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, 1996
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.
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(Exact name of registrant as specified in its charter)
Delaware 87-0394057
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Glen Head Road, Old Brookville, N.Y. 11545
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(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 11, 1997, the aggregate market value of the registrant's
voting stock held by non-affiliates was approximately $1,702,000.
The number of outstanding shares of Common Stock as of March 11, 1997
was 7,378,199.
PART I
ITEM 1. BUSINESS
The Company
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Faircom Inc., a Delaware corporation ("Faircom" or the "Company"),
owns and operates three radio stations, WFNT-AM and WCRZ-FM in Flint, Michigan,
and WWBN-FM in Tuscola, Michigan, a community north of Flint.
In August 1994, the Company sold WHFM-FM, its station in Southampton,
Long Island, New York for $1,850,000 cash, reduced by credits of $150,000 for
certain payments made by the purchaser prior to closing, and purchased WWBN-FM
for $450,000, consisting of $400,000 cash and an 8% note to the seller for
$50,000, paid in full December 1995.
In January 1997, the Company, through its wholly-owned subsidiary,
Faircom Mansfield Inc. ("Mansfield"), entered into a contract for the purchase
of substantially all of the assets of two radio stations in Mansfield, Ohio,
WMAN-AM and WYHT-FM, for total cash consideration of $7,650,000. Subject to FCC
approval and the satisfaction of contractual conditions, a closing is
anticipated in May 1997. Faircom Flint Inc., a wholly-owned subsidiary of the
Company, borrowed $400,000 by increasing its existing senior secured debt and
advanced such amount to Mansfield to make an escrow deposit under the contract.
This loan requires interest payments monthly at the prime rate plus 3% and
matures January 1, 1998. The Company is negotiating the refinancing of all its
existing indebtedness, increasing such indebtedness and obtaining additional
equity capital in connection with the Mansfield acquisition. Although the
Company believes such financing is available to it, no assurance can be given
that the Company will successfully consummate any such financing.
The Company was founded by Joel M. Fairman in April 1984 and began
operations with the objective of acquiring broadcasting properties at prices
considered attractive by the Company, financing them on terms satisfactory to
the Company, managing them in accordance with the Company's operating strategy
and building a broadcasting group. The Company has sought to acquire radio
properties which have a history of growing revenues and broadcast cash flow,
capable operating management and are in communities with good growth prospects
or which have attractive competitive environments. The Company 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.
The Company continuously reviews radio properties for possible
acquisition, and several acquisitions are currently being actively pursued. No
assurance can be given that the Company will successfully consummate any of
such acquisitions.
The Company's predecessor was founded in April 1984. In July 1984, a
plan of merger was consummated pursuant to which the Company became the
surviving entity of a merger between its predecessor and Comtron, Inc., a
public company incorporated in December 1982.
The Company'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 the Company's properties are owned and operated through
subsidiary corporations, and references to the term "Faircom" or "Company"
herein include such subsidiaries unless the context otherwise requires.
Operating Strategy
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The Company'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, the Company
reviews the station's operations and 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 the Company's strategy of minimizing
corporate expenses while giving considerable autonomy to its station managers.
The Company relies on experienced station managers who are given the
authority for decision making at the station level, subject to guidance by the
Company's management. The Company'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 the Company.
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 which it believes
is attractive to advertisers. The Company retains consultants to assist the
Company's programming personnel by evaluating and suggesting improvements for
programming. The Company also conducts research through outside consultants to
evaluate and improve its programming and also uses its own personnel for such
research.
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The Radio Broadcasting Industry and Company Operations
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At February 5, 1997, there were approximately 4,854 commercial AM and
5,429 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 1996, FM listenership
was about 77% of total radio audience.
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. Virtually all of the Company's
broadcasting revenues are derived from the sale of advertising. In 1996,
approximately 75% of the Company's consolidated station advertising revenues
were from local and regional sales, 24% 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 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 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. The Company's stations' advertising sales
are made by its sales staff under the direction of the general manager or sales
managers. The sales staffs utilize written sales presentations, some of which
incorporate computer-generated visual and statistical materials. Television,
billboard, newspaper and direct mail advertising, as well as special events and
promotions, are 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.
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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 Federal Communications
Commission ("FCC"), any of which could have a material effect on the Company'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
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The Company's radio broadcasting stations compete with the other
broadcasting 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. The Company
attempts to improve its competitive position by continuously reviewing its
programming and the programming of its competitors, upgrading its technical
facilities where appropriate, attempting to expand sales to its existing
advertising clients and developing new client 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 is considering 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
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technology also may be used in the future by existing radio broadcast stations
either on existing or alternate broadcasting frequencies. In addition,
applications by several entities currently are pending at 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. Thus far, the FCC has not granted the pending requests for
authorizations to offer satellite radio, nor has it adopted regulations for the
proposed satellite radio service. However, a rule making proceeding is pending
before the FCC to adopt DAB regulations. There are currently several pending
satellite DAB applications, and the FCC has begun rulemaking to establish
services and operational standards for satellite DAB. The FCC has granted at
least one applicant a waiver to begin satellite construction. 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
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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 an 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 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, a number of radio stations, including the
Company's stations, 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
5
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 (the "Telecom Act"). 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 protections from
competing applications for their broadcast licenses.
The Telecom 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 licensee 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 licensee 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 Telecom 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
6
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 Company'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. The Company'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 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 the Company's
EEO efforts at these stations. The Company has supplied the requested
information and is awaiting action upon the license renewal applications. Under
the Communications Act, the stations have valid, continuing operating
authority, pending ultimate disposition of the license renewal applications.
Under the FCC's rules, if the Company were found to be deficient in its EEO
efforts, the Company could be subject to monetary forfeitures, short-term
license renewals or EEO reporting requirements, or all of the foregoing, with
respect to these stations. The Company believes it has complied with the FCC's
EEO requirements and that the FCC's inquiry will not result in either monetary
forfeitures of a material nature or any other regulatory action which might
have a materially adverse effect on the Company. The Company expects its Flint
licenses to be renewed in due course.
The foregoing does not purport to be a complete summary of all of the
provisions of the Communications Act, the Telecom Act or the regulations or
policies of the FCC thereunder. Reference is made to such Acts, regulations,
and policies for further information.
Employees
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At the corporate level, the Company employs its President and
Treasurer, Mr. Fairman, and its Senior Vice President, who also utilize the
services of consultants, a bookkeeping service and the Company's attorneys. The
Company's President and Senior Vice President assist the general managers of
the Company's stations in developing strategies to increase the profitability
of the Company's broadcasting properties and in the operation of the stations.
The Company plans to continue its present policy of utilizing only a small
number of persons at the corporate level. Each market in which the Company 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,
the Company's subsidiaries employ 37 people on a full-time basis and 22 people
on a part-time basis.
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The Company has never experienced a strike or work stoppage and
believes that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company leases an aggregate of approximately 1,500 square feet of
office space for its corporate offices in Old Brookville, New York. The leases
expire February 28, 1998. The Company has the option to extend the leases for
an additional term of three years. Annual rental is currently $37,500.
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 the Company.
The Tuscola station occupies studio and office space in leased
premises in Frankenmuth, Michigan, at an annual rental of $1,920 under a lease
that expires June 1997. The station's tower, antenna and transmitter building
and equipment are owned by a subsidiary of the Company. Those facilities are
located on leased land in Millington, Michigan. The lease expires in June 1997
and has renewal options through June 2042. Current rental is $1,920 annually.
The Company owns substantially all of its studio and general office
equipment. The Company 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 2 and 4
to the Company's 1996 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market For Common Stock
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The Company's common stock is listed for trading on the National
Association of Securities Dealers, Inc. Over-the-Counter Bulletin Board (the
"OTC Bulletin Board") with the symbol "FXCM."
The following table reflects the high and low prices of the Common
Stock on the OTC Bulletin Board for each quarter during 1995 and 1996.
Fiscal Year High Low
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1995
First Quarter............................. 1/8 3/32
Second Quarter............................ 7/32 3/32
Third Quarter............................. 10/32 3/32
Fourth Quarter............................ 10/32 4/32
1996
First Quarter............................. 1/4 1/8
Second Quarter............................ 1/4 1/8
Third Quarter............................. 1/4 1/8
Fourth Quarter............................ 6/32 1/8
On March 11, 1997, the bid and asked prices of the Company's Common
Stock on the OTC Bulletin Board were 7/32 and 11/32, respectively. There were
363 holders of record of the Company's Common Stock on March 11, 1997.
Dividend Policy
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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 2 to the Company's 1996 Consolidated Financial
Statements.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31,
1996 1995 1994 1993 1992
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OPERATING RESULTS:
Net Broadcasting Revenues $ 4,873,954 $ 5,113,582 $ 4,983,513 $ 5,015,265 $ 6,061,729
Income from Operations 1,222,829 1,511,481 1,470,355 854,514 1,017,423
Income (Loss)
Before Extraordinary Item 278,840 244,816 992,079 (796,843) (2,278,749)
Extraordinary Item 787,201 3,216,605 337,247
Net Income (Loss) 278,840 244,816 1,779,280 2,419,762 (1,941,502)
Primary Income (Loss)
Per Common Share
Income (Loss)
Before Extraordinary Item .04 .03 .13 (.11) (.31)
Extraordinary Item .11 .44 .05
Primary Net Income (Loss)
Per Common Share .04 .03 .24 .33 (.26)
Fully Diluted Income (Loss)
Per Common Share
Income (Loss)
Before Extraordinary Item .02 .02 .06 (.11) (.31)
Extraordinary Item .05 .44 .05
Fully Diluted Net Income (Loss)
Per Common share .02 .02 .11 .33 (.26)
BALANCE SHEET DATA AT
YEAR END:
Total Current Assets 1,305,585 1,311,916 1,246,104 1,771,069 1,456,027
Total Current Liabilities 1,068,021 1,037,239 1,150,537 2,771,126 4,853,686
Total Assets 4,326,453 4,546,508 4,488,913 4,515,236 6,307,862
Long-Term Debt and
Obligations Under Capital
Leases 7,276,884 7,828,883 8,367,345 6,010,018 12,255,864
Redeemable Preferred Stock of
Subsidiaries at Liquidation Value 1,968,544 7,909,341
Total Capital Deficit (5,485,941) (5,764,781) (6,009,597) (11,624,571) (19,034,961)
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
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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.
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 13.9% in 1996 from 1995 (to $699,000
from $811,000) due to lower principal amounts of interest bearing debt
outstanding and lower interest rates during 1996.
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.
Year ended December 31, 1995 compared to year ended December 31, 1994
---------------------------------------------------------------------
The Company's net broadcasting revenues increased 2.6% in 1995
compared to 1994 (to $5,114,000 from $4,984,000). Increased net revenues at the
Company's Flint, Michigan radio stations in 1995 more than offset the absence
of any net revenues in 1995 from a radio station in Southampton, New York,
formerly owned by the Company and sold in August 1994. Net revenues increased
in the Flint stations as a result of higher local and national advertising
revenues generated by increased economic activity in the market and nationally.
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Operating expenses before depreciation, amortization and corporate
expenses increased by 3.3% in 1995 compared to 1994 (to $2,946,000 from
$2,853,000). Expenses increased as a result of increased operating expenses at
the Flint stations, offset in part by the absence of operating expenses in the
Southampton station formerly owned by the Company. The increases in Flint
operating expenses consist principally of increases in promotion and
advertising expense, the cost of new syndicated programming and higher sales
and administrative expense.
Net broadcasting revenues in excess of operating expenses before
depreciation, amortization and corporate expenses ("broadcast cash flow")
increased 1.7% (to $2,167,000 from $2,131,000) in 1995 compared to 1994. This
increase resulted from higher broadcast cash flow in Flint, offset by the
absence of any broadcast cash flow from Southampton in 1995.
Corporate expenses increased by 12.4% in 1995 from 1994 (to $305,000
from $271,000) primarily as a result of higher payments for employee
compensation, including incentive compensation.
Interest expense increased by 5.4% in 1995 from 1994 (to $811,000 from
$770,000) due to higher principal amounts of interest bearing debt outstanding
and higher interest rates during 1995.
The year 1995 contained no gain from sale of radio stations. Such
gain, in the amount of $965,000, was contained in the year 1994, reflecting the
sale in August 1994 of the Southampton radio station formerly owned by the
Company.
Preferred stock dividend requirement of subsidiaries decreased by
100.0% in 1995 from 1994 (to zero from $149,000) as a consequence of the
extinguishment of the preferred stock in a former subsidiary of the Company
resulting from the sale of the Company's former station in Southampton in
August 1994.
As a result principally of the absence in 1995 of the $965,000 gain
from sale of a radio station and the $787,000 gain from troubled debt
restructuring recognized in 1994, net income declined to $245,000 in 1995 from
$1,779,000 in 1994. The gain from sale of a radio station and the gain from
troubled debt restructuring accounted for $.13 and $.11 of the primary and $.06
and $.05 of the fully diluted per share earnings, respectively, in 1994.
Liquidity and Capital Resources
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In 1996, net cash provided by operating activities was $379,000
compared with $820,000 in 1995. Net decrease in cash and cash equivalents was
$(240,000) in 1996 compared with a net increase of $111,000 in 1995.
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Based upon current interest rates, its current capital structure and
without giving effect to any acquisitions, the Company believes its interest
expense for 1997 will be approximately $850,000. Scheduled debt principal
payments are $552,000. Corporate expenses and capital expenditures for 1997 are
estimated to be approximately $360,000 and $80,000, respectively. The Company
expects to be able to meet such interest expense, debt repayment, corporate
expenses and capital expenditures, aggregating $1,842,000, from net cash
provided by operations and current cash balances.
The Company is examining various alternatives for obtaining funds for
station acquisitions. No assurance can be given that the Company will
successfully consummate any such financing.
Inflation
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The Company does believe the effects of inflation have had a
significant impact on its consolidated financial 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.
13
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:
Principal Occupation
Name Age for Past Five Years
- ---- -- -------------------
Joel M. Fairman 67 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 57 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. since 1989. Mr. Pantaleoni
also currently serves as a director of Universal
Health Services, Inc., AAON Inc. and
Westwood Corporation.
Stephen C. Eyre 74 Director of the Company since May 1984.
Since June 1985, Dr. Eyre has been 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 71 Director of the Company since May 1984.
From January 1975 to February 1992, Mr.
Jansing was Chairman of the Board of
Directors of The Independent Election
Corporation of America, a proxy solicitation,
14
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 E. Risher 57 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.
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
15
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.
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 60 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
16
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
- --------------------
During the fiscal year ended December 31, 1996, options to purchase an
aggregate of 234,182 shares of Common Stock at a weighted average exercise
price of $.19 per share were granted pursuant to the Plan. As of March 11,
1997, no options granted pursuant to the Plan had been exercised. On that date
the bid and asked prices for the Common Stock on the OTC Bulletin Board were
$.22 and $.34, respectively.
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's directors and certain officers and persons who own more than ten
percent (10%) of a registered class of the Company's equity securities file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. Stephen C. Eyre's Report on Form 5 reflecting the grant and
expiration of certain stock options during 1996 was filed with the Securities
and Exchange Commission one day late as a result of a ministerial error. All
other reports were filed on a timely basis.
17
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary of Cash and Certain Other Compensation
- ----------------------------------------------
The following table sets forth certain summary information concerning
compensation paid or accrued by the Company and its subsidiaries to, or on
behalf of, the Company's Chief Executive Officer for the fiscal years ended
December 31, 1994, 1995 and 1996.
SUMMARY COMPENSATION TABLE
Long Term Compensation
---------------------------------------------------------
Annual Compensation Awards Payouts
--------------------------------------------- ---------------------------- -----------
Option/
Other Stock Long Term
Annual Restricted Appreciation Incentive All Other
Name and Compen- Stock Rights Plan Compensa-
Principal Position Year Salary($) Bonus ($) sation ($) Award(s) ($) ("SARs") (#) Payouts ($) tion ($)
- ------------------ ---- --------- --------- ---------- ------------ ------------ ----------- --------
Joel M. Fairman, 1996 100,000 28,000 --- --- 118,182(1) --- ---
Chairman of the
Board, President and 1995 90,000 15,000 --- --- 181,818(1) --- ---
Treasurer
1994 70,000 21,000 --- --- --- --- ---
- --------------
(1) Represents grant of stock options under the Company's Stock Option Plan.
18
The following table sets forth certain information concerning stock
options granted to Joel M. Fairman under the Company's Stock Option Plan in the
fiscal year ended December 31, 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------
Individual Grants
---------------------------------
Number of Percent of Total Potential Realizable Value at
Securities Options/SARs Assumed Annual Rates of Stock
Underlying Granted to Exercise or Price Appreciation for Option Term
Name and Option/SARs Employees in Base ----------------------------------
Principal Position Granted (#) Fiscal Year Price ($/Sh) 5% ($) 10% ($)
- ------------------ ----------- ---------------- ------------ ------ -------
Joel M. Fairman, 118,182 70.3 .17 5,543 12,267
Chairman of the
Board, President and
Treasurer
The following table sets forth certain information concerning
unexercised stock options granted to Joel M. Fairman under the Company's Stock
Option Plan:
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
----------------------------------------
Number of Unexercised Value of Unexercised In-
Options/SARs at FY- the-Money Options/SARs
End(#) at FY-End
--------------------- ------------------------
Value Realized
Shares (Market Price at
Acquired on Exercise Less
Name Exercise (#) Exercise Price) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ----------------- ----------- ------------- ----------- -------------
Joel M. Fairman None --- 300,000 --- $2,545 None
19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 11, 1997, the number of
shares of Common Stock of the Company and the percentage owned beneficially,
within the meaning of Securities and Exchange Commission Rule 13d-3, by (i) all
stockholders known by the Company to own more than 5% of the Common Stock; (ii)
all directors of the Company who are stockholders; and (iii) all directors and
officers as a group. Except as otherwise specified, the named beneficial owner
has sole voting and investment power.
Number of Shares
Name and Address of Beneficially
Beneficial Owners Owned Percent of Class
------------------- ---------------- ----------------
Joel M. Fairman
333 Glen Head Road
Old Brookville, New York 11545 1,500,000(1) 19.5%
Anthony Pantaleoni
666 Fifth Avenue
New York, New York 10103 110,000(2) 1.5%
Stephen C. Eyre
55 East 59th Street
New York, New York 10022 139,500(2) 1.9%
John C. Jansing
162 South Beach Road
Hobe Sound, FL 33455 153,500(2) 2.1%
Don G. Hoff and Sandra Hoff
1 Via Capistrano
Tiburon, CA 94920 430,000 5.8%
Ido Klear
111 Great Neck Road
Great Neck, New York 11021 380,000 5.2%
Citicorp Venture Capital, Ltd.
399 Park Avenue
New York, New York 10043 9,081,502(3) 55.2%
All officers and directors as
a group (five (5) persons) 2,014,000(4) 25.0%
- ------------------------
(1) Includes 300,000 shares issuable pursuant to currently exercisable stock
options held by Mr. Fairman under the Company's Stock Option Plan ("Plan").
20
(2) Includes 100,000 shares issuable pursuant to currently exercisable stock
options held by each of Messrs. Eyre, Jansing and Pantaleoni under the
Plan.
(3) Represents 9,081,502 shares issuable upon conversion of the Company's
8.65% Senior Convertible Note.
(4) Includes 686,000 shares issuable pursuant to currently exercisable stock
options under the Plan held by officers and directors of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended December 31, 1996, 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.
21
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.
11.1 Computation of Net Income Per Common Share.
* 21 Subsidiaries of the registrant.
27 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the period October 1, 1996
through December 31, 1996.
- --------------
* 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.
22
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 18, 1997
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 18, 1997
------------------------ and Chairman of the
Joel M. Fairman Board (Chief Executive,
Financial and
Accounting Officer)
By /s/ Anthony Pantaleoni Secretary and Director March 18, 1997
------------------------
Anthony Pantaleoni
By /s/ Stephen C. Eyre Director March 18, 1997
------------------------
Stephen C. Eyre
By /s/ John C. Jansing Director March 18, 1997
------------------------
John C. Jansing
23
FAIRCOM INC.
CONSOLIDATED FINANCIAL STATEMENTS AND
FORM 10-K - ITEM 8 AND ITEMS 14 (A) (1) AND (2)
YEAR ENDED DECEMBER 31, 1996
FAIRCOM INC.
CONSOLIDATED FINANCIAL STATEMENTS AND
FORM 10-K - ITEM 8 AND ITEMS 14 (A) (1) AND (2)
YEAR ENDED DECEMBER 31, 1996
F-1
FAIRCOM INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
CONSOLIDATING FINANCIAL STATEMENT SCHEDULES
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
CONSOLIDATED BALANCE SHEETS:
December 31, 1996 and 1995 F-4
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS ENDED DECEMBER 31, 1996:
Statements of income 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-24
F-2
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, 1996 and 1995 and the related consolidated statements of income, capital
deficit and cash flows for each of the three years in the period ended December
31, 1996. 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, 1996 and 1995 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Mitchel Field, New York
January 14, 1997
F-3
FAIRCOM INC.
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------------------------------------------
ASSETS (NOTE 2)
CURRENT ASSETS:
Cash and cash equivalents $ 123,221 $ 363,532
Accounts receivable, less allowance of $20,000 for possible
losses in 1996 and 1995 1,169,772 942,601
Prepaid expenses 12,592 5,783
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,305,585 1,311,916
- --------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, less accumulated depreciation and
amortization (Note 1) 1,184,554 1,327,067
- --------------------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS, net of accumulated amortization of $515,670
and $458,553 1,627,767 1,684,884
OTHER ASSETS:
deferred financing costs 167,222 167,641
other 41,325 55,000
- --------------------------------------------------------------------------------------------------------------------
1,836,314 1,907,525
- --------------------------------------------------------------------------------------------------------------------
$4,326,453 $4,546,508
====================================================================================================================
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 76,853 $ 58,946
Accrued expenses and liabilities 199,054 208,635
Taxes payable 10,150 20,150
Current portion of interest payable (Note 2 (b)) 226,417 235,458
Current portion of long-term debt (Note 2) 552,000 493,250
Current portion of obligations under capital leases (Note 4) 3,547 20,800
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,068,021 1,037,239
LONG-TERM DEBT, less current portion (Note 2) 7,276,884 7,828,883
INTEREST PAYABLE, less current portion (Note 2 (b)) 350,494 509,167
DEFERRED RENTAL INCOME (Note 3) 101,995 136,000
APPRAISAL RIGHT LIABILITY (Note 2 (d)) 1,015,000 800,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 9,812,394 10,311,289
- --------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2 (d) and 4)
CAPITAL DEFICIT (Notes 2 (c), 6 and 7):
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 (8,165,536) (8,444,376)
- --------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL DEFICIT (5,485,941) (5,764,781)
- --------------------------------------------------------------------------------------------------------------------
$4,326,453 $4,546,508
====================================================================================================================
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-4
FAIRCOM INC.
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
Year ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
BROADCASTING REVENUES:
Gross broadcasting revenues $5,517,586 $5,785,963 $5,607,940
Less: agency commissions (643,632) (672,381) (624,427)
- -----------------------------------------------------------------------------------------------------------------------------
NET BROADCASTING REVENUES 4,873,954 5,113,582 4,983,513
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Programming and technical expenses 1,218,160 1,229,333 1,161,600
Selling, general and administrative expenses 1,775,059 1,716,858 1,690,994
Depreciation and amortization 321,263 351,257 389,489
Corporate expenses 336,643 304,653 271,075
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 3,651,125 3,602,101 3,513,158
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 1,222,829 1,511,481 1,470,355
Interest expense (698,643) (811,298) (770,009)
Gain from sale of Southampton radio station (Note 8) - - 964,859
Other income 7,346 10,633 16,255
- -----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PREFERRED STOCK DIVIDEND REQUIREMENT OF
SUBSIDIARIES, PROVISION FOR APPRAISAL RIGHTS, TAXES ON INCOME
AND EXTRAORDINARY ITEM 531,532 710,816 1,681,460
Preferred stock dividend requirement of subsidiaries (Notes
2(c) and 8) - - (149,225)
Provision for appraisal rights (Note 2 (d)) (215,000) (438,000) (402,000)
- -----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME AND EXTRAORDINARY ITEM 316,532 272,816 1,130,235
TAXES ON INCOME (Note 9) 37,692 28,000 138,156
- -----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 278,840 244,816 992,079
EXTRAORDINARY ITEM:
Gain from troubled debt restructuring (Note 2(b)) - - 787,201
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 278,840 $ 244,816 $1,779,280
=============================================================================================================================
PRIMARY INCOME PER SHARE OF COMMON STOCK - ASSUMING NO DILUTION:
Income before extraordinary item $.04 $.03 $.13
Extraordinary item - - .11
- -----------------------------------------------------------------------------------------------------------------------------
PRIMARY NET INCOME PER COMMON SHARE $.04 $.03 $.24
=============================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 7,378,199 7,378,199 7,378,199
=============================================================================================================================
FULLY DILUTED INCOME PER COMMON SHARE - ASSUMING ISSUANCE OF ALL DILUTIVE
CONTINGENT SHARES:
Income before extraordinary item $.02 $.02 $.06
Extraordinary item - - .05
- -----------------------------------------------------------------------------------------------------------------------------
FULLY DILUTED NET INCOME PER COMMON SHARE $.02 $.02 $.11
=============================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 16,459,701 16,459,701 16,459,701
=============================================================================================================================
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-5
FAIRCOM INC.
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
- -------------------------------------------------------------------------------
COMMON STOCK
----------------------
ADDITIONAL
SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 7,378,199 $73,782 $2,605,813 $(14,304,166) $(11,624,571)
Extinguishment of
Southampton's
preferred stock
(Notes 2 (c) and 8) - - - 2,117,769 2,117,769
Extinguishment of
subordinated
claim and related
stock option (Note
2 (c)) - - - 1,717,925 1,717,925
Net income for the
year ended
December 31,
1994 - - - 1,779,280 1,779,280
- ------------------------------------------------------------------------------------------------------------------------
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)
========================================================================================================================
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-6
FAIRCOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 10)
- -------------------------------------------------------------------------------
Year ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $278,840 $244,816 $1,779,280
- ------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 323,474 351,257 389,489
Amortization of deferred rental income (34,005) (34,000) -
Provision for doubtful accounts 23,449 16,428 22,997
Gain from sale of radio station - - (964,859)
Preferred stock dividend requirement of
subsidiaries - - 149,225
Provision for appraisal rights 215,000 438,000 402,000
Gain from troubled debt restructuring - - (787,201)
Increase (decrease) in cash flows from changes in
operating assets and liabilities, net of effects of
sales of radio stations:
Accounts receivable (250,620) (2,708) (198,313)
Prepaid expenses (6,809) 31,724 (23,359)
Other assets (1,325) - (75,000)
Accounts payable 17,907 13,907 (9,746)
Accrued expenses and liabilities (9,581) (77,016) (136,753)
Taxes payable (10,000) (100,918) 121,068
Interest payable (167,714) (61,978) (47,787)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 99,776 574,696 (1,158,239)
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 378,616 819,512 621,041
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets used to satisfy secured
claims - - 1,700,000
Capital expenditures (63,440) (172,805) (375,904)
Intangible assets related to purchase of radio station - - (152,796)
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (63,440) (172,805) 1,171,300
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment for deferred financing costs (44,985) (235) (210,340)
Proceeds from long-term debt - - 720,578
Principal payments on long-term debt (493,249) (515,556) (2,228,943)
Principal payments under capital lease obligations (17,253) (19,660) (32,539)
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (555,487) (535,451) (1,751,244)
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (240,311) 111,256 41,097
CASH AND CASH EQUIVALENTS, beginning of year 363,532 252,276 211,179
- ------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $123,221 $363,532 $ 252,276
==============================================================================================================================
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-7
FAIRCOM INC.
SUMMARY OF ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
ORGANIZATION AND Faircom Inc. (the "Company") owns and operates radio
BUSINESS stations through its wholly-owned subsidiary in Flint,
Michigan.
PRINCIPLES OF The consolidated financial statements of the Company
CONSOLIDATION include the accounts of Faircom Inc. and its
subsidiaries, Faircom Flint Inc. ("Flint"), and Faircom
Evansville Inc., all of whose common stock is owned by
the Company. All intercompany accounts and transactions
are eliminated. Faircom Evansville Inc. was inactive
during the three years ended December 31, 1996. The
assets of Faircom Southampton Inc. ("Southampton") were
sold in 1994 (see Note 8). Southampton, which was a
wholly-owned subsidiary of the Company, was dissolved
in 1994.
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, the
EQUIVALENTS 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. For
EQUIPMENT 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 nineteen 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-8
FAIRCOM INC.
SUMMARY OF ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
INTANGIBLE ASSETS Intangible assets consist 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 forty years. Management evaluates the continuing
realizability of the intangible assets by assessing
projected future cash flows and obtaining independent
appraisals of the value of its radio stations.
LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board
issued 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. The Company adopted SFAS No. 121 in 1996 and
its implementation did not have a material effect on
the consolidated financial statements.
DEFERRED FINANCING Deferred financing costs are amortized on a
COSTS straight-line basis over the term of the related
debt.
REDEEMABLE The Company carried the redeemable preferred stock of
PREFERRED STOCK its former subsidiaries (see Notes 2(c) and 8) at their
AND APPRAISAL redemption values. Dividends on such stock were accrued
RIGHTS currently and charged to operations. At such time that
the appraisal rights of the preferred stockholders had
greater than a nominal value, an accrual and
corresponding charge to preferred stock requirements
were reflected in the consolidated financial
statements. Adjustments were made to this accrual based
on the passage of time and changes in appraisal values.
The value of the appraisal right given to Citicorp
Venture Capital, Ltd. ("CVC") for its guaranty of
certain debt interest (see Note 2 (d)) was accounted
for in a manner similar to the appraisal rights of the
preferred stockholders.
F-9
FAIRCOM INC.
SUMMARY OF ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
The value of the appraisal right given to CVC in
connection with its subordinated exchangeable note (see
Note 2 (d)) is accrued at a discounted amount, based on
the interest rate of the related note and the date on
which the appraisal right becomes exercisable.
Adjustments are made to this accrual based on the
passage of time and changes in appraisal values.
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".
REVENUE Revenue from radio advertisements, including barter
RECOGNITION transactions (advertising provided in exchange for
goods and services), is recognized as income when the
advertisements are broadcast. The merchandise or
services received as barter for advertising are charged
to expense when used or provided.
STOCK-BASED In October 1995, the Financial Accounting Standards
COMPENSATION Board issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123, which is
effective in 1996 for transactions entered into after
1994, establishes a fair value method of accounting for
stock-based compensation, through either recognition or
disclosure. The Company adopted the employee
stock-based compensation provisions of Statement No.
123 in 1996. However, since the pro forma net income
and earnings per share amounts assuming the fair value
method was adopted January 1, 1995 did not differ
materially from the comparable amounts reported on the
consolidated statements of income, no such pro forma
amounts have been disclosed. The adoption of Statement
No. 123 did not impact the Company's results of
operations, financial position or cash flows.
ADVERTISING COSTS Advertising costs are charged to expense as incurred
and amounted to $68,345, $149,469 and $118,770 for the
years ended December 31, 1996, 1995 and 1994,
respectively.
F-10
FAIRCOM INC.
SUMMARY OF ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
NET INCOME PER Net income per common share is based on the weighted
COMMON SHARE average number of shares of common stock outstanding
during each period. The effects of the assumed
conversion of a convertible note on per share data have
been reflected in the fully diluted calculation only
(see Note 2 (c)). The effects of the assumed exercise
of outstanding options were not dilutive and,
accordingly, have been excluded from both the primary
and fully diluted per share calculations (see Notes 6
and 7).
F-11
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. PROPERTY AND Property and equipment consist of the following:
EQUIPMENT
1996 1995
- ------------------------------------------------------------------------------------------------------
Land $ 116,000 $ 116,000
Buildings and building
improvements 633,136 626,722
Leasehold improvements 3,445 3,445
Towers and antenna systems 1,182,526 1,180,620
Studio, technical and transmitting
equipment 3,467,747 3,422,652
Office equipment, furniture and
fixtures 941,665 933,850
- ------------------------------------------------------------------------------------------------------
6,344,519 6,283,289
Less: accumulated depreciation and
amortization (5,159,965) (4,956,222)
- ------------------------------------------------------------------------------------------------------
Net property and equipment $1,184,554 $1,327,067
======================================================================================================
2. LONG-TERM DEBT Long-term debt consists of the following:
1996 1995
- ------------------------------------------------------------------------------------------------------
Senior secured term note (see (a) below) $5,713,717 $6,131,916
Senior secured term note (see (b) below) 760,200 834,000
Senior secured time note (see (b) below) 673,337 673,337
Subordinated senior convertible note (see
(c) below) 181,630 181,630
Subordinated senior exchangeable note
(see (d) below) 500,000 500,000
Notes payable for purchase of radio
station - 1,250
- ------------------------------------------------------------------------------------------------------
7,828,884 8,322,133
Less: Current portion of long-term debt (552,000) (493,250)
- ------------------------------------------------------------------------------------------------------
$7,276,884 $7,828,883
======================================================================================================
F-12
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(a) Senior secured term note
On December 22, 1994, Flint entered into an amended and
restated loan agreement (the "1994 loan agreement"), under
which certain existing indebtedness was consolidated,
creating three new loans (see also Note 2 (b)). A portion of
the "first loan" proceeds under the 1994 loan agreement was
used to repay in full two existing term loans, with the
balance used to fund loan closing costs and certain capital
expenditures. The "first loan" is evidenced by a term note
for $6,509,317, with interest payable monthly at the prime
rate plus 2-3/4% (base rate), which may be reduced if
certain conditions are met. The base rate can also be
increased by a maximum of 4% if Flint is in default for
non-payment of principal or interest. The principal balance
is payable in varying monthly installments, ranging from
$31,450 to $48,450, from January 1, 1995 through November 1,
1999, with the balance due on December 1, 1999. Flint has
the option, subject to certain terms and conditions, to
extend the "first loan" maturity date for an additional 60
months beyond December 1, 1999.
The borrowings are secured by all tangible and intangible
property of Flint and all outstanding Flint common stock
held by the Company, and are guaranteed by the Company.
The 1994 loan agreement contains certain financial and
restrictive covenants, including maintenance of minimum
operating income levels and debt coverage ratios, and
limitations on capital expenditures, additional
indebtedness, mergers and dividend payments.
F-13
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(b) Senior secured term note and time note
Under the 1994 loan agreement described in Note 2 (a), Flint
became obligated for a term note of $900,000 under the
"second loan" and a time note of $700,000 under the "third
loan". The "second loan" and "third loan" arose from the
acquisition by Flint's senior lender of the $3,180,564
subordinated secured claim against Flint, which Flint had
recorded in connection with its guaranty of certain
indebtedness of a former affiliate, Faircom Charleston, Inc.
("Charleston"), which was dissolved in 1994. The senior
lender, which had acquired the claim from the Resolution
Trust Corporation at a discounted amount, forgave all but
$1,600,000 of this claim and recast it as senior secured
indebtedness of Flint. An extraordinary gain of $787,201 was
recorded in 1994 by Flint in connection with this troubled
debt restructuring. The gain represents the principal amount
of the subordinated secured claim which was forgiven, less
the estimated interest of $793,363 payable over the term of
the "second loan" and "third loan", assuming a prime rate of
8.5%.
The principal balance of the term note under the "second
loan" is payable in varying monthly installments, ranging
from $5,500 to $8,550, from January 1, 1995 through November
1, 1999, with the balance due on December 1, 1999. Flint has
the option, subject to certain terms and conditions, to
extend the "second loan" maturity date for an additional 60
months beyond December 1, 1999. Interest on the term note is
payable monthly at the prime rate plus 2-3/4% (base rate),
which may be reduced if certain conditions are met. The base
rate can also be increased by a maximum of 4% if Flint is in
default for non-payment of principal or interest.
F-14
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Both principal and interest, at the prime rate plus 3%, on
the time note under the "third loan" are payable in a single
payment on December 1, 1999. However, to the extent that
Flint has excess cash flow, as defined in the 1994 loan
agreement, a quarterly payment is required, to be applied
first to accrued interest and then to principal. Flint made
a required quarterly principal payment of $41,246 on March
1, 1995, of which $14,583 was applied to accrued interest
and $26,663 was applied to principal. In addition, a
required quarterly payment of $72,438, which was applied to
accrued interest, was made on March 1, 1996. Flint was also
required to make quarterly payments from excess cash flow as
of September 1 and December 1, 1995 and 1996, but such
payments were waived by the lender.
The collateral and covenants in connection with the "second
loan" and "third loan" are the same as those described for
the "first loan" in Note 2 (a).
(c) Subordinated senior convertible note
The Company and Flint entered into a securities exchange
agreement with Citicorp Venture Capital, Ltd. ("CVC") on
December 22, 1994 (the "1994 CVC agreement"). Under the 1994
CVC agreement, the Company issued a senior convertible note
to CVC for $181,630, with interest payable quarterly at a
rate of 8.65% per annum. The interest rate may be increased
to 10% per annum if the Company is in default for
non-payment of principal or interest. Principal is payable
on December 1, 2004.
F-15
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The senior convertible note, which is subordinated to the
debt described in Notes 2 (a) and 2 (b), was issued in
exchange for the extinguishment of a subordinated claim
payable to CVC in the amount of $1,899,555 related to the
former Charleston Preferred Stock (extinguished and credited
against deficit in 1993 in the amount of its liquidation
value), which CVC had the option of converting into
6,963,733 shares of the Company's common stock; and the
extinguishment in 1994 of the former Southampton Preferred
Stock, with a liquidation value of $2,117,769, which CVC had
the option of converting into 2,117,769 shares of the
Company's common stock (see Note 8). The liquidation value
of the former Southampton Preferred Stock, and the
difference between the subordinated claim and the principal
amount of the new senior convertible note, were credited
against deficit in 1994.
CVC has the option at any time prior to December 1, 2004 to
convert all or any portion of the senior convertible note
into up to 9,081,502 shares of the Company's common stock,
at a conversion rate of 50,000 shares of stock for each
$1,000 of note principal, equivalent to a conversion price
of $.02 per share, subject to antidilution adjustments upon
stock splits and other events.
The senior convertible note contains certain restrictive
covenants, including limitations on capital expenditures,
additional indebtedness, mergers and dividend payments.
(d) Subordinated senior exchangeable note
Under the 1994 CVC agreement (see Note 2 (c)), the Company
also issued a senior exchangeable note to CVC for $500,000,
with interest payable quarterly at a rate of 10% per annum.
The interest rate may be increased to 12% per annum if the
Company is in default for non-payment of principal or
interest. Principal is payable on December 1, 2004.
F-16
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The senior exchangeable note, which is subordinated to the
debt described in Notes 2 (a) and 2 (b), was issued in
exchange for the extinguishment of an appraisal right with
respect to Flint held by CVC, valued for purposes of the
exchange at $310,000 at December 31, 1993 and $350,000 at
December 22, 1994, the date of the 1994 CVC agreement; and
for the extinguishment of the Company's subordinated
obligation to CVC, valued at $150,000 at December 22, 1994,
which was related to CVC's payment of certain accrued
interest under an interest guaranty on one of the Company's
notes payable.
At any time after December 1, 1999, CVC may request a
determination of the appraised value (as defined in the 1994
CVC agreement) of Flint, and elect to exchange $350,000 of
the principal amount of the senior exchangeable note for a
payment of 19.99% of such appraised value. Management
estimates that the present value of this appraisal right at
December 31, 1996, 1995 and 1994 was approximately
$1,015,000, $800,000 and $362,000, respectively, net of the
$350,000 principal amount that would be exchanged at each
such date and based on a 10% discount rate. If at any time
Flint is disposed of by the Company, CVC is entitled to
elect to exchange $350,000 of the principal amount of the
senior exchangeable note for a payment of 19.99% of the net
proceeds (as defined) received.
The senior exchangeable note has the same restrictive
covenants as described in Note 2 (c) for the senior
convertible note.
Minimum annual maturities of the Company's long-term debt for the
next five years and thereafter are approximately as follows: 1997
- $552,000; 1998 - $612,000; 1999 - $5,983,000; 2000 - $0; 2001 -
$0; and $682,000 thereafter.
The Company estimates that the carrying amount of its long-term
debt approximates its fair value.
F-17
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
3. DEFERRED RENTAL Effective January 1995, Flint, as lessor, entered into an
INCOME 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.
4. COMMITMENTS The Company has entered into operating lease agreements for
office space and certain equipment. The Company also
obtained equipment under capital leases.
The following is a schedule of approximate future minimum
lease payments required under these leases:
Operating Capital
----------------------------------------------------------
1996 $37,500 $3,641
1997 6,250 -
Less amount representing
interest - 94
----------------------------------------------------------
Present value of net
minimum lease payments $43,750 $3,547
==========================================================
Rent expense was approximately $46,000, $32,000 and $54,000
for the years ended December 31, 1996, 1995 and 1994,
respectively.
F-18
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
5. 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.
6. STOCK OPTION PLAN The Company has a stock option plan (the "Plan") under
which 900,000 shares of common 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,
ten 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-19
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
0 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 has not been presented because management
has determined that the compensation costs associated
with options granted in 1996 and 1995 are not material
to net income or net income per common share.
Transactions involving options granted under the Plan
are summarized below:
1996 1995 1994
-----------------------------------------------------------------------------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding, January 1 800,000 $.14 533,88 $.11 747,800 $.19
Granted 234,182 .19 309,318 .16 100,000 .16
Cancelled 209,182 .13 43,200 .31 313,918 .36
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31 825,000 $.16 800,00 $.14 533,882 $.11
===============================================================================================================================
Exercisable, December 31 676,000 $.16 661,00 $.14 427,242 $.10
===============================================================================================================================
The following table summarizes information about stock options outstanding
under the Plan at December 31, 1996:
- --------------------------------------------------------------------------------------------------------------
Options
Options Outstanding Exercisable
--------------------------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercise Exercise
Prices 12/31/96 Life Price 12/31/96 Price
- --------------------------------------------------------------------------------------------------------------
$.13 to .17 730,000 3.0 years $.15 631,000 $.15
.22 95,000 4.2 .22 45,000 .22
- --------------------------------------------------------------------------------------------------------------
$.13 to .22 825,000 3.0 years $.16 676,000 $.16
==============================================================================================================
Of the 825,000 options outstanding at December 31, 1996, 717,500 are
nonqualified options and 107,500 are ISOs.
F-20
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
7. COMMON STOCK At December 31, 1996, shares of the Company's
SHARES RESERVED authorized and unissued common stock were reserved for
issuance upon conversion of a subordinated senior
convertible note and exercise of options, as follows:
Subordinated senior convertible note (Note 2 (c)) 9,081,502
Stock option plan (Note 6) 900,000
- ---------------------------------------------------------------------------
9,981,502
===========================================================================
8. SALE OF In January 1994, Southampton entered into a contract to
SOUTHAMPTON RADIO sell substantially all of its assets. The Southampton
STATION Preferred Stock was extinguished because there were no
funds for payment to the Southampton preferred
stockholder available from the sale of Southampton.
The operations of the Southampton subsidiary prior to
the sale of the radio station, which closed in August
1994, were included in the statement of operations for
1994 and the sale resulted in a gain of $964,859. The
Southampton operations which were included in the
statement of operations are summarized as follows:
Net broadcasting revenues $269,000
Total operating expenses 165,000
- -----------------------------------------------------------------------------
Income from operations 104,000
Interest expense (122,000)
Gain from sale of station 965,000
Other income 10,000
- -----------------------------------------------------------------------------
Income before preferred stock dividend requirement
and taxes on income 957,000
Preferred stock dividend requirement (149,000)
Taxes on income (39,000)
- -----------------------------------------------------------------------------
Net income $769,000
=============================================================================
F-21
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The gain from sale of the Southampton radio station is
calculated as follows:
Proceeds from sale of station $1,700,000
Net assets sold:
Broadcasting property, net $272,000
Intangible assets 407,000 (679,000)
- -------------------------------------------------------------------------------
1,021,000
Capital lease assumed by buyer 44,000
Other expenses (86,000)
Write-off of remaining assets (14,000)
- -------------------------------------------------------------------------------
Gain from sale of station $ 965,000
===============================================================================
9. TAXES ON INCOME The provision for federal and state income taxes
consists of the following:
1996 1995 1994
- -------------------------------------------------------------------------------------------------------
Current:
Federal $152,000 $157,000 $1,021,000
State 37,692 70,000 97,156
- -------------------------------------------------------------------------------------------------------
189,692 227,000 1,118,156
Benefits of net operating
loss carryforwards 152,000 199,000 980,000
- -------------------------------------------------------------------------------------------------------
$ 37,692 $ 28,000 $ 138,156
=======================================================================================================
The net deferred tax asset consists of the following:
1996 1995
- -------------------------------------------------------------------------------------------------------
Gross deferred asset for:
Net operating loss carryforwards $2,311,000 $2,502,000
Excess gain on debt restructuring for
tax reporting purposes 186,000 274,000
Alternative minimum tax credit
carryforwards 35,000 35,000
- -------------------------------------------------------------------------------------------------------
Subtotal 2,532,000 2,811,000
Less: valuation allowance (2,532,000) (2,811,000)
- -------------------------------------------------------------------------------------------------------
Net $ - $ -
=======================================================================================================
F-22
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The Company has provided valuation allowances equal to
its deferred tax assets because of the uncertainty as
to future utilization.
The Company and Flint file consolidated federal and
separate state income tax returns. At December 31,
1996, consolidated net operating loss carryforwards
("NOL's") for income tax purposes were $6,421,000. The
tax NOL's expire during the years 2002 to 2008.
The difference between the Company's effective tax rate
on income before taxes on income and extraordinary item
and the federal statutory tax rate arises from the
following:
1996 1995 1994
- ---------------------------------------------------------------------
Federal tax expense at
statutory rate 34.0% 34.0% 34.0%
Federal taxes, based on
alternative minimum
calculation - 1.8% 7.7%
Non-deductible
expenses 31.9% 47.6% 26.7%
Benefit of net operating
losses (48.0)% (72.8)% (61.9)%
Changes in valuation
allowance (13.9)% - -
State taxes, net of
federal benefit 7.9% 16.9% 5.7%
Prior year's federal tax
overaccrual - (17.2)% -
- ---------------------------------------------------------------------
Effective tax rate 11.9% 10.3% 12.2%
=====================================================================
10. SUPPLEMENTAL CASH (a) Supplemental disclosure of cash flow information:
FLOW INFORMATION
Year ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
Interest paid during the
year $866,357 $873,276 $788,746
========================================================================================================
Income taxes paid
during the year $ 43,592 $133,257 $ 15,429
========================================================================================================
F-23
FAIRCOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(b) Supplemental disclosures of non-cash investing and
financing activities:
In December 1994, the subordinated claim against
Flint of $1,899,555 and a related stock option were
extinguished and exchanged as partial consideration
for the Company's $181,630 subordinated senior
convertible note. The difference of $1,717,925 was
credited against deficit (see Note 2 (c)). In
December 1994, the former Southampton Preferred
Stock and a related stock conversion right were
extinguished and exchanged as partial consideration
for the above-mentioned convertible note (see Note
2 (c)).
In December 1994, the Company issued a $500,000
subordinated senior exchangeable note in exchange
for the extinguishment of CVC's appraisal right to
Flint, valued at $350,000, and the extinguishment
of the Company's $150,000 subordinated obligation
to CVC (see Note 2 (d)).
In December 1994, a $3,180,564 subordinated secured
claim against Flint was acquired by Flint's senior
lender from the Resolution Trust Corporation,
reduced to $1,600,000, and recast as senior secured
indebtedness of Flint, resulting in an
extraordinary gain of $787,201 (see Note 2 (b)).
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 3).
11. SUBSEQUENT EVENT In January 1997, the Company, through its wholly-owned
subsidiary, Faircom Mansfield Inc. ("Mansfield"),
entered into a contract for the purchase of
substantially all of the assets of two radio stations
in Mansfield, Ohio for total cash consideration of
$7,650,000. Mansfield was formerly named Faircom
Evansville Inc. Subject to FCC approval and the
satisfaction of contractual conditions, a closing is
anticipated in May 1997. Flint borrowed $400,000 by
increasing its existing senior secured debt in the form
of a "fourth loan", and advanced such amount to
Mansfield to make an escrow deposit under the contract.
This loan requires interest payments monthly at the
prime rate plus 3% and matures January 1, 1998. The
Company is negotiating the refinancing of all its
existing indebtedness, increasing such indebtedness and
obtaining additional equity capital in connection with
the Mansfield acquisition.
F-24
FAIRCOM INC.
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
FORM 10-K - ITEM 14 (D)
DECEMBER 31, 1996
FAIRCOM INC.
- ------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
FORM 10-K - ITEM 14 (d)
DECEMBER 31, 1996
S-1
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
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 14, 1997, 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 14, 1997
S-3
FAIRCOM INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS (COMPANY ONLY)
- -------------------------------------------------------------------------------
December 31, 1996 1995
- ------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,014 $ 20,110
Other current assets 4,155 2,410
Interest receivable from subsidiary 29,004 14,502
Advance to subsidiary - 8,000
- ------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 40,173 45,022
OFFICE EQUIPMENT, FURNITURE AND FIXTURES - NET 630 630
NOTE RECEIVABLE FROM SUBSIDIARY (NOTE 2) 1,243,000 1,243,000
OTHER ASSETS 7,341 9,051
- ------------------------------------------------------------------------------------------------
$1,291,144 $1,297,703
================================================================================================
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES:
Accrued expenses and liabilities $ 132,747 $ 132,747
Taxes payable 150 150
- ------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 132,897 132,897
LONG-TERM DEBT 681,630 681,630
APPRAISAL RIGHT LIABILITY 1,015,000 800,000
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,829,527 1,614,527
- ------------------------------------------------------------------------------------------------
EXCESS OF LOSSES AND PREFERRED STOCK DIVIDENDS AND
PROVISION FOR APPRAISAL RIGHTS OF SUBSIDIARIES
OVER COST (NOTE 1) 4,947,558 5,447,957
- ------------------------------------------------------------------------------------------------
CAPITAL DEFICIT:
Common stock 73,782 73,782
Additional paid-in capital 2,605,813 2,605,813
Deficit (8,165,536) (8,444,376)
- ------------------------------------------------------------------------------------------------
TOTAL CAPITAL DEFICIT (5,485,941) (5,764,781)
- ------------------------------------------------------------------------------------------------
$1,291,144 $1,297,703
================================================================================================
S-4
FAIRCOM INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS (COMPANY ONLY)
- -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
INCOME:
MANAGEMENT FEES FROM SUBSIDIARIES
(NOTE 3) $226,498 $354,328 $ 335,000
INTEREST 174,024 174,024 174,150
OTHER - 367 11
- ---------------------------------------------------------------------------------------------------
400,522 528,719 509,161
- ---------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
DEPRECIATION AND AMORTIZATION 3,035 3,035 1,834
GENERAL AND ADMINISTRATIVE 336,643 304,653 271,075
INTEREST 65,711 65,873 30,709
- ---------------------------------------------------------------------------------------------------
405,389 373,561 303,618
- ---------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE PROVISION FOR
APPRAISAL RIGHT; EQUITY IN INCOME,
PREFERRED STOCK DIVIDENDS, PROVISION FOR
APPRAISAL RIGHTS AND EXTRAORDINARY GAIN
OF SUBSIDIARIES; AND TAXES ON INCOME (4,867) 155,158 205,543
PROVISION FOR APPRAISAL RIGHT (215,000) (438,000) (362,000)
EQUITY IN INCOME, PREFERRED STOCK
DIVIDENDS, PROVISION FOR APPRAISAL RIGHTS
AND EXTRAORDINARY GAIN OF SUBSIDIARIES
(NOTE 1) 500,399 527,658 1,942,737
- ---------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME 280,532 244,816 1,786,280
TAXES ON INCOME 1,692 - 7,000
- ---------------------------------------------------------------------------------------------------
NET INCOME $278,840 $244,816 $1,779,280
===================================================================================================
S-5
FAIRCOM INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS (COMPANY ONLY)
- -------------------------------------------------------------------------------
Year ended december 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $278,840 $244,816 $1,779,280
- ------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 3,035 3,035 1,834
Provision for appraisal right 215,000 438,000 362,000
Equity in (income), preferred stock
dividends, provision for appraisal
rights and extraordinary gain of
subsidiaries (500,399) (527,658) (1,942,737)
Increase (decrease) in cash flows
from changes in operating assets
and liabilities:
Other current assets (1,745) (2,410) 1,990
Other assets (1,325) - (6,000)
Interest receivable from
subsidiary (14,502) (14,502) -
Accrued expenses and
liabilities and taxes payable - (79,519) (9,129)
Interest payable - (1,663) 1,663
- ------------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS (299,936) (184,717) (1,590,379)
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (21,096) 60,099 188,901
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in advances and
loans to subsidiaries 8,000 (8,000) (11,000)
Payment of loan receivable-subsidiary - - 1,832
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 8,000 (8,000) (9,168)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 29,046
Payment of loan from subsidiary - (85,850) (174,150)
- ------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING
ACTIVITIES - (85,850) (145,104)
- ------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (13,096) (33,751) 34,629
CASH AND CASH EQUIVALENTS, beginning of
year 20,110 53,861 19,232
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 7,014 $ 20,110 $ 53,861
============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
Interest paid during the year $ 65,711 $ 67,537 $ -
============================================================================================================
S-6
FAIRCOM INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- -------------------------------------------------------------------------------
1. INVESTMENTS IN The financial statements account for the Company's investment
SUBSIDIARIES in its subsidiaries on 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. NOTE RECEIVABLE In connection with the Company's borrowing of $2,000,000 from
FROM SUBSIDIARY Price Communications Corporation ("Price") in 1986, the
Company advanced $2,000,000 to Flint in exchange for Flint's
14% exchangeable subordinated note ("Note"), which is due
January 31, 1997. The Note was pledged to Citicorp Venture
Capital, Ltd. ("CVC") in connection with CVC's guaranty of
interest payments on the Price note. In connection with a
securities exchange agreement entered into in December 1994 by
the Company and Flint with CVC, the pledge of the Note was
cancelled and all rights and claims of CVC with respect to the
Note were extinguished. At December 31, 1996 and 1995, the
principal balance of the Note was $1,243,000. As of January 31,
1997, the Note was exchanged for a new Flint 14% note to the
Company in the principal amount of $1,243,000 due February 1,
2000.
3. MANAGEMENT FEES The Company received $226,498, $354,328 and $335,000 from its
subsidiaries for management and administrative services for
the years ended December 31, 1996, 1995 and 1994, respectively.
S-7
FAIRCOM INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -------------------------------------------------------------------------------
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO END OF
OF YEAR EXPENSE DEDUCTIONS * YEAR
- ----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL
RECEIVABLES:
YEARS ENDED DECEMBER 31,
1996 $20,000 $42,449 $42,449 $20,000
==================================================================================================================================
1995 $20,000 $16,428 $16,428 $20,000
==================================================================================================================================
1994 $20,000 $22,997 $22,997 $20,000
==================================================================================================================================
(*) REPRESENTS ACCOUNTS WRITTEN OFF AGAINST THE RESERVE.
S-8
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
*3.1 CERTIFICATE OF INCORPORATION, AS AMENDED.
*3.2 BY-LAWS OF THE COMPANY.
11.1 COMPUTATION OF NET INCOME PER COMMON SHARE.
*21 SUBSIDIARIES OF THE REGISTRANT.
27 FINANCIAL DATA SCHEDULE.
- --------------------
* 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.