1 Exhibit 20(a) FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ..........to.............. Commission file number 0-15392 FAIRCOM INC. (Exact name of registrant as specified in its charter) Delaware 87-0394057 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 333 Glen Head Road, Old Brookville, N.Y. 11545 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (516) 676-2644 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ Common Stock, $.01 Par Value Not Applicable Securities registered pursuant to Section 12(g) of the Act: NONE -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 20, 1998, the aggregate market value of the registrant's voting stock held by non-affiliates was approximately $5,294,000. The number of outstanding shares of Common Stock as of March 20, 1998 was 7,378,199. 2 PART I ITEM 1. BUSINESS The Company Faircom Inc., a Delaware corporation ("Faircom" or the "Company"), owns and operates six radio stations, WFNT(AM) and WCRZ(FM) in Flint, Michigan; WWBN(FM) in Tuscola, Michigan, a community north of Flint; WMAN(AM) and WYHT(FM) in Mansfield, Ohio, and WSWR(FM) in Shelby, Ohio adjoining Mansfield. Faircom was founded by Joel M. Fairman in April 1984 and began operations with the objective of acquiring broadcasting properties at prices considered attractive by Faircom, financing them on terms satisfactory to Faircom, managing them in accordance with Faircom's operating strategy and building a broadcasting group. Faircom has sought to acquire radio properties which have a history of growing revenues and broadcast cash flow, have capable operating management and are in communities with good growth prospects or which have attractive competitive environments. Faircom focuses its acquisition efforts on medium and smaller radio markets, particularly where there may be an opportunity to achieve a significant cluster of stations in the market or to add additional stations in surrounding communities. Faircom has not purchased, and does not foresee purchasing in the near future, properties with negative cash flows, or so-called "under-performing" or "turnaround" properties, unless they complement or can be combined with the operations of positive cash flow properties in a market or regional cluster. Faircom's strategy is to have at least $1,000,000 in broadcast cash flow and be among the top three operators in each of its markets. In June 1997, Faircom, through its wholly-owned subsidiary, Faircom Mansfield Inc. ("Faircom Mansfield"), purchased substantially all of the assets of WMAN(AM) and WYHT(FM) for total cash consideration of $7,650,000. Faircom also negotiated the refinancing of all its existing indebtedness, increased such indebtedness and obtained additional equity capital in connection with the acquisition. In January 1998, Faircom purchased substantially all of the assets and operations of radio station WSWR(FM) in Shelby, Ohio for $1,125,000 in cash. The acquisition was financed with internal funds and a loan to Faircom of $1,100,000 from Blue Chip Capital Fund II Limited. This loan is expected to be refinanced from term loans to Regent Communications Inc. ("Regent") at the closing of the pending merger of Faircom and Regent discussed below. The loan is in the form of a subordinated note, matures on the first to occur of April 1, 1999 or the closing of the merger and bears accrued interest at 14% per annum, payable at maturity. Faircom continuously reviews radio properties for possible acquisition, and several acquisitions are currently being actively pursued. No assurance can be given that Faircom will successfully consummate any of such acquisitions. 3 Faircom's executive offices are located at 333 Glen Head Road, Suite 220, Old Brookville, New York 11545 and its telephone number is (516) 676-2644. All of Faircom's properties are owned and operated through subsidiary corporations and references to the term "Faircom" or the "Company" herein include such subsidiaries unless the context requires otherwise. Pending Merger On December 5, 1997, Faircom signed an agreement to merge with Regent Communications, Inc. ("Regent"), another group radio broadcaster. Under the terms of the agreement, Faircom will merge with and into a subsidiary of Regent. The shareholders of Faircom will receive shares of Regent Series C Convertible Preferred Stock, par value $.01 per share ("Series C Preferred Stock"). The Series C Preferred Stock has full voting rights, provides for annual cumulative dividends of 7%, and is convertible on a one-for-one basis (subject to adjustment in certain events) into the common stock, $.01 par value per share, of Regent. The Series C Preferred Stock is subject to mandatory conversion under certain circumstances. In the event of a liquidation of Regent, the Series C Preferred Stock has a preference in the amount of its stated value of $5.00 per share, together with accrued and unpaid dividends. In the merger, the outstanding shares of Faircom Common Stock will be exchanged for fully paid and nonassessable shares of Series C Preferred Stock, and each outstanding Faircom option will be converted into a Regent option entitling the holder to acquire, on equivalent terms, the same number of shares of Series C Preferred Stock as the holder would have been entitled to receive in the merger if such Faircom option had been exercised in full prior to the date of the merger. The number of shares of Series C Preferred Stock to be issued in the merger and issuable pursuant to Regent options to be received in exchange for Faircom options in the merger will be based upon an aggregate liquidation preference amount of $33,162,000, adjusted by the amount of Faircom's net working capital and decreased by its senior debt and by one-half of the prepayment premium on such senior debt to be paid at the closing of the merger, all as computed as of the last day of the month immediately preceding the closing date of the merger. Faircom anticipates a closing of the merger in the second quarter of 1998. The closing of the merger is subject to the effectiveness of a registration statement and delivery of a related proxy statement to Faircom's stockholders, satisfaction of the conditions of the merger agreement and the approval of Faircom's stockholders. Operating Strategy Faircom's strategy has been to purchase radio properties that exhibit growing revenues and broadcast cash flow, and have experienced, in-place operating personnel. After acquiring a radio station, Faircom reviews the station's operations and 2 4 attempts to realize economies associated with ownership of multiple stations by centralizing such functions as accounting and other administrative activities. A minimal staff is maintained at the corporate level reflecting Faircom's strategy of minimizing corporate expenses while giving considerable autonomy to its station managers. Faircom relies on experienced station managers who are given the authority for decision making at the station level, subject to guidance by Faircom's management. Faircom's station managers are partially compensated on the basis of their ability to meet or exceed budgeted operating results. Consequently, operating personnel can benefit by meeting the revenue and expense objectives of Faircom. Each station targets specific demographic groups based upon advertiser demand, the format of the station and the competition in the market. Through program selection, promotion, advertising and the use of selected on-air personnel, each station attempts to attract a target audience that it believes is attractive to advertisers. Faircom retains consultants to assist its programming personnel by evaluating and suggesting improvements for programming. Faircom also conducts research through outside consultants to evaluate and improve its programming and also uses its own personnel for such research. The Radio Broadcasting Industry At December 31, 1997, there were 4,762 commercial AM and 5,542 commercial FM stations authorized and operating in the United States. An increasing number of persons listen to FM radio because of clearer sound characteristics and stereo transmission. In the spring of 1997, FM listenership was about 78% of total radio audience. Operations Radio station revenue is derived predominantly from local and regional advertising and to a lesser extent from national advertising. Network compensation also provides some revenue. For example, in 1997, approximately 77% of Faircom's consolidated station advertising revenues were from local and regional sales, 22% from national sales and about 1% from network or syndication compensation. Local and regional sales generally are made by a station's sales staff. National sales generally are made by "national rep" firms, specializing in radio advertising sales on the national level. These firms are compensated on a commission-only basis. Local and regional sales are made primarily to businesses in the market covered by a station's broadcast signal and to some extent to businesses in contiguous or nearby markets. Such businesses include auto dealers, soft drink, beer and wine distributors, fast food outlets and financial institutions. National sales are made to larger, nationwide advertisers, such as soft drink producers, automobile manufacturers and airlines. Most advertising contracts are short-term, generally running only for a few weeks. Advertising rates charged by a radio station are based primarily on the station's ability to attract 3 5 audiences in the demographic groups which advertisers wish to reach and on the number of stations competing in the market area. Rating service surveys quantify the number of listeners tuned to the station at various times. Rates are generally highest during morning and evening drive-time hours. Faircom's stations' advertising sales are made by their sales staffs under the direction of a general manager or sales managers. Television, billboard, newspaper and direct mail advertising, as well as special events and promotions, can be used to supplement direct contact by the sales staff in developing advertising clients. The primary costs incurred in operating a radio station are salaries, programming, promotion and advertising expenditures, occupancy costs of premises for studios and offices, transmitting and other equipment expenses and music license royalty fees. Radio broadcasting revenues are spread over the calendar year. The first quarter generally reflects the lowest and the third and fourth quarters the highest revenues for the year, due in part to increases in retail advertising in the summer and in the fall in preparation for the holiday season and, in election years, to political advertising. The radio industry is continually faced with technological changes and innovations, the possible rise in popularity of competing entertainment and communications media, changes in labor conditions, governmental restrictions and actions of federal regulatory bodies, including the FCC, any of which could have a material effect on Faircom's business. However, broadcasting stations have generally enjoyed growth in listeners and value within the past several decades. Population increases and greater availability of radios, particularly car and portable radios, have contributed to this growth. Competition The radio broadcasting industry is a highly competitive business. Faircom's radio broadcasting stations compete for audience share and revenue directly with the other AM and FM radio stations in their respective market areas, as well as with other advertising media such as newspapers, television, magazines, outdoor advertising, transit advertising and mail marketing. Competition within the radio broadcasting industry occurs primarily in the individual market areas so that a station in one market does not generally compete with stations in other market areas. In addition to management experience, factors which are material to competitive position include the station's ratings in its market, rates charged for advertising time, broadcast signal coverage, assigned frequency, audience characteristics, the ability to create and execute promotional campaigns for clients and for the station, local program acceptance and the number and characteristics of other stations in the market area. Faircom attempts to improve its competitive position by reviewing programming and the programming of competitors, upgrading technical facilities where appropriate, attempting to expand sales to existing advertising clients and developing new client 4 6 relationships, and by promotional campaigns aimed at the demographic groups targeted by its stations. In order to provide additional opportunity for persons interested in obtaining radio broadcasting licenses, including minorities, the FCC in 1984 proposed new licenses for new full service FM broadcast stations in 684 communities. This FCC program is referred to as the "Docket 80-90" proceeding. Where these stations have commenced commercial broadcasting, they have increased competition in these markets. Also, it has been customary in the industry for experienced operators to buy stations in markets they consider attractive and attempt to improve the performance of these stations by additional investment and better management, thus increasing competition in these markets. The FCC recently has allocated spectrum to a new technology, digital audio broadcasting ("DAB"), to deliver satellite-based audio programming to a national or regional audience and has adopted regulations for a DAB service. DAB may provide a medium for the delivery by satellite or terrestrial means of multiple new audio programming formats with compact disc quality sound to local and national audiences. Another form of DAB, known as In-Band On Channel ("IBOC"), could provide DAB in the present FM radio band. It is not known at this time whether this technology also may be used in the future by existing radio broadcast stations either on existing or alternate broadcasting frequencies. In addition, three applications have been granted by the FCC for authority to offer multiple channels of digital, satellite-delivered S-Band aural services that could compete with conventional terrestrial radio broadcasting. These satellite radio services use technology that may permit higher sound quality than is possible with conventional AM and FM terrestrial radio broadcasting. Implementation of DAB or IBOC would provide an additional audio programming service that could compete with Faircom's radio stations for listeners, but the effect upon Faircom cannot be predicted. Implementation of DAB or IBOC would provide an additional audio programming service that could compete with the Company's radio stations for listeners, but the effect upon the Company cannot be predicted. FCC Regulation The FCC regulates radio stations under the Communications Act of 1934, as amended (the "Communications Act") which, together with FCC rules and policies promulgated thereunder, governs the issuance, renewal and assignment of licenses, technical operations, employment practices and, to a limited extent, business and program practices of radio stations and other communications entities. The rules also generally prohibit the acquisition of ownership in, or control of, a television station and either an AM or a FM radio station serving the same market. Such so-called "cross-ownership" prohibition is subject to waiver for stations in the 25 largest television markets under certain conditions. There are also prohibitions relating to ownership in or control of a daily newspaper and a broadcast 5 7 station in the same market and limitations on the extent to which aliens may own an interest in broadcast stations. Over the past five years, broadcasters such as Faircom have entered into what have commonly been referred to as "Local Market Agreements," or "LMAs." While these agreements may take varying forms, under a typical LMA, separately owned and licensed radio stations agree to enter into cooperative arrangements of varying sorts, subject to compliance with the requirements of antitrust laws and with the FCC's rules and policies. Under these types of arrangements, separately owned stations could agree to function cooperatively in terms of programming, advertising sales, etc., subject to the licensee of each station maintaining independent control over the programming and station operations of its own station. One typical type of LMA is a programming agreement among two separately owned radio stations serving a common service area, whereby the licensee of one station programs substantial portions of the broadcast day on the other licensee's station, subject to ultimate editorial and other controls being exercised by the latter licensee, and sells advertising time during such program segments. Such arrangements are an extension of the concept of "time brokerage" agreements, under which a licensee of a station sells blocks of time on its station to an entity or entities which program the blocks of time and which sell their own commercial advertising announcements during the time periods in question. In the past, the FCC has determined that issues of joint advertising sales should be left to antitrust enforcement and has specifically revised its so-called "cross- interest" policy to make that policy inapplicable to time brokerage arrangements. Under the cross-interest policy, the FCC may prohibit one party from acquiring certain economic interests in two broadcast stations in the same market. Furthermore, the staff of the FCC's Mass Media Bureau has, over the past five years, held that LMAs are not contrary to the Communications Act provided that the licensee of the station which is being substantially programmed by another entity maintains complete responsibility for and control over operations of its broadcast station and assures compliance with applicable FCC rules and policies. However, LMAs in which one station programs more than 15% of the weekly broadcast time of another local radio station are prohibited under FCC rules if the programming station could not own the programmed station under the FCC's so-called "multiple ownership" rules. On February 8, 1996, the President signed into law the Telecommunications Act of 1996. This legislation (a) permits foreign nationals to serve as officers and directors of broadcast licensees and their parent companies, (b) directs the FCC to eliminate its national ownership limits on radio station ownership, (c) requires the FCC to relax its numerical restrictions on local radio ownership, (d) extends the FCC's radio and television cross ownership waiver policy to the top 50 markets, (e) extends the license renewal period for radio and television stations to eight years and (f) affords renewal applicants significant new projections from competing applications for their broadcast licenses. 6 8 The Telecommunications Act's provisions regarding local radio ownership limits create a sliding scale of permissible ownership, depending on market size. In radio markets with 45 or more commercial radio stations, a license may own up to eight stations, no more than five of which can be in a single radio service (i.e. no more than five AM or five FM). In radio markets with 30 to 44 commercial radio stations, a license may own up to seven stations, no more than four of which are in a single radio service. In radio markets having 15 to 29 commercial radio stations, a licensee may own up to six radio stations, no more than four of which are in a single radio service. Finally, with respect to radio markets having 14 or fewer commercial radio stations, a licensee may own up to five radio stations, no more than three of which are in the same service; provided that the licensee may not own more than one half of the radio stations in the market. The Telecommunications Act affords renewal applicants additional protection from renewal challenges by (a) changing the standard for grant of license renewal and (b) precluding the FCC from considering the relative merits of a competing applicant in connection with making its determination on a licensee's renewal application. The new standard for license renewal is that a station's license will be renewed if (x) the station has served the public interest, convenience and necessity, (y) there have been no serious violations of the Communications Act or FCC rules by the licensee and (z) there have been no other violations of the Communications Act or FCC rules which, taken together, would establish a pattern of abuse by the licensee. The Communications Act limits the ownership of broadcast licenses by "aliens." Faircom's voting securities contain a legend which states that the securities are subject to certain restrictions on transfer to "aliens" (as defined in the Communications Act) as set forth in the By-laws of Faircom. Faircom's By-laws provide that shares of voting securities held by aliens which cause Faircom to be in violation of any provisions of the Communications Act shall not be entitled to vote, to receive dividends or have any other rights, and the holders of such securities will be required to transfer them to Faircom or another person whose ownership of such shares would not be in violation of the Communications Act. The foregoing does not purport to be a complete summary of all of the provisions of the Communications Act, the Telecommunications Act or the regulations or policies of the FCC thereunder. Reference is made to such Acts, regulations, and policies for further information. Licenses Faircom's license for its Tuscola station, WWBN(FM), was to expire October 1, 1996, and was renewed for a term through October 1, 2003. Pursuant to regulations adopted by the FCC in January 1997, as provided by the Telecom Act, the license renewal term was extended to October 1, 2004, a period of eight years. Faircom's licenses for its Flint stations, WCRZ(FM) and WFNT(AM), also were to expire on October 1, 1996. Timely license renewal applications for the stations were 7 9 filed, and, as part of the FCC's review process, the Equal Employment Opportunity ("EEO") Branch of the FCC's Mass Media Bureau requested additional written information regarding Faircom's EEO recruitment efforts at these stations. Such additional information was furnished, and on September 30, 1997, the FCC released a Memorandum Opinion and Order and Notice of Apparent Liability. The Opinion found that there was no evidence that the licensee engaged in employment discrimination, but that the overall EEO recruitment effort was deficient because the licensee failed to recruit actively for some of its vacancies and to engage in meaningful self-assessment of its EEO program. The Order granted renewal of the stations' licenses for a term expiring October 1, 2004, subject to an admonishment and reporting requirements with respect to EEO recruitment performance for the 12 month periods ending June 1, 1998, 1999 and 2000. A Notice of Apparent Liability was issued in the amount of $11,000. The management of Faircom and its FCC counsel believe that the factual assumptions on which the FCC Opinion, Order and Notice are based are incorrect, and incomplete. On October 30, 1997, Faircom filed with the FCC a Petition for Reconsideration in this matter, Faircom and its FCC counsel are unable to predict the ultimate outcome of this matter, but, in the opinion of both, a rejection a Faircom's Petition would not have a material adverse effect on Faircom. The licenses of WMAN(AM) and WYHT(FM) in Mansfield, Ohio, and WSWR(FM), in Shelby, Ohio, were renewed October 1, 1996 and expire October 1, 2004. Employees At the corporate level, Faircom employs its President and Treasurer, Joel M. Fairman, and John E. Risher, its Senior Vice President, who also utilize the services of consultants, a bookkeeping service and Faircom's attorneys. Faircom's President and Senior Vice President assist the general managers of Faircom's stations in developing strategies to increase the profitability of Faircom's broadcasting properties and in the operation of the stations. Faircom plans to continue its present policy of utilizing only a small number of persons at the corporate level. Each market in which Faircom owns and operates radio stations has its own complement of employees, including a general manager, a sales manager, a business manager, advertising sales staff, on-air personalities and engineering and operating personnel. In the aggregate, Faircom's subsidiaries employ 64 people on a full-time basis and 32 people on a part-time basis. Faircom has never experienced a strike or work stoppage and believes that its relations with its employees are good. ITEM 2. PROPERTIES Faircom leases approximately 780 square feet of office space for its corporate offices in Old Brookville, New York. The lease expires February 28, 2001. Annual rent is currently $22,200. 8 10 The Flint stations occupy studio and office space in a building of approximately 6,000 square feet located on 10 acres in southeastern Flint, Michigan. The AM towers and antennas are also located on this land. An FM tower, antenna and transmitter building and equipment are located on 19 acres of land located nearby. The land, buildings, towers, antennas and equipment are owned by a subsidiary of Faircom. The Tuscola station occupies studio and office space in leased premises in Frankenmuth, Michigan, at an annual rental of $1,800 under a lease that expires in September 1998. The station's tower, antenna and transmitter building and equipment are owned by a subsidiary of Faircom. Those facilities are located on leased land in Millington, Michigan. The lease expires in June 2002 and has renewal options through June 2042. Current rental is $2,112 annually. The Mansfield stations occupy studio and office space in a building of approximately 6,600 square feet located on six acres in Mansfield, Ohio. An auxiliary AM tower is located at this site. An adjoining property of approximately 10 acres is the site of a building of approximately 6,000 square feet that contains AM and FM transmitters and equipment and storage space. The AM and FM towers and antenna are located on this property. The land, buildings, towers, antennas and equipment are owned by a subsidiary of Faircom. All operations of WSWR(FM) in Shelby have been moved to the Mansfield studio and office space. The tower, antenna and transmitter building and equipment of WSWR(FM) are located on approximately one-half acre in Plymouth Township, Ohio, northeast of Shelby. The tower site is leased through September 2002 at a current rental of $1,200 annually, with four five-year term renewal options, each at a 10% increase in annual rent over the prior term. WSWR(FM) also leases approximately 1,000 square feet for office, sales, and broadcast use in Willard, Ohio. The lease is at a current annual rental of $3,600 and expires in August 2002. The lease contains an option to renew for an additional five-year term at an annual rental of $4,200. Faircom owns substantially all of its studio and general office equipment. Faircom believes that its properties are in good condition and are adequate for its operations, although opportunities to upgrade facilities are constantly reviewed. All the tangible and intangible property of the Company's subsidiaries is pledged as security for senior debt of the subsidiaries. See Notes 3 and 5 to the Company's 1997 Consolidated Financial Statements for a description of encumbrances against the Company's properties and the Company's rental obligations. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any lawsuit or legal proceeding that, in the opinion of the Company, is likely to have a material adverse effect on the Company. 9 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 10 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market For Common Stock The Company's common stock is quoted on the OTC Bulletin Board under the symbol "FXCM" and is traded on the over-the-counter market. The following table reflects the reported high and low bid quotations for Faircom Common Stock on the OTC Bulletin Board for each quarter during 1996 and 1997. Such quotations reflect interdealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions. Fiscal Year High Low 1996 First Quarter....................... $.25 $.13 Second Quarter...................... $.25 $.13 Third Quarter....................... $.25 $.13 Fourth Quarter...................... $.19 $.13 1997 First Quarter....................... $.22 $.13 Second Quarter...................... $.28 $.22 Third Quarter....................... $.63 $.28 Fourth Quarter...................... $.94 $.56 On March 20, 1998, the bid and asked prices of the Company's Common Stock on the OTC Bulletin Board were $.81 and $.94, respectively. There were 329 holders of record of the Company's Common Stock on March 20, 1998. Dividend Policy The Company has never paid dividends on its Common Stock. It is the Company's current policy to retain future earnings for the capital requirements of its business. The Company and its subsidiaries are subject to certain restrictions under existing agreements with their lenders which limit dividends on their Common Stock. See Note 3 to the Company's 1997 Consolidated Financial Statements. 11 13 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA Year Ended December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- OPERATING RESULTS: Net Broadcasting Revenues $ 5,993,291 $ 4,873,954 $ 5,113,582 $ 4,983,513 $ 5,015,265 Income from Operations 1,015,144 1,222,829 1,511,481 1,470,355 854,514 Income (Loss) Before Extraordinary Items (362,537) 278,840 244,816 992,079 (796,843) Extraordinary Items (4,333,310) 787,201 3,216,605 Net Income (Loss) (4,695,847) 278,840 244,816 1,779,280 2,419,762 Basic Income (Loss) Per Common Share: Income (Loss) Before Extraordinary Items (.05) .04 .03 .13 (.11) Extraordinary Items (.59) .11 .44 Basic Net Income (Loss) Per Common Share (.64) .04 .03 .24 .33 Diluted Income (Loss) Per Common Share: Income (Loss) Before Extraordinary Items (.05) .02 .02 .06 (.11) Extraordinary Items (.59) .05 .44 Diluted Net Income (Loss) Per Common share (.64) .02 .02 .11 .33 BALANCE SHEET DATA AT YEAR END: Total Current Assets 1,919,232 1,305,585 1,311,916 1,246,104 1,771,069 Total Current Liabilities 859,631 1,068,021 1,037,239 1,150,537 2,771,126 Total Assets 13,010,554 4,326,453 4,546,508 4,488,913 4,515,236 Long-Term Debt and Obligations Under Capital Leases 21,911,661 7,276,884 7,828,883 8,367,345 6,010,018 Redeemable Preferred Stock of Subsidiaries at Liquidation Value 1,968,544 Total Capital Deficit (10,181,788) (5,485,941) (5,764,781) (6,009,597) (11,624,571) The Company has not declared or paid Common Stock cash dividends since inception. 12 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Year ended December 31, 1997 compared to year ended December 31, 1996 The results of the Company's operations for the year ended December 31, 1997 compared to the year ended December 31, 1996 are not comparable or necessarily indicative of results in the future due to the significance of acquisitions. As of June 30, 1997, the Company, through a wholly-owned subsidiary, Faircom Mansfield Inc. ("Faircom Mansfield"), acquired the assets and operations of two radio stations, WMAN-AM and WYHT-FM, both located in Mansfield, Ohio (the "Mansfield Stations") for aggregate cash consideration of $7,650,000. The acquisition has been accounted for as a purchase, and accordingly the operating results of the Mansfield Stations have been included in the Consolidated Statements of Operations from the acquisition date. The increase in the Company's net broadcasting revenues in 1997 as compared with 1996 resulted principally from the ownership and operation of the Mansfield Stations during 1997. Net broadcasting revenues increased to $5,993,000 from $4,874,000, or 23.0%, in 1997 as compared with 1996. Programming and technical expenses and selling, general and administrative expenses increased in 1997 as compared with 1996, principally as a result of the acquisition of the Mansfield Stations. Such increases were to $1,591,000 from $1,218,000, or 30.6%, and to $2,270,000 from $1,775,000, or 27.9%, respectively. Operating expenses before depreciation, amortization and corporate expenses also increased in 1997 as compared with 1996, primarily as a result of the acquisition of the Mansfield Stations. Such increase was to $3,860,000 from $2,993,000, or 29.0%, in 1997 as compared with 1996. Net broadcasting revenues in excess of operating expenses before depreciation, amortization and corporate expenses ("broadcast cash flow") increased 13.4% to $2,133,000 in 1997 from $1,881,000 in 1996. This increase resulted from the acquisition of the Mansfield Stations as described above, offset in part by lower broadcast cash flow from the Company's radio stations in Flint, Michigan. Depreciation and amortization and interest expense increased in 1997 as compared with 1996 as a result of the addition of assets and debt incurred in connection with the acquisition of the Mansfield Stations. Taxes on income for both 1997 and 1996 related principally to state income taxes. There were no current federal income taxes in 1997, as a result of a taxable loss. Current federal income taxes in 1996 were offset in full by the utilization 13 15 of net operating loss carryforwards. The Company has provided valuation allowances equal to its deferred tax assets because of uncertainty as to their future utilization. The deferred tax assets relate principally to net operating loss carryforwards. Although the Company was marginally profitable in 1994 through 1996, the loss in 1997 along with substantial historical losses caused management to conclude that it was still premature to reduce the valuation allowance. As a result principally of an extraordinary loss from debt extinguishment of $4,703,000, offset in part by an extraordinary gain from debt extinguishment of $370,000, net loss was $4,696,000 for 1997 compared to net income of $279,000 in 1996. Year ended December 31, 1996 compared to year ended December 31, 1995 The Company's net broadcasting revenues decreased 4.7% in 1996 compared to 1995 (to $4,874,000 from $5,114,000), primarily due to lower regional and national advertising activity in the Flint, Michigan radio market and resulting lower regional and national advertising revenues in the Company's Flint radio stations. Programming and technical expenses decreased by 0.9% in 1996 compared to 1995 (to $1,218,000 from $1,229,000) and selling, general and administrative expenses increased by 3.4% (to $1,775,000 from $1,717,000). Operating expenses before depreciation, amortization and corporate expenses increased by 1.6% in 1996 compared to 1995 (to $2,993,000 from $2,946,000). Net broadcasting revenues in excess of operating expenses before depreciation, amortization and corporate expenses ("broadcast cash flow") decreased 13.2% (to $1,881,000 from $2,167,000) in 1996 compared to 1995, principally as a result of the lower net broadcasting revenues in Flint. Corporate expenses increased by 10.5% in 1996 from 1995 (to $337,000 from $305,000) primarily as a result of higher employee compensation, professional fees and related expense. Such employee compensation in 1996 included incentive payments indexed to 1995 operating results. Interest expense decreased by 26.9% in 1996 from 1995 (to $914,000 from $1,249,000) due to lower principal amounts of interest bearing debt outstanding, lower interest rates during 1996 and a lower provision for appraisal rights. Taxes on income for both 1996 and 1995 related principally to state income taxes. Current federal income taxes in 1996 and 1995 and a portion of state income taxes in 1995 were offset by the utilization of net operating loss carryforwards. The Company has provided valuation allowances equal to its deferred tax assets because of uncertainty as to their future utilization. The deferred tax assets relate principally to net operating loss carryforwards. Although the Company was marginally 14 16 profitable in 1994 through 1996, substantial historical losses caused management to conclude that it was still premature to reduce the valuation allowance. As a result principally of lower provision for appraisal rights and interest expense in 1996 compared with 1995, offset by lower income from operations, net income increased to $279,000 in 1996 from $245,000. Liquidity and Capital Resources In 1997, net cash provided by operating activities was $418,000 compared with $379,000 provided by operating activities in 1996. Net increase in cash and cash equivalents was $412,000 in 1997 compared with a net decrease of $240,000 in 1996. In January 1998, Faircom Mansfield purchased substantially all of the assets and operations of radio station WSWR-FM in Shelby, Ohio for $1,125,000 in cash. The acquisition was financed with internal funds and a loan to the Company of $1,100,000. The loan is in the form of a subordinated note, matures on the first to occur of April 1, 1999 or the closing of the merger with Regent Communications, Inc. ("Regent"), discussed below, and bears accrued interest at 14% per annum, payable at maturity. Based upon current interest rates, and assuming the merger with Regent is not consummated, the Company believes its interest payments for 1998 will be approximately $1,213,000. Scheduled debt principal payments are $430,000. Corporate expenses and capital expenditures for 1997 are estimated to be approximately $410,000 and $200,000, respectively. The Company expects to be able to meet such interest expense, debt repayment, corporate expenses and capital expenditures, aggregating $2,253,000, from net cash provided by operations and current cash balances. For the years 1999 through 2001, currently scheduled debt principal payments average $685,000 yearly. Interest payments, corporate expenses and capital expenditures are expected to be approximately the same as projected for 1998, adjusted for inflation. The Company expects to be able to meet such cash requirements from net cash provided by operations and cash balances. The Company believes its $1,100,000 loan maturing April 1, 1999, and the balance of its long-term debt in the amount of $19,858,000, maturing July 1, 2002, will be refinanced at their respective maturity dates either from its current lenders or from other sources, if still outstanding. The terms of the Securities Purchase Agreement applicable to the Company's Convertible Subordinated Promissory Class A and Class B Notes (the "Notes"), as amended, provide that if the Company does not, on or before April 1, 1999, consummate a merger of the Company with another corporation on terms acceptable to the holders of the Notes, then upon notice from such holders, the Company shall take all action necessary to liquidate the Company and each of its subsidiaries on terms and conditions acceptable to such holders, such approval not to be unreasonably withheld. As indicated below, the Company expects to complete a merger with Regent in the second quarter of 1998. If, however, such merger should not occur, the Company 15 17 believes there are a number of alternatives available to it which would be acceptable to the holders of the Notes. On December 5, 1997, the Company announced that it had signed an agreement to merge with Regent, another group radio broadcaster. The Company anticipates a closing of the merger in the second quarter of 1998. The closing of the merger is subject to the effectiveness of a registration statement and delivery of a related proxy statement to the Company's stockholders, satisfaction of the conditions of the merger agreement and the approval of the Company's stockholders. The Company estimates the fees and expenses of this transaction, for which the Company is responsible, to be approximately $543,000. Of this amount, approximately $233,000 is payable only if the merger is consummated. Of the balance of $310,000, the Company expects to pay such fees and expenses from net cash provided by operations and current cash balances, and, with respect to the amount payable on consummation of the merger, from such balances at the time of the closing of the merger. Inflation The Company does not believe the effects of inflation have had a significant impact on its consolidated financial statements. Compliance with Year 2000 Management has initiated a Company-wide program to prepare the Company's computer systems and applications for year 2000 compliance. The Company expects to incur internal staff costs as well as other expenses necessary to prepare its systems for the year 2000. The Company expects to both replace some systems and upgrade others. Maintenance or modification costs will be expensed as incurred. The total cost of this effort is still being evaluated, but is not expected to be material to the Company. Cautionary Statement Concerning Forward-Looking Statements This Form 10-K, including this Management's Discussion and Analysis, includes or may include certain forward-looking statements with respect to Faircom that involve risks and uncertainties. This Form 10-K contains certain forward-looking statements concerning financial position, business strategy, budgets, projected costs, and plans and objectives of management for future operations, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "project" and other similar expressions. Although Faircom believes its expectations reflected in such forward-looking statements are based on reasonable assumptions, readers are cautioned that no assurance can be given that such expectations will prove correct and that actual results and developments may differ materially from those conveyed in such forward-looking statements. For these statements, Faircom claims the protections of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. 16 18 Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements herein include changes in general economic, business and market conditions, as well as changes in such conditions that may affect the radio broadcast industry or the markets in which Faircom operate, in particular, increased competition for attractive radio properties and advertising dollars, fluctuations in the costs of operating radio properties, and changes in the regulatory climate affecting radio broadcast companies. Such forward-looking statements speak only as of the date on which they are made, and Faircom undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-K. If Faircom does update or correct one or more forward-looking statements, readers should not conclude that Faircom will make additional updates or corrections with respect thereto or with respect to other forward-looking statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data required pursuant to this Item begin on page F-1 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 17 19 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 69 Founder, President, Treasurer and Chairman of the Board of the Company since its inception in April 1984. From September 1965 until June 1984, Mr. Fairman was employed in an executive capacity by investment banking firms. Anthony Pantaleoni 58 Secretary and director of the Company since its inception in April 1984. Mr. Pantaleoni has been a partner in the law firm of Fulbright & Jaworski L.L.P. for more than five years. Mr. Pantaleoni also currently serves as a director of Universal Health Services, Inc., AAON Inc. and Westwood Corporation. Stephen C. Eyre 75 Director of the Company since May 1984. From July 1985 to December 1997, Dr. Eyre was Executive Director of The John A. Hartford Foundation. From March 1983 through June 1985 he was Distinguished Professor, Citicorp Chair of Finance at Pace University, New York City. Prior to March 1983, Dr. Eyre was a director of Citibank, N.A. (December 1981 - March 1983), Senior Vice-President and Secretary (1980 - 1983) and Comptroller (1973 - 1980) of Citibank and Citicorp. Dr. Eyre currently serves as a director or trustee of various Prudential Global Equity and Money Market Funds. John C. Jansing 72 Director of the Company since May 1984. From January 1975 to February 18 20 1992, Mr. Jansing was Chairman of the Board of Directors of The Independent Election Corporation of America, a proxy solicitation, tabulation and services firm. Mr. Jansing also serves as a director of Vestaur Securities, Inc. and Alpine Group Corporation. In addition, Mr. Jansing currently serves as a director of the following investment funds: Affiliated Fund, Inc.; Lord Abbett Value Appreciation Fund, Inc.; Lord Abbett Bond-Debenture Fund, Inc.; Lord Abbett Cash Reserve Fund, Inc.; Lord Abbett Development Growth Fund, Inc.; Lord Abbett Income Fund, Inc.; and the Lord Abbett Tax Free Income Fund, Inc. John H. Wyant 52 Director of the Company since September 1997. Mr. Wyant has served since its formation in 1992 as President of Blue Chip Venture Company, a venture capital investment firm which, together with its affiliates, manages an aggregate of approximately $180 million of committed capital for investment in privately held high growth companies. From 1991 to 1992, Mr. Wyant served as Executive Vice President, Corporate Finance, of Gradison & Co., a financial services firm, where his primary activity was the development and formation of Blue Chip Venture Company. Mr. Wyant was initially trained in marketing with The Proctor & Gamble Company and served in marketing and general management positions with Taft Broadcasting Company. Subsequently, he was Chief Executive Officer of Home Entertainment Network and Nutrition Technology Corporation, both venture capital-backed companies. Mr. Wyant is also a director of Zaring National Corporation, Ciao Cucina Corporation and a number of privately held companies. 19 21 John E. Risher 58 Senior Vice President of the Company since January 1996 and Vice President of the Company from July 1991 to January 1996. Mr. Risher is also President and General Manager, since January 1996, of the Company's subsidiary, Faircom Flint Inc. Prior to January 1996, Mr. Risher was Vice President and General Manager of the subsidiary since its acquisition of the Company's radio stations in Flint, Michigan in December 1986. For 20 years prior to 1986, Mr. Risher was employed in sales, sales management and as a general manager for radio stations. Directors of the Company are elected annually and hold office until the Annual Meeting of stockholders or until their successors have been elected and have duly qualified. Executive officers of the Company are elected annually and hold office until the first meeting of the Board of Directors following the Annual Meeting of stockholders or until their successors have been elected and have duly qualified. Compensation Pursuant to Stock Option Plan On September 18, 1984 the Board of Directors of the Company adopted a stock option plan (the "Plan"), which was subsequently approved by the stockholders of the Company on September 12, 1985. The Plan provides for the granting of incentive stock options as well as options not qualifying as incentive stock options (non-statutory stock options). Under the terms of the Plan, the Company's right to grant additional incentive stock options terminated September 18, 1994, ten years from the date the Plan was adopted by the Company's Board of Directors. The Plan was adopted for the purpose of advancing the interests of the Company and furthering its growth and development by encouraging and enabling directors, officers and key employees of the Company and its subsidiaries and other persons, who are presently making and are expected to continue to make substantial contributions to the successful growth of the Company, to acquire an increased and proprietary interest in its continued success and progress. Incentive stock options granted pursuant to the Plan provide certain restrictions concerning to whom and upon what basis the grant and exercise of options may be made and on the disposition of stock issued upon exercise of options as required by the tax laws. 20 22 An aggregate of 900,000 shares of the Common Stock, par value $.01 per share, is available and reserved for issuance under the Plan. Eligibility Employees (either full or part-time), directors and consultants to the Company and its subsidiaries, who are deemed to have the potential to contribute to the future success of the Company, are eligible to receive non-statutory stock options under the Plan. Until September 1994, full-time and part-time employees (including employees who are also directors of the Company or a subsidiary) and salaried directors, were eligible to receive incentive stock options. Approximately 97 employees of the Company and its subsidiaries are entitled to participate in the Plan. Administration of the Plan The Plan may be administered by the Board of Directors or by a committee appointed by the Board of Directors of the Company (the "Committee"). Currently, the Board of Directors is administering the Plan. Subject to the provisions of the Plan, either the Board of Directors or the Committee, whichever is then acting with respect to the Plan, possesses the authority in its discretion (i) to determine, upon review of relevant information, the fair market value of the Common Stock; (ii) to determine the exercise price per share of stock options to be granted; (iii) to determine the Eligible Participants to whom, and time or times at which, awards shall be granted and the number of shares to be represented by each stock option; (iv) to construe and interpret the Plan; (v) to prescribe, amend and rescind rules and regulations relating to the Plan; (vi) to determine the terms and provisions of each award (which need not be identical) and (vii) to make all other determinations necessary to or advisable for the administration of the Plan. The Plan provides for the issuance of shares of Common Stock for any nature of consideration, including a promissory note, as determined by the Board of Directors or the Committee. The Board of Directors or the Committee may also determine the conditions which it deems appropriate to assure that such consideration will be received by, or accrued to, the Company. The consideration may be different for different options. Grants and Exercises under the Plan and Other Stock Options During the fiscal year ended December 31, 1997, options to purchase an aggregate of 69,000 shares of Common Stock at a weighted average exercise price of $.53 per share were granted pursuant to the Plan. As of March 20, 1998, no options granted pursuant to the Plan had been exercised. On that date the bid and asked prices for the Common Stock as quoted on the OTC Bulletin Board were $.81 and $.94, respectively. At June 30, 1997, in connection with the issuance of its Class A and Class B Convertible Subordinated Promissory Notes ("Notes"), the Company issued options 21 23 to purchase 958,886 and 159,814 shares of its common stock at an exercise price of $.53 per share to its President and Senior Vice President, respectively. These options are exercisable through July 1, 2002 to the extent the Notes are converted to common stock. If less than all of the Notes are ultimately converted, the number of options will be reduced proportionately. 22 24 ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION Summary of Cash and Certain Other Compensation The following table sets forth certain summary information concerning compensation paid or accrued by the Company and its subsidiaries to, or on behalf of, the Company's Chief Executive Officer for the fiscal years ended December 31, 1995, 1996 and 1997. SUMMARY COMPENSATION TABLE -------------------------- Long Term Compensation ------------------------------------------------ Annual Compensation Awards Payouts -------------------------------------------------- ------------------------------- ----------- Other Number of Long Term Annual Restricted Securities Incentive Name and Compen- Stock Underlying Plan Principal Position Year Salary($) Bonus ($) sation ($) Award(s) ($) Options Payouts ($) - - ------------------ ---- --------- --------- ---------- ------------ ----------- ----------- Joel M. Fairman, 1997 $125,438 $28,000 $2,459(1) --- 958,886 --- Chairman of the Board, President and 1996 $102,672 $28,000 $2,024(1) --- 118,182 --- Treasurer 1995 $90,000 $15,000 $1,040(1) --- 181,818 --- (RESTUBBED TABLE CONTINUED FROM ABOVE) All Other Name and Compensa- Principal Position tion ($) - - ------------------ -------- Joel M. Fairman, 29,574(2) Chairman of the Board, President and 26,639(2) Treasurer 28,960(2) (1) Represents tax "gross up" for use of motor vehicle. (2) Represents tax "gross up" for premiums paid by the Company for a "key man" life insurance policy owned by Mr. Fairman. 23 25 The following table sets forth certain information concerning stock options granted to Joel M. Fairman and John E. Risher in the fiscal year ended December 31, 1997. OPTION GRANTS IN LAST FISCAL YEAR Number of Securities Percent of Total Underlying Options Granted Exercise or Potential Realizable Value at Name and Options to Employees in Base Expiration Assumed Annual Rates of Stock Price Principal Position Granted Fiscal Year Price ($/Sh)(1) Date Appreciation for Option Term(2) - - ------------------ ---------- ---------------- --------------- ---------- ----------------------------------- 5% ($) 10% ($) ------ ------- Joel M. Fairman, 958,886 83.5% .53 7/1/2002 $139,326 $307,994 Chairman of the Board, President and Treasurer John E. Risher, 30,000 2.6% .53 7/1/2002 $4,359 $23,221 Senior Vice President 159,214 17.9% .53 7/1/2002 $9,636 $51,332 (1) The exercise price per share under each option was at least equal to the fair market value of the Common Stock on the date of grant. (2) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date and are not presented to forecast possible future appreciation, if any, in the price of the Common Stock. The gains shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise of the options or the sale of the underlying shares. The actual gains, if any, on the stock option exercises will depend on the future performance of the Common Stock, the optionee's continued employment through applicable vesting periods and the date on which the options are exercised. 24 26 The following table sets forth certain information concerning unexercised stock options granted to Joel M. Fairman and John E. Risher: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES Value of Unexercised In- Number of Unexercised the-Money Options Options FY-End at FY-End(1) --------------------- ------------------------ Value Realized Shares (Market Price at Acquired on Exercise Less Name Exercise Exercise Price) Exercisable Unexercisable Exercisable Unexercisable - - ---- --------- ------------------ ----------- ------------- ----------- ------------- Joel M. Fairman None --- 300,000 958,886 $204,670 $304,686 John E. Risher None --- 131,000 253,814 $78,645 $113,742 (1) The "Value" set forth in this column is based on the difference between the fair market value at December 31, 1997 ($.84 per share as quoted on the OTC Bulletin Board), and the option exercise price, multiplied by the number of shares underlying the option. 25 27 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of March 20, 1998, certain information with respect to all stockholders known to Faircom to beneficially own more than 5% of the Faircom Common Stock, and information with respect to Faircom Common Stock beneficially owned by each director of Faircom, the President of Faircom and all directors and executive officers of Faircom as a group. Except as otherwise specified, the stockholders listed in the table have sole voting and investment power with respect to Faircom Common Stock owned by them. Name and Address of Number of Shares Beneficial Owners Beneficially Owned(a) Percent of Class ------------------- --------------------- ---------------- Blue Chip Capital Fund II Limited.......................... 14,492,085(b) 66.3% Partnership 2000 PNC Center 201 East Fifth Street Cincinnati, Ohio 45202 Miami Valley Venture Fund L.P.............................. 2,557,427(c) 25.7% 2000 PNC Center 201 East Fifth Street Cincinnati, Ohio 45202 John H. Wyant.............................................. 17,049,512(d) 69.8% c/o Blue Chip Venture Company, Ltd. 2000 PNC Center 201 East Fifth Street Cincinnati, Ohio 45202 PNC Bank, National Association, Trustee.................... 1,962,488(e) 21.0% 201 East Fifth Street Cincinnati, Ohio 45202 Joel M. Fairman............................................ 2,458,886(f) 28.5% 333 Glen Head Road Old Brookville, New York 11545 Don G. Hoff and Sandra Hoff................................ 430,000 5.8% 1 Via Capistrano Tiburon, California 94920 Ido Klear.................................................. 380,000 5.2% 111 Great Neck Road Great Neck, New York 11021 Anthony Pantaleoni......................................... 110,000(g) 1.5% 666 Fifth Avenue New York, New York 10103 Stephen C. Eyre............................................ 139,000(g) 1.9% 69 Dogwood Lane Locust Valley, New York 11560 26 28 Name and Address of Number of Shares Beneficial Owners Beneficially Owned(a) Percent of Class ------------------- --------------------- ---------------- John C. Jansing............................................ 153,500(g) 2.1% 162 South Beach Road Hobe Sound, Florida 33455 All officers and directors as a group (6 persons).......... 20,227,212(h) 77.0% - - ------------------------ (a) The Securities and Exchange Commission has defined "beneficial ownership" to include sole or shared voting or investment power with respect to a security or the right to acquire beneficial ownership within 60 days. The number of shares indicated are owned with sole voting and investment power unless otherwise noted and includes certain shares held in the name of affiliated companies as to which beneficial ownership may be disclaimed. (b) Represents: (A) 8,431,875 shares issuable upon conversion of Faircom's Class A Convertible Subordinated Promissory Note held by Blue Chip Capital Fund II Limited Partnership in the principal amount of $3,750,000; and (b) 6,060,210 shares issuable upon conversion of Faircom's Class B Convertible Subordinated Promissory Note held by Blue Chip Capital Fund II Limited Partnership in the aggregate principal amount of $3,900,000. See note (d) below. (c) Represents: (A) 1,487,979 shares issuable upon conversion of Faircom's Class A Convertible Subordinated Promissory Note held by Miami Valley Venture Fund L.P., in the principal amount of $661,765; and (b) 1,069,448 shares issuable upon conversion of Faircom's Class B Convertible Subordinated Promissory Note held by Miami Valley Venture Fund L.P. in the principal amount of $688,235. See note (d) below. (d) John H. Wyant, a director of Fairman, is a beneficial owner and manager of Blue Chip Venture Company Ltd., which is the general partner of Blue Chip Capital Fund II Limited Partnership, and Blue Chip Venture Company of Dayton, Ltd., an investment manager for Miami Valley Venture Fund L.P. Mr. Wyant disclaims beneficial ownership of the securities held by Blue Chip Capital Fund II Limited Partnership and Miami Valley Venture Fund L.P. See notes (b) and (c) above. (e) Represents 1,322,646 shares issuable upon conversion of Faircom's Class A Convertible Subordinated Promissory Notes held by PNC Bank, National Association, Trustee in the principal amount of $588,235 and 639,842 shares issuable upon conversion of Faircom's Class B Convertible Subordinated Promissory Notes held by PNC Bank, National Association, Trustee in the principal amount of $411,765. (f) Includes 1,258,886 shares issuable pursuant to stock options held by Mr. Fairman, including options granted under Faircom's Stock Option Plan (the "Plan") and outside the Plan. 27 29 (g) Includes 100,000 shares issuable pursuant to stock options held by each of Messrs. Pantaleoni, Eyre and Jansing under the Plan. (h) Includes 1,849,700 shares issuable pursuant to stock options held by officers and directors of Faircom, including options granted under the Plan and outside the Plan, and 17,049,512 shares issuable upon conversion of Faircom's Class A and Class B Convertible Subordinated Promissory Notes held by Blue Chip Capital Fund II Limited Partnership and Miami Valley Fund L.P. See note (d) above. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the fiscal year ended December 31, 1997, Anthony Pantaleoni, Secretary and a Director of the Company, was a partner in the law firm of Fulbright & Jaworski L.L.P., which firm was retained by the Company during such fiscal year. As of June 30, 1997, the Company sold $10,000,000 aggregate principal amount of its convertible subordinated notes to Blue Chip Capital Fund II Limited Partnership ("Blue Chip") and Miami Valley Fund L.P. ("Miami Valley"). John H. Wyant, who was elected a director of Faircom on September 16, 1997, is a beneficial owner and manager of Blue Chip Venture Company Ltd., which is the general partner of Blue Chip, and Blue Chip Venture Company of Dayton, Ltd., an investment manager for Miami Valley. 28 30 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1 and 2. Index to financial statements and related schedules. See the Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules beginning on page F-1 of this report. (a) 3. Exhibits. * 3.1 Certificate of Incorporation, as amended. * 3.2 By-Laws of the Company. * 21 Subsidiaries of the registrant. 27 Financial Data Schedule. (b) No reports on Form 8-K were filed during the period October 1, 1997 through December 31, 1997. - - -------- * Previously filed as an exhibit to the Company's registration of securities on Form 10, dated February 12, 1987, pursuant to Section 12(g) of the Securities Exchange Act of 1934. 29 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FAIRCOM INC. By /s/ Joel M. Fairman ------------------- Joel M. Fairman President March 30, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- By /s/ Joel M. Fairman President, Treasurer March 30, 1998 ----------------------- and Chairman of the Board Joel M. Fairman (Chief Executive, Financial and Accounting Officer) By /s/ Anthony Pantaleoni Secretary and Director March 30, 1998 ----------------------- Anthony Pantaleoni By /s/ Stephen C. Eyre Director March 30, 1998 ---------------------- Stephen C. Eyre By ---------------------- Director March , 1998 John C. Jansing By /s/ John H. Wyant Director March 30, 1998 ---------------------- John H. Wyant 30 32 FAIRCOM INC. CONSOLIDATED FINANCIAL STATEMENTS FORM 10-K - ITEM 8 AND ITEMS 14 (A) (1) AND (2) YEAR ENDED DECEMBER 31, 1997 F-1 33 FAIRCOM INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3 CONSOLIDATED BALANCE SHEETS: December 31, 1997 and 1996 F-4 CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1997: Statements of operations F-5 Statements of capital deficit F-6 Statements of cash flows F-7 SUMMARY OF ACCOUNTING POLICIES F-8 - F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-12 - F-27 F-2 34 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders Faircom Inc. We have audited the consolidated balance sheets of Faircom Inc. as of December 31, 1997 and 1996 and the related consolidated statements of operations, capital deficit, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Faircom Inc. at December 31, 1997 and 1996 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Mitchel Field, New York /s/ BDO Seidman, LLP January 21, 1998 --------------------- BDO Seidman, LLP F-3 35 FAIRCOM INC. CONSOLIDATED BALANCE SHEETS December 31, 1997 1996 - - --------------------------------------------------------------------------------------------------------------------- ASSETS (NOTE 3) CURRENT ASSETS: Cash and cash equivalents $ 535,312 $ 123,221 Accounts receivable, less allowance of $32,000 and $20,000 for possible losses 1,358,002 1,169,772 Prepaid expenses 25,918 12,592 - - --------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 1,919,232 1,305,585 - - --------------------------------------------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT, less accumulated depreciation and amortization (Note 1) 2,156,244 1,184,554 - - --------------------------------------------------------------------------------------------------------------------- INTANGIBLE ASSETS, net of accumulated amortization of $784,791 and $515,670 (Note 2) 7,701,341 1,627,767 OTHER ASSETS: Deferred financing costs 837,411 167,222 Escrow deposit for purchase of radio station (Note 13) 100,000 - Other 296,326 41,325 - - --------------------------------------------------------------------------------------------------------------------- 8,935,078 1,836,314 - - --------------------------------------------------------------------------------------------------------------------- $13,010,554 $4,326,453 ===================================================================================================================== LIABILITIES AND CAPITAL DEFICIT CURRENT LIABILITIES: Accounts payable $ 87,280 $ 76,853 Accrued expenses and liabilities 163,805 199,054 Taxes payable 70,150 10,150 Current portion of interest payable (Note 3 (a)) 108,391 226,417 Current portion of long-term debt (Note 3) 430,005 552,000 Current portion of obligations under capital leases - 3,547 - - --------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 859,631 1,068,021 LONG-TERM DEBT, less current portion (including $10,000,000 to a related party in 1997) (Note 3) 21,911,661 7,276,884 INTEREST PAYABLE, less current portion (Note 3 (a)) 353,063 350,494 DEFERRED RENTAL INCOME (Note 4) 67,987 101,995 APPRAISAL RIGHT LIABILITY (Note 3 (b)) - 1,015,000 - - --------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 23,192,342 9,812,394 - - --------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 3 (b) and 5) F-4 36 CAPITAL DEFICIT (Notes 3 (b), 7 and 8): Common stock - $.01 par value, 35,000,000 shares authorized; 7,378,199 shares issued and outstanding 73,782 73,782 Additional paid-in capital 2,605,813 2,605,813 Deficit (12,861,383) (8,165,536) - - ---------------------------------------------------------------------------------------------------------- TOTAL CAPITAL DEFICIT (10,181,788) (5,485,941) - - ---------------------------------------------------------------------------------------------------------- $ 13,010,554 $ 4,326,453 ========================================================================================================== See accompanying summary of accounting policies and notes to consolidated financial statements. F-5 37 FAIRCOM INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31, 1997 1996 1995 - - --------------------------------------------------------------------------------------------------------------------------------- BROADCASTING REVENUES: Gross broadcasting revenues $ 6,696,564 $5,517,586 $5,785,963 Less: agency commissions (703,273) (643,632) (672,381) - - --------------------------------------------------------------------------------------------------------------------------------- NET BROADCASTING REVENUES 5,993,291 4,873,954 5,113,582 - - --------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Programming and technical expenses 1,590,531 1,218,160 1,229,333 Selling, general and administrative expenses 2,269,800 1,775,059 1,716,858 Depreciation and amortization 726,564 321,263 351,257 Corporate expenses 391,252 336,643 304,653 - - --------------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 4,978,147 3,651,125 3,602,101 - - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 1,015,144 1,222,829 1,511,481 Interest expense (including provision for appraisal rights of $215,000 in 1996 and $438,000 in 1995 (Note 3(b)) (1,330,676) (913,643) (1,249,298) Other income 24,537 7,346 10,633 - - --------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE TAXES ON INCOME AND EXTRAORDINARY ITEMS (290,995) 316,532 272,816 TAXES ON INCOME (Note 9) 71,542 37,692 28,000 - - --------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS (362,537) 278,840 244,816 - - --------------------------------------------------------------------------------------------------------------------------------- EXTRAORDINARY ITEMS: Gain from debt extinguishment (Note 3(a)) 370,060 - - Loss from debt extinguishment (Note 3(b)) (4,703,370) - - - - --------------------------------------------------------------------------------------------------------------------------------- Extraordinary items - net (4,333,310) - - - - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(4,695,847) $ 278,840 $ 244,816 =================================================================================================================================== BASIC INCOME (LOSS) PER SHARE OF COMMON STOCK - ASSUMING NO DILUTION (Note 10): Income (loss) before extraordinary items $(.05) $.04 $.03 Extraordinary items (.59) - - - - --------------------------------------------------------------------------------------------------------------------------------- BASIC NET INCOME (LOSS) PER COMMON SHARE $(.64) $.04 $.03 =================================================================================================================================== WEIGHTED AVERAGE SHARES OUTSTANDING 7,378,199 7,378,199 7,378,199 =================================================================================================================================== DILUTED INCOME (LOSS) PER COMMON SHARE - ASSUMING ISSUANCE OF ALL DILUTIVE CONTINGENT SHARES (Note 10): Income (loss) before extraordinary items $(.05) $.02 $.02 Extraordinary items (.59) - - - - --------------------------------------------------------------------------------------------------------------------------------- DILUTED NET INCOME (LOSS) PER COMMON SHARE $(.64) $.02 $.02 =================================================================================================================================== WEIGHTED AVERAGE SHARES OUTSTANDING 7,378,199 16,459,701 16,459,701 =================================================================================================================================== See accompanying summary of accounting policies and notes to consolidated financial statements. F-6 38 FAIRCOM INC. CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT FOR THE THREE YEARS ENDED DECEMBER 31, 1997 Common Stock --------------------------------- Additional Shares Amount paid-in capital Deficit Total - - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 7,378,199 $73,782 $2,605,813 $(8,689,192) $(6,009,597) Net income for the year ended December 31, 1995 - - - 244,816 244,816 - - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 7,378,199 73,782 2,605,813 (8,444,376) (5,764,781) Net income for the year ended December 31, 1996 - - - 278,840 278,840 - - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 7,378,199 73,782 2,605,813 (8,165,536) (5,485,941) NET LOSS FOR THE YEAR ENDED DECEMBER 31,1997 - - - (4,695,847) (4,695,847) - - --------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 7,378,199 $73,782 $2,605,813 $(12,861,383) $(10,181,788) =================================================================================================================================== See accompanying summary of accounting policies and notes to consolidated financial statements. F-7 39 FAIRCOM INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 12) Year ended December 31, 1997 1996 1995 - - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (4,695,847) $278,840 $244,816 - - ------------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 726,564 323,474 351,257 Amortization of deferred rental income (34,008) (34,005) (34,000) Provision for doubtful accounts 46,308 23,449 16,428 Provision for appraisal rights - 215,000 438,000 Net loss from debt extinguishments 4,333,310 - - Increase (decrease) in cash flows from changes in operating assets and liabilities, net of effects of purchase of radio stations: Accounts receivable (234,538) (250,620) (2,708) Prepaid expenses (13,326) (6,809) 31,724 Other assets - (1,325) - Accounts payable 10,427 17,907 13,907 Accrued expenses and liabilities (35,249) (9,581) (77,016) Taxes payable 60,000 (10,000) (100,918) Interest payable 254,603 (167,714) (61,978) - - ------------------------------------------------------------------------------------------------------------------------------- TOTAL ADJUSTMENTS 5,114,091 99,776 574,696 - - ------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 418,244 378,616 819,512 - - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Assets related to purchase of radio stations (7,650,000) - - Capital expenditures (131,701) (63,440) (172,805) Acquisition of intangible assets (81,180) - - Escrow deposit for purchase of radio station (100,000) - - - - ------------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (7,962,881) (63,440) (172,805) - - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment for deferred financing costs (834,137) (44,985) (235) Proceeds from long-term debt 23,000,000 - - Principal payments on long-term debt (7,805,588) (493,249) (515,556) Purchase of convertible and exchangeable debt (5,385,000) - - Payment of appraisal right liability (1,015,000) - - Principal payments under capital lease obligations (3,547) (17,253) (19,660) - - ------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 7,956,728 (555,487) (535,451) - - ------------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 412,091 (240,311) 111,256 CASH AND CASH EQUIVALENTS, beginning of year 123,221 363,532 252,276 F-8 40 Year ended December 31, 1997 1996 1995 - - ------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, end of year $ 535,312 $123,221 $363,532 =============================================================================================================================== See accompanying summary of accounting policies and notes to consolidated financial statements. F-9 41 FAIRCOM INC. SUMMARY OF ACCOUNTING POLICIES ORGANIZATION AND Faircom Inc. (the "Company") owns and operates BUSINESS radio stations through its wholly-owned subsidiaries in Flint, Michigan and, effective June 30, 1997, in Mansfield, Ohio. PRINCIPLES OF The consolidated financial statements of the CONSOLIDATION Company include the accounts of Faircom Inc. and its subsidiaries, Faircom Flint Inc. ("Flint"), and Faircom Mansfield Inc. ("Mansfield"), all of whose common stock is owned by the Company. All intercompany accounts and transactions are eliminated. Prior to January 1997, Mansfield was named Faircom Evansville Inc. and was inactive. USE OF ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH For purposes of the statement of cash flows, EQUIVALENTS the Company considers all highly liquid financial instruments purchased with an original maturity of three months or less to be cash equivalents. The carrying amount reported in the consolidated balance sheets for cash and cash equivalents approximates its fair value. PROPERTY AND Property and equipment are stated at cost. EQUIPMENT For financial reporting purposes, depreciation is determined using the straight-line method based upon the estimated useful lives of the various classes of assets, ranging from three to fifteen years. Leasehold improvements are amortized over the shorter of their useful lives or the terms of the related leases. Both straight-line and accelerated methods are used for federal and state income tax purposes. F-10 42 FAIRCOM INC. SUMMARY OF ACCOUNTING POLICIES INTANGIBLE ASSETS Intangible assets consist principally of the excess of the purchase price (including related acquisition costs) over the fair value of tangible assets of acquired radio stations, a substantial portion of which represents the value of Federal Communications Commission licenses. These assets are amortized on a straight-line basis over lives ranging from 15 to 40 years. Management evaluates the continuing realizability of the intangible assets by assessing projected future undiscounted cash flows of its radio stations. LONG-LIVED ASSETS The Company follows Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires, among other things, that losses resulting from impairment of assets expected to be held, and gains or losses from assets expected to be disposed of, be included as a component of income from continuing operations before taxes on income. DEFERRED FINANCING Deferred financing costs are amortized on a COSTS AND OTHER straight-line basis over the term of the ASSETS related debt. Non-compete agreements, comprising substantially all of the category "other assets", are amortized over the terms of the related agreements. APPRAISAL RIGHT The value of the appraisal right given to Citicorp Venture Capital, Ltd. ("CVC") in connection with its subordinated exchangeable note (see Note 3 (b)) was accrued at a discounted amount, based on the interest rate of the related note and the date on which the appraisal right was to become exercisable. Adjustments were made to this accrual based on the passage of time and changes in appraisal values. The appraisal right liability was extinguished as of June 30, 1997, the time that the related underlying debt was purchased (see Note 3(b)). TAXES ON INCOME Income taxes are calculated using the liability method specified by Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". F-11 43 FAIRCOM INC. SUMMARY OF ACCOUNTING POLICIES REVENUE Revenue from radio advertisements, including RECOGNITION barter transactions (advertising provided in exchange for goods and services), is recognized as income when the advertisements are broadcast. Revenue from barter transactions is recorded based on the estimated fair value of the goods and services received. The merchandise or services received as barter for advertising are charged to expense when used or provided. Any merchandise or services received prior to the broadcast of the related advertisements are recorded as a liability; if the advertisement is broadcast first, a receivable is recorded. Barter liabilities and receivables were not material at December 31, 1997 and 1996. STOCK-BASED In 1996, the Company adopted the disclosure COMPENSATION provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a fair value method of accounting for stock-based compensation, through either recognition or disclosure. The disclosure provisions require the Company to disclose pro forma information regarding net income (loss) and net income (loss) per share as if compensation cost for stock options granted by the Company had been determined in accordance with the fair value method prescribed by SFAS No. 123. ADVERTISING COSTS Advertising costs are charged to expense as incurred and amounted to $75,858, $68,345 and $149,469 for the years ended December 31, 1997, 1996 and 1995, respectively. NET INCOME (LOSS) In February 1997, the Financial Accounting PER COMMON SHARE Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 establishes a different method of computing earnings per share than was previously required under the provisions of Accounting Principles Board Opinion No. 15 ("APB 15"). Under SFAS No. 128, the Company is required to report both basic net income (loss) per common share and diluted net income (loss) per common share for all periods presented. The adoption of SFAS No. 128 had no effect on the per share amounts previously reported by the Company under APB 15. F-12 44 FAIRCOM INC. SUMMARY OF ACCOUNTING POLICIES Net income (loss) per common share is based on the weighted average number of shares of common stock outstanding during each period. The effects of the assumed conversion of convertible debt on per share data have been reflected in the diluted calculation only for 1996 and 1995; such effects were not dilutive for 1997 (see Note 3 (b)). The effects of the assumed exercise of outstanding options were not dilutive and, accordingly, have been excluded from the diluted per share calculations (see Notes 7 and 8). RECENT ACCOUNTING In June 1997, the FASB issued SFAS No. 130, PRONOUNCEMENTS "Reporting Comprehensive Income." This Statement establishes standards for reporting and displaying comprehensive income and its components in the financial statements. It does not, however, require a specific format for the statement, but requires the Company to display an amount representing total comprehensive income for the period of the financial statement. The Company is in the process of determining its preferred format. This Statement is effective for fiscal years beginning after December 15, 1997. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Statement establishes standards for the manner in which public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to stockholders. This Statement is effective for financial statements for periods beginning after December 15, 1997, and the Company has not yet determined the impact, if any, of the Statement on its financial reporting. 1. PROPERTY AND Property and equipment consist of the following: EQUIPMENT 1997 1996 - - ----------------------------------------------------------------------------------------- Land $ 285,000 $ 116,000 Buildings and improvements 958,583 636,581 Towers and antenna systems 1,457,564 1,182,526 Studio, technical and transmitting equipment 3,819,910 3,467,747 Office equipment, furniture and fixtures 1,043,648 941,665 F-13 45 FAIRCOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - ----------------------------------------------------------------------------------------- 7,564,705 6,344,519 Less: accumulated depreciation and amortization (5,408,461) (5,159,965) - - ----------------------------------------------------------------------------------------- Net property and equipment $2,156,244 $1,184,554 ========================================================================================= 2. INTANGIBLE ASSETS Intangible assets consist of the following: 1997 1996 - - ----------------------------------------------------------------------------------------- Excess of purchase price over fair value of tangible assets of acquired radio stations (substantially related to the value of Federal Communications Commission licenses) $8,255,940 $1,994,425 Related acquisition costs 216,209 135,029 Other 13,983 13,983 - - ----------------------------------------------------------------------------------------- 8,486,132 2,143,437 Less: accumulated amortization (784,791) (515,670) - - ----------------------------------------------------------------------------------------- $7,701,341 $1,627,767 ========================================================================================= 3. LONG-TERM DEBT Long-term debt consists of the following: AND FAIR VALUE DISCLOSURES 1997 1996 - - --------------------------------------------------------------------------------------- Senior secured term and time notes (see (a) below) $12,341,666 $7,147,254 Convertible and exchangeable subordinated promissory notes (see (b) below) 10,000,000 681,630 - - --------------------------------------------------------------------------------------- 22,341,666 7,828,884 Less: Current portion of long-term debt (430,005) (552,000) F-14 46 FAIRCOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - --------------------------------------------------------------------------------------- $21,911,661 $7,276,884 ======================================================================================= (a) Senior secured term and time notes In connection with the June 1997 Mansfield acquisition described in Note 12, the Company repaid its outstanding senior secured term and time notes, which had an aggregate principal balance of $7,371,000 at that time, and borrowed $12,500,000 from the same lender under an amended and restated loan agreement (the "1997 loan agreement"). The term notes under the 1997 loan agreement mature July 1, 2002 with optional renewal by the Company under certain circumstances for an additional five years. The principal balance is payable in varying monthly installments, ranging from $31,667 to $72,500, from August 1, 1997 through June 1, 2002, with the balance due on the maturity date. Interest on the term notes initially is at the rate of 4.50% over 30 day commercial paper rates. The borrowings are secured by all tangible and intangible property of Flint and Mansfield and all outstanding Flint and Mansfield common stock held by the Company, and are guaranteed by the Company. F-15 47 FAIRCOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The 1997 loan agreement contains certain financial and restrictive covenants, including maintenance of minimum operating income levels and debt coverage ratios, and limitations on capital expenditures, corporate expenses, additional indebtedness, mergers and dividend payments. As of the date that the Company entered into the 1997 loan agreement, certain accrued interest was extinguished, resulting in an extraordinary gain of $370,060. (b) Convertible and exchangeable subordinated promissory notes As of June 30, 1997, the Company completed the sale of $10,000,000 aggregate principal amount of its convertible subordinated promissory notes due July 1, 2002 (the "Notes"). The Notes consist of Class A and Class B convertible subordinated promissory notes, each in the aggregate principal amount of $5,000,000. The Class A Notes are convertible into 11,242,500 shares of the Company's common stock, and the Class B Notes into 7,769,500 shares of common stock. The aggregate 19,012,000 of such shares on full conversion of the Notes would represent 67.1% of the Company's outstanding common stock on a fully diluted and adjusted basis. The Notes bear interest at 7% per annum, compounded quarterly, payable at the maturity of the Notes. The terms of the Securities Purchase Agreement applicable to the Class A and Class B Notes, as amended, provide that if the Company does not, on or before April 1, 1999, consummate a merger of the Company with another corporation on terms acceptable to the holders of the Notes, then upon notice from such holders, the Company shall take all action necessary to liquidate the Company and each of its subsidiaries on terms and conditions acceptable to such holders, such approval not to be unreasonably withheld. Subsequent to the sale of the Notes, an individual who is a beneficial owner and manager of the general partner of one of the holders of the Notes and of the investment manager of the other holder of the Notes became a director of the Company. F-16 48 FAIRCOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The proceeds from the sale of the Notes were used (i) to purchase for $6,400,000 from Citicorp Venture Capital, Ltd. ("Citicorp") the Company's 8.65% Senior Convertible Note ("Convertible Note") in the principal amount of $181,630 due December 1, 2004 and the Company's 10% Senior Exchangeable Note ("Exchangeable Note") in the principal amount of $500,000 due December 1, 2004, representing all of Citicorp's interests in the Company, and (ii) to pay a portion of the purchase price for the Mansfield acquisition, described in Note 12, and the legal and other fees and expenses of such acquisition. The Convertible Note was convertible into 9,081,502 shares of Common Stock, which would have represented 52.5% of the Company's fully diluted outstanding Common Stock prior to the acquisition and the financing activities described herein. The Exchangeable Note gave Citicorp the right to request, at any time after December 1, 1999, that $350,000 principal amount of such Note be exchanged for a payment equal to 19.99% of the appraised value, as defined, of the Company's subsidiary which owns and operates radio stations in Flint, Michigan. In connection with the purchase for $6,400,000 of the Citicorp notes, which had a principal amount aggregating $681,630, the Company's appraisal right liability of $1,015,000 was also extinguished. This debt extinguishment resulted in an extraordinary loss of $4,703,370. Minimum annual maturities of the Company's long-term debt for the next five years are approximately as follows: 1998 - $430,000; 1999 - $554,000; 2000 - $688,000; 2001 - $812,000; and 2002 - $19,858,000. F-17 49 FAIRCOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company estimates that the carrying amounts of its senior secured term and time notes, $12,341,666 and $7,147,254 at December 31, 1997 and 1996, respectively, approximated their fair values at those dates, based on rates available to the Company for debt with similar terms and remaining maturities. The fair values of the convertible and exchangeable subordinated promissory notes are not readily determinable. Such debt was carried at $10,000,000 at December 31, 1997 and $1,696,630 (including a related appraisal right liability of $1,015,000) at December 31, 1996. The 1997 debt is convertible into common stock with a market value of approximately $16,000,000 at December 31, 1997. The 1996 debt was convertible into common stock with a market value of approximately $1,540,000 at December 31, 1996, and $350,000 of the debt was exchangeable into the aforementioned appraisal right. The Company believes that an undetermined discount for lack of liquidity would be appropriate due to the large amounts of stock that would be issuable upon conversion. 4. DEFERRED RENTAL Effective January 1995, Flint, as lessor, INCOME entered into an operating lease agreement with a telecommunications company. The lessee agreed to arrange for the construction of a new radio tower and antenna at one of Flint's tower sites, at lessee's expense, and transfer title to those assets to Flint, in exchange for the right to use a portion of the new tower and related building facilities in its operations on a rent-free basis for five years. The lessee has three successive five-year renewal options, providing for no rent in the sixth year, a total of $18,000 rent in the seventh year, and annual increases of 4% beginning with the eighth year. Flint has recorded as an advance minimum lease payment an amount equal to the fair value of the tower and antenna constructed for its benefit, based on the lessee's construction costs, aggregating approximately $170,000. The assets received were capitalized, the advance lease payment is being amortized as rental income on a straight-line basis over the five year initial lease term, and the unamortized portion of the lease payment is recorded as deferred rental income. F-18 50 FAIRCOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. COMMITMENTS The Company has entered into an operating lease agreement for office space. The following is a schedule of approximate future minimum lease payments required under this lease: 1998 $22,200 1999 22,200 2000 22,200 2001 3,700 ------------------------------------------- $70,300 =========================================== Rent expense was approximately $56,000, $46,000 and $32,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 6. RETIREMENT PLANS Effective January 1, 1995, the Company established a qualified salary reduction plan under Section 401(k) of the Internal Revenue Code for eligible employees. Under the plan, the Company may, but is not required to, make matching and discretionary contributions to participants' accounts. Matching contributions charged against operations amounted to $6,800 and $4,600 for the years ended December 31, 1996 and 1995, respectively. No matching contributions were made for the year ended December 31, 1997. F-19 51 FAIRCOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. STOCK OPTION PLAN The Company has a stock option plan (the AND OTHER STOCK "Plan") under which 900,000 shares of common OPTIONS stock have been reserved for issuance. Under this Plan, the Company may grant options to purchase up to 900,000 shares of common stock in the form of either nonqualified stock options or incentive stock options ("ISOs"). The Plan provides that the option price for the nonqualified options be determined by the Board of Directors at or prior to the time the option is granted (but in no event at a price below par value of the common stock) and for ISOs, at a price not less than 100% of the fair market value of the common stock at the date the option is granted, except for those individuals possessing more than 10% of the total combined voting power of all classes of stock of the Company or its subsidiaries, for whom the price is not less than 110% of the fair market value of the common stock. The term of each option granted shall be determined by the Board of Directors, provided that the term for each ISO granted under the Plan not be more than 10 years from the date of the grant and the term for each option granted to an individual owning more than 10% of the combined voting power, as described above, not be more than five years. Under the terms of the Plan, the Company's right to grant additional ISOs terminated September 18, 1994, 10 years from the date the Plan was adopted by the Company's Board of Directors. The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees", and related Interpretations in accounting for the Plan. Under APB 25, for options granted to employees at exercise prices equal to the fair market value of the underlying common stock at the date of grant, no compensation cost is recognized. F-20 52 FAIRCOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At June 30, 1997, in connection with the issuance of its Class A and Class B Convertible Subordinated Notes ("Notes"), the Company issued options to purchase 958,886 and 159,814 shares of its common stock at an exercise price of $.53 per share to its President and Senior Vice President, respectively. These options are exercisable through July 1, 2002 to the extent the Notes are converted to common stock. If less than all of the Notes are ultimately converted, the number of options will be reduced proportionately. At the time when any portion of the Notes is converted and the proportionate number of options become exercisable, the Company will record a nonrecurring charge to operations based on the difference between the exercise price and the market value of the Company's common stock at that time. If all of the Notes had been converted and all of the options had been exercised at December 31, 1997, the charge to operations would have been approximately $355,000. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") requires the Company to provide, beginning with 1995 grants, pro forma information regarding net income and net income per common share as if compensation costs for the Company's stock option plans had been determined in accordance with the fair value based method prescribed in SFAS No. 123. Such pro forma information is as follows: 1997 1996 1995 - - ----------------------------------------------------------------------------------------- Pro forma net income (loss) $(4,865,688) $257,255 $220,071 Pro forma basic net income (loss) per common share $(.66) $.03 $.03 - - ----------------------------------------------------------------------------------------- F-21 53 FAIRCOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The weighted-average fair value per share for options granted was $.08, $.09 and $.08 in 1997, 1996 and 1995, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 1997, 1996 and 1995 grants: Dividends: None Volatility: 46.5% Risk-free interest rate: Ranging from 6.28% to 6.38% Expected term: 5 years Transactions involving options are summarized below: 1997 1996 1995 ------------------------------------------------------------------------------------ WEIGHTED- Weighted- Weighted- AVERAGE Average Average EXERCISE Exercise Exercise SHARES PRICE Shares Price Shares Price - - --------------------------------------------------------------------------------------------------------------- Outstanding, January 1 825,000 $.16 800,000 $.14 533,882 $.11 Granted 1,187,700 .53 234,182 .19 309,318 .16 Cancelled 69,000 .13 209,182 .13 43,200 .31 F-22 54 FAIRCOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - --------------------------------------------------------------------------------------------------------------- Outstanding, December 31 1,943,700 $.37 825,000 $.16 800,000 $.14 =============================================================================================================== Exercisable, December 31 721,000 $.20 676,000 $.16 661,000 $.14 =============================================================================================================== F-23 55 FAIRCOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information about stock options outstanding at December 31, 1997: Options Outstanding Options Exercisable --------------------------------------- ---------------------- Weighted- Number Average Weighted- Weighted- Outstanding Remaining Average Number Average Exercise at Contractual Exercise Exercisable Exercise Price 12/31/97 Life (years) Price at 12/31/97 Price - - ------------------------------------------------------------------------------------------------- .13 112,500 .5 $.13 105,000 $.13 .16 409,318 2.1 .16 352,818 .16 .17 139,182 3.9 .17 139,182 .17 .22 95,000 3.2 .22 55,000 .22 .53 1,187,700 4.5 .53 69,000 .53 - - ------------------------------------------------------------------------------------------------ 1,943,700 2.8 $.37 721,000 $.20 ================================================================================================= Of the 1,943,700 options outstanding at December 31, 1997, 1,866,200 are nonqualified options and 77,500 are ISOs. 8. COMMON STOCK At December 31, 1997, shares of the Company's SHARES RESERVED authorized and unissued common stock were reserved for issuance upon conversion of convertible subordinated promissory notes and exercise of options, as follows: Convertible subordinated promissory notes (Note 3 (b)) 19,012,000 Stock options (Note 7) 1,943,700 - - ----------------------------------------------------------------------------- 20,955,700 ============================================================================= F-24 56 FAIRCOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. TAXES ON INCOME The provision for federal and state income taxes consists of the following: 1997 1996 1995 - - -------------------------------------------------------------------------------------- Current: Federal $ - $152,000 $157,000 State 71,542 37,692 70,000 - - -------------------------------------------------------------------------------------- 71,542 189,692 227,000 Benefits of net operating loss carryforwards - 152,000 199,000 - - -------------------------------------------------------------------------------------- $71,542 $ 37,692 $ 28,000 ====================================================================================== The net deferred tax asset consists of the following: 1997 1996 - - ---------------------------------------------------------------------------------------- Gross deferred asset for: Net operating loss carryforwards $2,448,000 $2,311,000 Excess gain on debt restructuring for tax reporting purposes - 186,000 Alternative minimum tax credit carryforwards 35,000 35,000 - - ---------------------------------------------------------------------------------------- Subtotal 2,483,000 2,532,000 Less: valuation allowance (2,483,000) (2,532,000) - - ---------------------------------------------------------------------------------------- Net $ - $ - - - ---------------------------------------------------------------------------------------- The Company has provided valuation allowances equal to its deferred tax assets because of the uncertainty as to future utilization. The Company and its subsidiaries file consolidated federal and separate state income tax returns. At December 31, 1997, consolidated net operating loss carryforwards ("NOLs") for income tax purposes were approximately $6,800,000. Such NOLs may be limited as to use upon a significant change in the Company's ownership. The tax NOLs expire during the years 2002 to 2012. F-25 57 FAIRCOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The difference between the Company's effective tax rate on income before taxes on income and the federal statutory tax rate arises from the following: 1997 1996 1995 - - ----------------------------------------------------------------------------------------- Federal tax expense at statutory rate 34.0% 34.0% 34.0% Federal taxes, based on alternative minimum calculation - - 1.8 Loss from debt extinguishment - non-deductible (34.6) - - Amortization of intangibles and other non-deductible expenses (1.0) 31.9 47.6 Benefit of net operating losses - (48.0) (72.8) Changes in valuation allowance 1.1 (13.9) - State taxes, net of federal benefit (1.0) 7.9 16.9 Prior year's federal tax overaccrual - - (17.2) - - ----------------------------------------------------------------------------------------- Effective tax rate (1.5)% 11.9% 10.3% ========================================================================================= There was no material income tax effect related to the extraordinary items described in Note 3. F-26 58 FAIRCOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. NET INCOME (LOSS) PER COMMON SHARE The following table sets forth the computation of basic and diluted net income (loss) per common share: - - -------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1997 1996 1995 - - -------------------------------------------------------------------------------------------------------------------------- NUMERATOR: Income (loss) before extraordinary items - basic $(362,537) $278,840 $244,816 Addback: Interest from subordinated senior convertible note (net of tax effect) - 13,840 14,093 - - -------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS - DILUTED $(362,537) $292,680 $258,909 ========================================================================================================================== EXTRAORDINARY ITEMS - BASIC AND DILUTED $(4,333,310) $ - $ - ========================================================================================================================== DENOMINATOR: Weighted average shares outstanding Common stock - basic 7,378,199 7,378,199 7,378,199 Shares issuable upon assumed conversion of subordinated senior convertible note - 9,081,502 9,081,502 - - -------------------------------------------------------------------------------------------------------------------------- Common shares - diluted 7,378,199 16,459,701 16,459,701 ========================================================================================================================== BASIC INCOME (LOSS) PER SHARE OF COMMON STOCK - ASSUMING NO DILUTION: Income (loss) before extraordinary items $(.05) $.04 $.03 Extraordinary items (.59) - - - - -------------------------------------------------------------------------------------------------------------------------- BASIC NET INCOME (LOSS) PER COMMON SHARE $(.64) $.04 $.03 ========================================================================================================================== DILUTED INCOME (LOSS) PER COMMON SHARE ASSUMING ISSUANCE OF ALL DILUTIVE CONTINGENT SHARES: Income (loss) before extraordinary items $(.05) $.02 $.02 Extraordinary items (.59) - - - - -------------------------------------------------------------------------------------------------------------------------- DILUTED NET INCOME (LOSS) PER COMMON SHARE $(.64) $.02 $.02 ========================================================================================================================== Note: The effects of the assumed exercise of outstanding options were not dilutive and, accordingly, have been F-27 59 FAIRCOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS excluded from the diluted per share calculations. The effects of the assumed conversion of convertible debt were not dilutive for 1997. F-28 60 11. SUPPLEMENTAL CASH (a) Supplemental disclosure of cash flow information: FLOW INFORMATION Year ended December 31, 1997 1996 1995 - - ----------------------------------------------------------------------------------------- Interest paid during the year $1,076,073 $ 866,357 $ 873,276 ========================================================================================= Income taxes paid during the year $ 71,542 $ 43,592 $ 133,257 ========================================================================================= (b) Supplemental disclosures of non-cash investing and financing activities: In January 1995, Flint received a tower and antenna, valued at $170,000, as an advance lease payment under the terms of an operating lease agreement (see Note 4). In June 1997, certain accrued interest was extinguished, resulting in an extraordinary gain of $370,060 (see Note 3 (a)). 12. ACQUISITION OF RADIO As of June 30, 1997, Mansfield STATIONS acquired the assets and operations of two commercial radio stations located in Mansfield, Ohio (the "Stations"), from an unrelated company and its principals, pursuant to the terms of an Asset Purchase Agreement, made as of May 20, 1997 (the "Agreement"). Under the terms of the Agreement, the selling company received aggregate consideration of $7,350,000 in cash, which included $1 in consideration of a five-year non-compete agreement. In addition, the Company paid $300,000 in cash to one of the selling company's principals in consideration of a five year non-compete agreement. A substantial portion of the purchase price for the Stations was allocated to intangible assets, representing principally the value of the Federal Communications Commission licenses acquired. The acquisition of the Stations has been accounted for by the purchase method of accounting and, accordingly, the operating results of the Stations are included in the Company's consolidated results of operations from June 30, 1997, the date of acquisition. F-29 61 FAIRCOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following are the Company's estimates of selected pro forma unaudited consolidated results as if the Stations had been acquired as of the beginning of 1996: 1997 1996 - - ------------------------------------------------------------------------------------- ($000s except per share amounts) Net broadcasting revenues $7,154 $7,152 ===================================================================================== Loss before extraordinary items $ (570) $ (168) ===================================================================================== Basic loss before extraordinary items, per common share $ (.08) $ (.02) ===================================================================================== 13. SUBSEQUENT (a) On September 25, 1997, Mansfield filed an ACQUISITION AND application with the Federal Communications PENDING MERGER Commission ("FCC") to acquire the assets and operations of radio station WSWR-FM, Shelby, Ohio, for $1,125,000. The net broadcasting revenues and results of operations of the Shelby station for 1997 were not material in relation to the Company's comparable amounts. Mansfield deposited $100,000 in escrow pursuant to the contract to acquire the Shelby station. The closing of this acquisition occurred in January 1998. In connection with the closing, the Company borrowed $1,100,000 from a holder of the Class A and Class B convertible subordinated promissory notes described in Note 3(b). To evidence this loan, the Company issued its Class C Subordinated Promissory Note, which bears interest at a rate of 14% per annum payable at maturity, and is payable on the earlier of April 1, 1999 or the closing of the merger described in the following paragraph. F-30 62 FAIRCOM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (b) On December 5,1997, the Company signed an agreement to merge with Regent Communications, Inc., another group radio broadcaster. Under the terms of the agreement, Faircom will merge with and into a subsidiary of Regent. The shareholders of Faircom will receive shares of Regent Series C Convertible Preferred Stock, par value $.01 per share ("Series C Preferred Stock"). The Series C Preferred Stock has full voting rights, provides for annual cumulative dividends of 7%, and is convertible on a one-for-one basis (subject to adjustment in certain events) into the common stock, $.01 par value per share, of Regent. The Series C Preferred Stock is subject to mandatory conversion under certain circumstances. In the event of a liquidation of Regent, the Series C Preferred Stock has a preference in the amount of its stated value of $5.00 per share, together with accrued and unpaid dividends. In the merger, the outstanding shares of Faircom Common Stock will be exchanged for fully paid and nonassessable shares of Series C Preferred Stock, and each outstanding Faircom option will be converted into a Regent option entitling the holder to acquire, on equivalent terms, the same number of shares of Series C Preferred Stock as the holder would have been entitled to receive in the merger if such Faircom option had been exercised in full prior to the date of the merger. The number of shares of Series C Preferred Stock to be issued in the merger and issuable pursuant to Regent options to be received in exchange for Faircom options in the merger will be based upon an aggregate liquidation preference amount of $33,162,000, adjusted by the amount of Faircom's net working capital and decreased by its senior debt and by one-half of the prepayment premium on such senior debt to be paid at the closing of the merger, all as computed as of the last day of the month immediately preceding the closing date of the merger. As of the date of issuance of this report, the closing of the merger is still pending, subject to shareholder approval and satisfaction of certain other conditions. F-31 63 FAIRCOM INC. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES FORM 10-K - ITEM 14 (D) DECEMBER 31, 1997 S-1 64 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 65 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES The Board of Directors and Stockholders Faircom Inc. The audits referred to in our report dated January 21, 1998, relating to the consolidated financial statements of Faircom Inc., which is contained in Item 8 of this Form 10-K, included the audit of the financial statement schedules listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based upon our audits. In our opinion such financial statement schedules present fairly, in all material respects, the information set forth therein. /s/BDO Seidman, LLP -------------------- BDO Seidman, LLP Mitchel Field, New York January 21, 1998 S-3 66 FAIRCOM INC. SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS (COMPANY ONLY) December 31, 1997 1996 - - --------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 11,478 $ 7,014 Other current assets - 4,155 Interest receivable from subsidiary 92,944 29,004 - - --------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 104,422 40,173 OFFICE EQUIPMENT, FURNITURE AND FIXTURES - NET 630 630 NOTES RECEIVABLE FROM SUBSIDIARIES (NOTE 2) 3,673,000 1,243,000 OTHER ASSETS, INCLUDING DEFERRED FINANCING COSTS OF $629,403 AND $6,016 630,728 7,341 - - --------------------------------------------------------------------------------------------------------------------------- $ 4,408,780 $ 1,291,144 =========================================================================================================================== LIABILITIES AND CAPITAL DEFICIT CURRENT LIABILITIES: Accrued expenses and liabilities $ 30,033 $ 132,747 Taxes payable 150 150 - - --------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 30,183 132,897 LONG-TERM DEBT 10,000,000 681,630 INTEREST PAYABLE 353,063 - APPRAISAL RIGHT LIABILITY - 1,015,000 - - --------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 10,383,246 1,829,527 - - --------------------------------------------------------------------------------------------------------------------------- EXCESS OF LOSSES AND PREFERRED STOCK DIVIDENDS OF SUBSIDIARIES OVER COST (NOTE 1) 4,207,322 4,947,558 - - --------------------------------------------------------------------------------------------------------------------------- CAPITAL DEFICIT: Common stock 73,782 73,782 Additional paid-in capital 2,605,813 2,605,813 Deficit (12,861,383) (8,165,536) - - --------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITAL DEFICIT (10,181,788) (5,485,941) - - --------------------------------------------------------------------------------------------------------------------------- $ 4,408,780 $ 1,291,144 =========================================================================================================================== S-4 67 FAIRCOM INC. SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS (COMPANY ONLY) Year ended December 31, 1997 1996 1995 - - --------------------------------------------------------------------------------------------------------------------------- INCOME: Corporate overhead from subsidiaries (Note 3) $ 172,000 $ 226,498 $ 354,328 Interest 245,653 174,024 174,024 Other 319 - 367 - - --------------------------------------------------------------------------------------------------------------------------- 417,972 400,522 528,719 - - --------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Depreciation and amortization 72,514 3,035 3,035 General and administrative 391,252 336,643 304,653 Interest (including provision for appraisal rights of $215,000 in 1996 and $438,000 in 1995) 385,919 280,711 503,873 - - --------------------------------------------------------------------------------------------------------------------------- 849,685 620,389 811,561 - - --------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE EQUITY IN INCOME AND EXTRAORDINARY GAIN OF SUBSIDIARIES; TAXES ON INCOME; AND EXTRAORDINARY LOSS (431,713) (219,867) (282,842) EQUITY IN INCOME AND EXTRAORDINARY GAIN OF SUBSIDIARIES (NOTE 1) 439,236 500,399 527,658 - - --------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE TAXES ON INCOME AND EXTRAORDINARY LOSS 7,523 280,532 244,816 TAXES ON INCOME - 1,692 - - - --------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE EXTRAORDINARY LOSS 7,523 278,840 244,816 EXTRAORDINARY LOSS FROM DEBT EXTINGUISHMENT (4,703,370) - - - - --------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(4,695,847) $ 278,840 $ 244,816 =========================================================================================================================== S-5 68 FAIRCOM INC. SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS (COMPANY ONLY) Year ended December 31, 1997 1996 1995 - - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(4,695,847) $ 278,840 $ 244,816 - - --------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 72,514 3,035 3,035 Provision for appraisal right - 215,000 438,000 Equity in income and extraordinary gain of subsidiaries (439,236) (500,399) (527,658) Extraordinary loss from debt extinguishment 4,703,370 - - Increase (decrease) in cash flows from changes in operating assets and liabilities: Other current assets 4,155 (1,745) (2,410) Other assets - (1,325) - Interest receivable from subsidiary (63,940) (14,502) (14,502) Accrued expenses and liabilities and taxes payable (102,714) - (79,519) Interest payable 353,063 - (1,663) - - --------------------------------------------------------------------------------------------------------------------- TOTAL ADJUSTMENTS 4,527,212 (299,936) (184,717) - - --------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (168,635) (21,096) 60,099 - - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in subsidiary (301,000) - - Decrease (increase) in advances and loans to subsidiaries (2,430,000) 8,000 (8,000) - - --------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (2,731,000) 8,000 (8,000) - - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment for deferred financing costs (695,901) - - Proceeds from long-term debt 10,000,000 - - Purchase of convertible and exchangeable debt (5,385,000) - - Payment of appraisal right liability (1,015,000) - - Payment of loan from subsidiary - - (85,850) - - --------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,904,099 - (85,850) - - --------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,464 (13,096) (33,751) CASH AND CASH EQUIVALENTS, beginning of year 7,014 20,110 53,861 - - --------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, end of year $ 11,478 $ 7,014 $ 20,110 ===================================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 1997 1996 1995 - - --------------------------------------------------------------------------------------------------------------------- Interest paid during the year $ 32,856 $ 65,711 $ 67,537 ===================================================================================================================== S-6 69 FAIRCOM INC. SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT 1. INVESTMENTS IN The financial statements account for SUBSIDIARIES the Company's investment in its subsidiaries by the equity method of accounting and have been prepared for the purpose of presenting the financial position and operating results of the Company as a separate entity. The Company has also prepared consolidated financial statements of the Company and its subsidiaries which represent the primary financial statements. 2. NOTES RECEIVABLE Notes receivable from subsidiaries FROM SUBSIDIARIES consist of the following: December 31, 1997 1996 -------------------------------------------------------------------------------------- Faircom Flint Inc. $1,523,000 $1,243,000 Faircom Mansfield Inc. 2,150,000 - -------------------------------------------------------------------------------------- $3,673,000 $1,243,000 ====================================================================================== Interest on the Flint notes was at the rate of 14% per annum through June 30, 1997 and prime thereafter. Interest on the Mansfield notes is at prime. The prime rate was 8.5% at December 31, 1997. All of the notes mature on July 1, 2002. 3. CORPORATE The Company received $172,000, OVERHEAD $226,498 and $354,328 from its subsidiaries for corporate overhead, representing fees and expenses in connection with management and administrative services for the years ended December 31, 1997, 1996 and 1995, respectively. S-7 70 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, 1997 $20,000 $46,308 $34,308 $32,000 =================================================================================================================================== 1996 $20,000 $42,449 $42,449 $20,000 =================================================================================================================================== 1995 $20,000 $16,428 $16,428 $20,000 =================================================================================================================================== (*) Represents accounts written off against the reserve. S-8 71 [ARTICLE] 5 [MULTIPLIER] 1000 [S] [C] [PERIOD-TYPE] YEAR [FISCAL-YEAR-END] DEC-31-1997 [PERIOD-START] JAN-01-1997 [PERIOD-END] DEC-31-1997 [CASH] 535 [SECURITIES] 0 [RECEIVABLES] 1,390 [ALLOWANCES] 32 [INVENTORY] 0 [CURRENT-ASSETS] 1,919 [PP&E] 7,565 [DEPRECIATION] 5,408 [TOTAL-ASSETS] 13,011 [CURRENT-LIABILITIES] 860 [BONDS] 21,912 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [COMMON] 74 [OTHER-SE] (10,256) [TOTAL-LIABILITY-AND-EQUITY] 13,011 [SALES] 0 [TOTAL-REVENUES] 6,697 [CGS] 0 [TOTAL-COSTS] 2,294 [OTHER-EXPENSES] 0 [LOSS-PROVISION] 34 [INTEREST-EXPENSE] 1,331 [INCOME-PRETAX] (291) [INCOME-TAX] 72 [INCOME-CONTINUING] (363) [DISCONTINUED] 0 [EXTRAORDINARY] (4,333) [CHANGES] 0 [NET-INCOME] (4,696) [EPS-PRIMARY] (.64) [EPS-DILUTED] (.64)