 4,527,212 (299,936) (184,717)
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (168,635) (21,096) 60,099
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiary (301,000) - -
Decrease (increase) in advances and loans to
subsidiaries (2,430,000) 8,000 (8,000)
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (2,731,000) 8,000 (8,000)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment for deferred financing costs (695,901) - -
Proceeds from long-term debt 10,000,000 - -
Purchase of convertible and exchangeable
debt (5,385,000) - -
Payment of appraisal right liability (1,015,000) - -
Payment of loan from subsidiary - - (85,850)
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 2,904,099 - (85,850)
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 4,464 (13,096) (33,751)
CASH AND CASH EQUIVALENTS, beginning of year 7,014 20,110 53,861
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 11,478 $ 7,014 $ 20,110
=====================================================================================================================
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid during the year $ 32,856 $ 65,711 $ 67,537
=====================================================================================================================
</TABLE>
S-6
<PAGE>
FAIRCOM INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1. INVESTMENTS IN The financial statements account for
SUBSIDIARIES the Company's investment in its
subsidiaries by the equity method of
accounting and have been prepared for
the purpose of presenting the
financial position and operating
results of the Company as a separate
entity. The Company has also prepared
consolidated financial statements of
the Company and its subsidiaries which
represent the primary financial
statements.
2. NOTES RECEIVABLE Notes receivable from subsidiaries
FROM SUBSIDIARIES consist of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C>
Faircom Flint Inc. $1,523,000 $1,243,000
Faircom Mansfield Inc. 2,150,000 -
--------------------------------------------------------------------------------------
$3,673,000 $1,243,000
======================================================================================
</TABLE>
Interest on the Flint notes was at
the rate of 14% per annum through
June 30, 1997 and prime thereafter.
Interest on the Mansfield notes is at
prime. The prime rate was 8.5% at
December 31, 1997. All of the notes
mature on July 1, 2002.
3. CORPORATE The Company received $172,000,
OVERHEAD $226,498 and $354,328 from its
subsidiaries for corporate overhead,
representing fees and expenses in
connection with management and
administrative services for the years
ended December 31, 1997, 1996 and
1995, respectively.
S-7
<PAGE>
FAIRCOM INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Additions Balance at
beginning charged to end of
of year expense Deductions * year
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful receivables:
Years ended December 31,
<S> <C> <C> <C> <C>
1997 $20,000 $46,308 $34,308 $32,000
===================================================================================================================================
1996 $20,000 $42,449 $42,449 $20,000
===================================================================================================================================
1995 $20,000 $16,428 $16,428 $20,000
===================================================================================================================================
</TABLE>
(*) Represents accounts written off against the reserve.
S-8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 535
<SECURITIES> 0
<RECEIVABLES> 1,390
<ALLOWANCES> 32
<INVENTORY> 0
<CURRENT-ASSETS> 1,919
<PP&E> 7,565
<DEPRECIATION> 5,408
<TOTAL-ASSETS> 13,011
<CURRENT-LIABILITIES> 860
<BONDS> 21,912
0
0
<COMMON> 74
<OTHER-SE> (10,256)
<TOTAL-LIABILITY-AND-EQUITY> 13,011
<SALES> 0
<TOTAL-REVENUES> 6,697
<CGS> 0
<TOTAL-COSTS> 2,294
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 34
<INTEREST-EXPENSE> 1,331
<INCOME-PRETAX> (291)
<INCOME-TAX> 72
<INCOME-CONTINUING> (363)
<DISCONTINUED> 0
<EXTRAORDINARY> (4,333)
<CHANGES> 0
<NET-INCOME> (4,696)
<EPS-PRIMARY> (.64)
<EPS-DILUTED> (.64)
</TABLE>
