<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------------------
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
---------------------
Date of Report (Date of Earliest Event Reported): JUNE 3, 1997
CHANCELLOR BROADCASTING COMPANY
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation)
<TABLE>
<S> <C>
0-27726 75-2538487
(Commission File Number) (I.R.S. Employer Identification No.)
12655 NORTH CENTRAL EXPRESSWAY
SUITE 405
DALLAS, TEXAS 75243
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(972) 239-6220
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
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<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS
7(a) Financial Statements of Business Acquired -- Colfax Communications, Inc.
Radio Group
The following information called for by Item 7(a) is included on pages A-1
through A-11 of this report:
<TABLE>
<S> <C> <C>
(1) Report of Independent Public Accountants.................... A-1
(2) Combined Balance Sheets of Colfax Communications, Inc. Radio
Group as of December 31, 1996, 1995 and 1994................ A-2
(3) Combined Statements of Income of Colfax Communications, Inc.
Radio Group for the years ended December 31, 1996, 1995 and
1994........................................................ A-3
(4) Combined Statements of Changes in Partners' Equity of Colfax
Communications, Inc. Radio Group for the years ended
December 31, 1996, 1995 and 1994............................ A-4
(5) Combined Statements of Cash Flows of Colfax Communications,
Inc. Radio Group for the years ended December 31 1996, 1995
and 1994.................................................... A-5
(6) Notes to Combined Financial Statements...................... A-6
</TABLE>
7(a) Financial Statements of Business to Be Acquired -- KYSR Inc. and KIBB
Inc.
The following information called for by Item 7(a) is included on pages B-1
through B-9 of this report:
<TABLE>
<S> <C> <C>
(1) Independent Auditors' Report................................ B-1
(2) Combined Balance Sheets of KYSR Inc. and KIBB Inc. as of
December 31, 1995 and 1996 and March 31, 1997 (unaudited)... B-2
(3) Combined Statements of Operations of KYSR Inc. and KIBB Inc.
for the years ended December 31, 1994, 1995 and 1996 and the
three months ended March 31, 1996 and 1997.................. B-3
(4) Combined Statements of Cash Flows of KYSR Inc. and KIBB Inc.
for the years ended December 31, 1994, 1995 and 1996 and the
three months ended March 31, 1996 and 1997.................. B-4
(5) Notes to Combined Financial Statements...................... B-5
</TABLE>
7(a) Financial Statements of Business to Be Acquired -- WLIT Inc.
The following information called for by Item 7(a) is included on pages C-1
through C-9 of this report:
<TABLE>
<S> <C> <C>
(1) Independent Auditors' Report................................ C-1
(2) Balance Sheets of WLIT Inc. as of December 31, 1995 and 1996
and March 31, 1997 (unaudited).............................. C-2
(3) Statements of Earnings of WLIT Inc. for the years ended
December 31, 1994, 1995 and 1996 and the three months ended
March 31, 1996 and 1997 (unaudited)......................... C-3
(4) Statements of Cash Flows of WLIT Inc. for the years ended
December 31, 1994, 1995 and 1996 and the three months ended
March 31, 1996 and 1997 (unaudited)......................... C-4
(5) Notes to Financial Statements............................... C-5
</TABLE>
<PAGE> 3
7(a) Financial Statements of Business to Be Acquired -- WDRQ Inc.
The following information called for by Item 7(a) is included on pages D-1
through D-9 of this report:
<TABLE>
<S> <C> <C>
(1) Independent Auditors' Report................................ D-1
(2) Balance Sheets of WDRQ Inc. as of December 31, 1995 and 1996
and March 31, 1997 (unaudited).............................. D-2
(3) Statements of Earnings of WDRQ Inc. for the years ended
December 31, 1994, 1995 and 1996 and the three months ended
March 31, 1996 and 1997 (unaudited)......................... D-3
(4) Statements of Cash Flows of WDRQ Inc. for the years ended
December 31, 1994, 1995 and 1996 and the three months ended
March 31, 1996 and 1997 (unaudited)......................... D-4
(5) Notes to Financial Statements............................... D-5
</TABLE>
7(c) Exhibits
<TABLE>
<S> <S>
**(23.1) Consent of Arthur Andersen LLP, independent accountants
**(23.2) Consent of KPMG Peat Marwick LLP, independent accountants
</TABLE>
- ---------------
** Filed herewith
<PAGE> 4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Colfax Communications, Inc. Radio Group:
We have audited the accompanying combined balance sheets of the Colfax
Communications, Inc. Radio Group (the "Company") as of December 31, 1996, 1995,
and 1994, and the related combined statements of income (loss), changes in
partners' equity and cash flows for each of the three years in the period ended
December 31, 1996. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In January 1997, substantially all of the assets and liabilities of the
Company were sold.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Colfax
Communications, Inc. Radio Group as of December 31, 1996, 1995, and 1994, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN
Washington, D.C.
March 31, 1997
A-1
<PAGE> 5
COLFAX COMMUNICATIONS, INC. RADIO GROUP
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Current assets:
Cash............................................. $ 1,718,589 $ 682,672 $ 216,414
Accounts receivable, net of allowance for
doubtful accounts of $710,813, $441,889, and
$238,801, respectively........................ 15,514,187 7,626,579 8,978,881
Prepaid expenses and other current assets........ 520,358 286,774 343,441
------------ ----------- -----------
Total current assets..................... 17,753,134 8,596,025 9,538,736
Property and equipment at cost, net of
depreciation..................................... 14,508,097 8,675,724 9,608,603
Intangibles and other noncurrent assets at cost,
net of amortization.............................. 147,579,599 32,383,587 37,653,803
------------ ----------- -----------
Total assets............................. $179,840,830 $49,655,336 $56,801,142
============ =========== ===========
Liabilities:
Accounts payable and accrued expenses............ $ 5,116,890 $ 3,224,139 $ 3,883,242
Current maturities of long-term debt............. -- -- 900,000
------------ ----------- -----------
Total current liabilities................ 5,116,890 3,224,139 4,783,242
Long-term debt................................... 55,650,000 39,225,000 7,100,000
------------ ----------- -----------
Total liabilities........................ 60,766,890 42,449,139 11,883,242
------------ ----------- -----------
Commitments (Note 8):
Partners' equity:
Radio Acquisition Associates..................... (1,141,558) (2,783,226) (3,121,671)
Equity Group Holdings............................ 119,013,080 9,888,902 47,558,478
Colfax Communications, Inc....................... 1,202,418 100,521 481,093
Class B Limited Partners......................... -- -- --
------------ ----------- -----------
Total partners' equity................... 119,073,940 7,206,197 44,917,900
------------ ----------- -----------
Total liabilities and partners' equity... $179,840,830 $49,655,336 $56,801,142
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
A-2
<PAGE> 6
COLFAX COMMUNICATIONS, INC. RADIO GROUP
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Advertising revenues:
Local sponsors.................................... $37,496,454 $23,425,588 $24,147,363
National sponsors................................. 12,885,713 9,151,724 8,221,228
Other............................................. 2,518,200 1,910,483 2,090,737
----------- ----------- -----------
Gross advertising revenues................ 52,900,367 34,487,795 34,459,328
Less -- Commissions............................... (6,785,322) (4,345,062) (4,283,386)
----------- ----------- -----------
Net advertising revenues.................. 46,115,045 30,142,733 30,175,942
----------- ----------- -----------
Operating expenses:
Programming....................................... 7,675,793 5,461,691 9,604,067
Sales and advertising............................. 14,507,662 11,360,597 10,885,717
General and administrative........................ 5,793,377 4,332,286 3,651,832
Engineering....................................... 1,260,447 1,014,375 1,084,282
Depreciation and amortization..................... 4,617,958 6,505,492 7,599,901
----------- ----------- -----------
Total operating expenses.................. 33,855,237 28,674,441 32,825,799
----------- ----------- -----------
Income (loss) from operations............. 12,259,808 1,468,292 (2,649,857)
Interest expense.................................... 4,368,669 655,795 531,387
Loss on sale of fixed assets........................ -- 770,689 --
Other expense (income).............................. (184,289) -- 75,364
----------- ----------- -----------
Net income (loss)......................... $ 8,075,428 $ 41,808 $(3,256,608)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
A-3
<PAGE> 7
COLFAX COMMUNICATIONS, INC. RADIO GROUP
COMBINED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
RADIO EQUITY CLASS B
ACQUISITION COLFAX GROUP LIMITED
ASSOCIATES COMM., INC. HOLDINGS PARTNERS TOTAL
----------- ----------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1993..................... $(2,464,398) $ 528,938 $ 52,305,936 $-- $ 50,370,476
Capital contributions
from partners......... 368,281 60,023 5,949,744 -- 6,378,048
Capital distributions to
partners.............. (1,678,638) (68,618) (6,826,760) -- (8,574,016)
Net income (loss)........ 653,084 (39,250) (3,870,442) -- (3,256,608)
----------- ---------- ------------ --- ------------
Balance, December 31,
1994..................... (3,121,671) 481,093 47,558,478 -- 44,917,900
Capital contributions
from partners......... -- 5,735 567,746 -- 573,481
Capital distributions to
partners.............. (1,031,464) (372,709) (36,922,819) -- (38,326,992)
Net income (loss)........ 1,369,909 (13,598) (1,314,503) -- 41,808
----------- ---------- ------------ --- ------------
Balance, December 31,
1995..................... (2,783,226) 100,521 9,888,902 -- 7,206,197
Capital contributions
from partners......... 5,104 1,130,725 111,941,654 -- 113,077,483
Capital distributions to
partners.............. (981,106) (82,845) (8,221,217) -- (9,285,168)
Net income (loss)........ 2,617,670 54,017 5,403,741 -- 8,075,428
----------- ---------- ------------ --- ------------
Balance, December 31,
1996..................... $(1,141,558) $1,202,418 $119,013,080 $-- $119,073,940
=========== ========== ============ === ============
</TABLE>
The accompanying notes are an integral part of these statements.
A-4
<PAGE> 8
COLFAX COMMUNICATIONS, INC. RADIO GROUP
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 8,075,428 $ 41,808 $(3,256,608)
Adjustments to reconcile net loss to net cash
used in operating activities --
Depreciation and amortization............... 4,617,958 6,505,492 7,599,901
Loss on asset disposal...................... -- 770,689 57,398
Restructuring charge........................ -- 737,729 --
Change in assets and liabilities:
(Increase) decrease in accounts
receivable............................. (7,888,416) 1,352,302 (1,664,323)
(Increase) decrease in prepaid expenses
and other current assets............... (233,584) 56,667 170,619
Increase (decrease) in accounts payable
and accrued expenses................... 1,892,751 (1,396,832) 708,448
------------- ------------ -----------
Net cash provided by operating
activities........................... 6,464,137 8,067,855 3,615,435
------------- ------------ -----------
Cash flows from investing activities:
Cash paid for acquisition of intangibles and
other noncurrent assets..................... (126,017,951) (363,174) (12,944)
Payments for additions to property and
equipment................................... (5,907,584) (823,737) (968,929)
Disposal of intangible assets.................. 6,280,000 -- --
Disposal of fixed assets....................... -- 113,825 --
------------- ------------ -----------
Net cash used in investing
activities........................... (125,645,535) (1,073,086) (981,873)
------------- ------------ -----------
Cash flows from financing activities:
Repayment of note payable...................... (5,800,000) (8,000,000) (800,000)
Loan proceeds.................................. 22,225,000 39,225,000 --
Capital contributions from partners............ 113,077,483 573,481 6,378,048
Capital distributions to partners.............. (9,285,168) (38,326,992) (8,190,101)
------------- ------------ -----------
Net cash provided by (used in)
financing activities................. 120,217,315 (6,528,511) (2,612,053)
------------- ------------ -----------
Net increase (decrease) in cash.................. 1,035,917 466,258 21,509
Cash, beginning of period........................ 682,672 216,414 194,905
------------- ------------ -----------
Cash, end of period.............................. $ 1,718,589 $ 682,672 $ 216,414
============= ============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest......... $ 4,391,300 $ 615,900 $ 514,213
============= ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
A-5
<PAGE> 9
COLFAX COMMUNICATIONS, INC. RADIO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996, 1995, AND 1994
1. BASIS OF PRESENTATION:
The accompanying combined financial statements include the radio station
holdings of Colfax Communications, Inc. ("Colfax"), a Maryland Corporation.
Three of the stations serve the Washington, D.C., market: WGMS-FM (classical
format), WBIG-FM (oldies format), and WTEM(AM) (all-sports format). Two
stations, WBOB-FM (country format) and KQQL(FM) (oldies format), serve the
Minneapolis-St. Paul market. Five of the stations serve the Phoenix market:
KOOL-FM (oldies format), KOY(AM) (nostalgia format), KZON-FM (alternative
format), KISO(AM) (urban adult contemporary format), and KYOT-FM (new adult
contemporary format). Two stations serve the Milwaukee market: WMIL-FM (country
format) and WOKY(AM) (adult standard format). Three stations serve the Boise
market: KIDO(AM) (news/talk format), KLTB(FM) (oldies format), and KARO(FM)
(class rock format). All stations are owned by entities under the common control
of Colfax and its affiliates.
2. DESCRIPTION OF COLFAX COMMUNICATIONS, INC., RADIO GROUP:
Classical Acquisition Limited Partnership
Classical Acquisition Limited Partnership ("CALP") is a Maryland limited
partnership formed to acquire and operate radio stations WGMS(AM) (currently
WTEM(AM)) and WGMS-FM. Radio Acquisition Associates Limited Partnership, a
Maryland limited partnership, had a 98.04 percent general partner interest and
Equity Group Holdings, a District of Columbia general partnership, had a 1.96
percent limited partner interest in CALP prior to the admission of the Class B
Limited Partners as discussed below. Radio Acquisition Associates Limited
Partnership has Colfax as a 1 percent general partner and Equity Group Holdings
as a 99 percent limited partner.
Certain Class B Limited Partners were admitted to the partnership on
January 1, 1993 and on January 1, 1995. The Class B Limited Partners have a
13.25 percent interest in CALP and Equity Group Holdings' limited partnership
interest in CALP was reduced to 1.813 percent effective January 1, 1993. Radio
Acquisition Associates' Limited Partnership general partnership interest was
reduced to 90.687 percent and 84.937 percent effective January 1, 1993 and
January 1, 1995, respectively.
Radio 570 Limited Partnership
Radio 570 Limited Partnership ("Radio 570") is a Maryland limited
partnership formed on December 10, 1991, to operate radio station WTEM-AM
(formerly WGMS-AM). Radio 570 was formed by Colfax as the 1 percent general
partner and Equity Group Holdings ad the 99 percent limited partner. WTEM began
broadcasting on May 24, 1992.
Effective January 1, 1993, certain Class B Limited Partners were admitted
to the partnership. On September 15, 1995, a Class B Limited Partner was
redeemed of his partnership interest. As of December 31, 1996 and 1995, the
Class B Limited Partners had a 9.25 percent interest and Equity Group Holdings
had an 89.75 percent Class A Limited Partnership interest.
Radio 100 Limited Partnership
Radio 100 Limited Partnership ("Radio 100") was formed on August 11, 1992,
to acquire and operate radio stations. Radio 100 was formed by Colfax as the 1
percent general partner and Equity Group Holdings as the 99 percent limited
partner.
In 1993, Radio 100 completed its acquisition of two radio stations in
Minnesota for $25,500,000. WBOB-FM (formerly WCTS-FM) and KQQL(FM) began on-air
operations under Radio 100 ownership on May 7, 1993, and February 18, 1993,
respectively.
A-6
<PAGE> 10
COLFAX COMMUNICATIONS, INC. RADIO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1993, certain Class B Limited Partners were admitted
to the partnership. The Class B Limited Partners have a 10.25 percent interest
and the Equity Group Holdings Class A Limited Partnership interest was reduced
to 88.75 percent.
Radio 100 of Maryland Limited Partnership
Radio 100 of Maryland Limited Partnership ("Radio 100 of Maryland") was
formed on December 2, 1992 to acquire and operate radio stations. Radio 100 of
Maryland was formed by Colfax as the 1 percent general partner and Equity Group
Holdings as the 99 percent limited partner.
On June 3, 1993, Radio 100 of Maryland acquired WBIG-FM (formerly WJZE-FM)
in Washington, D.C. for $19,500,000.
Effective January 1, 1993, certain Class B Limited Partners were admitted
to the partnership. On September 15, 1995, a Class B Limited Partner was
redeemed of his partnership interest. On October 1, 1995, a Class B Limited
Partner was admitted to the partnership. As of December 31, 1996 and 1995, the
Class B Limited Partners had an 11.25 percent interest and Equity Group Holdings
had an 87.75 percent Class A Limited Partnership interest.
Radio 94 of Phoenix Limited Partnership
Radio 94 of Phoenix Limited Partnership ("Radio 94") was formed on January
3, 1996, to acquire and operate radio stations. Radio 94 was formed by Colfax as
the 1 percent general partner and Equity Group Holdings as the 99 percent
limited partner. On April 1, 1996, Radio 94 acquired KOOL(AM) and KOOL-FM in
Phoenix, Arizona for $35,000,000. Effective April 5, 1996, certain Class B
Limited Partners were admitted to the partnership. The Class B Limited Partners
have an 8.25 percent interest and the Equity Group Holdings Class A Limited
Partnership interest was reduced to 90.75 percent. On October 4, 1996, Radio 94
sold KOOL(AM) to Salem Media of Arizona, Inc.
Radio 95 of Phoenix Limited Partnership
Radio 95 of Phoenix Limited Partnership ("Radio 95") was formed on May 3,
1996, to acquire and operate radio stations. Radio 95 was formed by Colfax as
the 1 percent general partner and Equity Group Holdings as the 99 percent
limited partner. On September 12, 1996, Radio 95 acquired KYOT-FM, KZON-FM,
KOY(AM), and KISO(AM), each in Phoenix, Arizona; KIDO(AM) and KLTB(FM), each in
Boise, Idaho; KARO(FM) in Caldwell, Idaho; WMIL-FM in Waukesha, Wisconsin; and
WOKY(AM) in Milwaukee, Wisconsin, for $95,000,000.
A-7
<PAGE> 11
COLFAX COMMUNICATIONS, INC. RADIO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Sale of Stations
On August 24, 1996, Chancellor Radio Broadcasting Company ("Chancellor"), a
Delaware Corporation, agreed to purchase substantially all of the assets of
CALP, Radio 570, Radio 100, Radio 100 of Maryland, Radio 94 (with the exception
of KOOL(AM)), and Radio 95 (with the exception of KIDO(AM), KLTB(FM), and
KARO(FM)) for total consideration of $365,000,000 plus the net working capital
of the stations. The transaction closed on January 23, 1997. The agreement
stipulates that the purchase price for the assets be allocated among the limited
partnerships as follows:
<TABLE>
<CAPTION>
<S> <C>
CALP........................................................ $ 50,000,000
Radio 570................................................... 21,000,000
Radio 100................................................... 85,000,000
Radio 100 of Maryland....................................... 90,000,000
Radio 94.................................................... 30,000,000
Radio 95.................................................... 89,000,000
------------
$365,000,000
============
</TABLE>
On October 28, 1996, Jacor Broadcasting of Idaho, Inc., an Ohio
corporation, entered into an agreement to purchase substantially all of the
assets of radio stations KIDO(AM), KLTB(FM), and KARO(FM) for $11,000,000. The
transaction closed on January 31, 1997.
Partnership Allocations
The partnerships distribute cash from operations and allocate net profits
or losses to the partners, in general, in accordance with their stated interests
except that no partner shall receive any distribution from a partnership until
such time as the net invested capital of the general partner and Class A Limited
Partner have been distributed, along with a cumulative priority return on the
average net invested capital at an annual rate equal to the prime rate plus one
quarter of one percent compounded monthly.
In accordance with the Company's debt agreement (described below)
distributions to partners may be permitted on a quarterly basis if certain
requirements are met.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Accounting
The accompanying financial statements are prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
Barter Transactions
The partnerships enter into barter transactions in which they provide
on-air advertising in exchange for goods and services. Revenues and expenses
from barter transactions are presented in the accompanying statement of revenues
and expenses based on the estimated fair market value of the goods or services
received. Barter revenue approximated $1,925,000, $1,590,000, and $1,870,000 for
the years ended December 31, 1996, 1995, and 1994, respectively; while barter
expense approximated $1,763,000, $1,486,000, and $1,520,000 for the years ended
December 31, 1996, 1995, and 1994, respectively.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the partnerships do not pay Federal and
state income taxes but rather allocate profits and losses to the partners for
inclusion in their respective income tax returns.
A-8
<PAGE> 12
COLFAX COMMUNICATIONS, INC. RADIO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Buildings and Leasehold Improvements
Buildings and leasehold improvements are recorded at cost or appraised
value at acquisition. Depreciation is recorded using the straight-line method
over 31.5 or 40 years as prescribed by the Internal Revenue Code.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are recorded at cost or appraised value
at acquisition. Depreciation is recorded using the straight-line method over the
estimated useful life of the assets, which is typically 5 to 7 years.
Intangible Assets
Intangible assets are recorded at cost or appraised value at acquisition.
Amortization is recorded over their useful lives. The estimated useful lives of
intangible assets as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
USEFUL LIFE
-----------
<S> <C>
FCC Licenses................................................ 7-25 years
Covenants Not to Compete.................................... 3 years
Employment Agreements....................................... 2 years
Organizational Costs........................................ 5 years
Start-up Costs.............................................. 5 years
</TABLE>
Land
Certain partners have contributed to Radio 570 a parcel of land in
Germantown, Maryland which is being used as the site for a new array of
broadcasting towers. The land has been recorded at its original purchase price
plus costs related to preparing the land for its intended use.
Radio 100 of Maryland acquired a parcel of land and property in Washington,
D.C., in connection with the acquisition of WJZE-FM. This parcel of land was
recorded at its appraised value at acquisition. This land was sold in February
1995.
Radio 100 acquired a parcel of land in Nowthen, Minnesota, through the
purchase of KQQL-FM. This parcel of land was recorded at its appraised value at
acquisition.
Radio 95 acquired various parcels of land located in Phoenix, Milwaukee,
and Boise in connection with its purchase of nine stations during 1996. These
parcels of land were recorded at their estimated market value at acquisition.
Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
In 1995 the Company adopted Statement of Financial Accounting Standard
("SFAS") No. 107, "Disclosure about Fair Value of Financial Instruments," which
requires disclosures of fair value information about financial instruments,
whether or not recognized in the balance sheet.
A-9
<PAGE> 13
COLFAX COMMUNICATIONS, INC. RADIO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amount reported in the balance sheets for cash, accounts
receivable, accounts payable and accrued liabilities, approximate their fair
value due to the immediate or short-term maturity of such instruments. The
carrying amount reported for long-term debt approximates fair value due to the
debt being priced at floating rates (see Note 7 for additional information).
4. PROPERTY AND EQUIPMENT:
The components of property and equipment at December 31, 1996 and 1995, are
summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Land.................................... $ 3,719,572 $ 1,901,663 $ 2,233,341
Buildings............................... 1,372,161 26,453 604,927
Construction in progress................ 27,660 27,232 201,404
Furniture, fixtures and equipment....... 11,323,175 8,520,853 7,690,841
Leasehold improvements.................. 835,407 816,031 522,806
----------- ----------- -----------
17,277,975 11,292,232 11,253,319
Less -- Accumulated depreciation........ (2,769,878) (2,616,508) (1,644,716)
----------- ----------- -----------
$14,508,097 $ 8,675,724 $ 9,608,603
=========== =========== ===========
</TABLE>
5. FCC LICENSES AND OTHER NONCURRENT ASSETS:
The components of FCC licenses and other noncurrent assets at December 31,
1996 and 1995, are summarized below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
FCC licenses............................ $163,988,330 $ 39,505,773 $ 39,505,773
Covenants not to compete................ 1,931,834 8,493,147 8,493,147
Start-up and organization costs......... 2,489,973 2,132,587 2,153,036
Other................................... 1,376,763 958,245 1,891,395
------------ ------------ ------------
169,786,900 51,089,752 52,043,351
Less -- Accumulated amortization........ (22,207,301) (18,706,165) (14,389,548)
------------ ------------ ------------
$147,579,599 $ 32,383,587 $ 37,653,803
============ ============ ============
</TABLE>
6. RELATED-PARTY TRANSACTIONS:
Each partnership is involved in certain transactions with other
partnerships in the radio group related to sharing of services and purchasing.
These transactions are settled on a current basis through adjustments to
partners' equity accounts.
On January 18, 1995, CALP and Radio 100 of Maryland each entered into a 10
year agreement to lease tower space from Colfax Towers, Inc. The annual rental
payment for CALP equaled $31,200 and $30,000 for the years ended December 31,
1996 and 1995, respectively. The annual rental payment for Radio 100 of Maryland
equaled $37,200 and $36,000 for the years ended December 31, 1996 and 1995,
respectively. Colfax Towers, Inc., is owned by the shareholders of Colfax
Communications, Inc.
Employees of Colfax perform activities on behalf of and oversee the
operations of the radio stations included in the radio group. Colfax does not
charge any fees to the radio stations for the performance of such services.
Corporate expenses of $1,240,253, $1,354,296, and $1,144,082 related to those
services are not included in the financial statements of the radio group for the
years ending December 31, 1996, 1995, and 1994, respectively. These corporate
expenses were funded directly by the owners of Colfax Communications, Inc.
A-10
<PAGE> 14
COLFAX COMMUNICATIONS, INC. RADIO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT:
On December 27, 1995, CALP, Radio 570, Radio 100, and Radio 100 of Maryland
entered into a $40 million revolving loan agreement. On April 2, 1996, under an
amendment to the loan agreement, CALP, Radio 570, Radio 100, Radio 100 of
Maryland, and Radio 94 (collectively, the "Borrowers") increased the amount
available under the revolving loan agreement to $60 million. At December 31,
1996, $55,650,000 was outstanding under this agreement. The proceeds were
allocated to each borrower on the basis of each station's capital account as
follows:
<TABLE>
<S> <C>
CALP........................................................ $ 5,702,360
Radio 570................................................... 4,156,587
Radio 100................................................... 16,423,860
Radio 100 of Maryland....................................... 9,214,544
Radio 94.................................................... 20,152,649
-----------
$55,650,000
===========
</TABLE>
The initial proceeds were used to repay the indebtedness of CALP to make
certain permitted distributions to partners of the Borrowers, and for working
capital purposes in the operations of the Borrowers. Borrowings under this
agreement bear interest at floating rates equal to prime and/or LIBOR (as
defined in the loan agreement) plus an applicable margin determined by a
leverage ratio. The expiration date of the loan agreement is December 31, 2002.
Under the loan agreement, the Borrowers are required to maintain a specific
leverage ratio and certain ratios pertaining to cash flow coverage.
In connection with the sale of the stations (discussed in Note 2), the debt
was repaid in full in January 1997.
8. COMMITMENTS:
The Radio Group has entered into various contracts for exclusive radio
broadcasting rights and other programming. In addition, the partnerships lease
office space and have entered into various service contracts, including certain
personal service contracts. These broadcasting rights, leases and service
contracts expire over periods ranging from 1997 to 2012. The minimum future
commitments under these agreements, leases and service contracts are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 3,766,028
1998........................................................ 2,826,433
1999........................................................ 1,178,594
2000........................................................ 1,140,345
2001........................................................ 646,234
Thereafter.................................................. 2,077,616
-----------
$11,635,250
===========
</TABLE>
9. RESTRUCTURING CHARGES:
During 1995, the Radio Group recorded restructuring costs of $737,729 at
certain radio stations. These costs included severance and salary payments to
terminated employees of $357,563, costs related to hiring a new general manager
at one of the radio stations of $135,519 and costs related to a loss on space
vacated by one of the radio stations of $244,647.
A-11
<PAGE> 15
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Chancellor Broadcasting Company:
We have audited the accompanying combined balance sheets of KYSR Inc. and
KIBB Inc. as of December 31, 1995 and 1996, and the related combined statements
of operations and cash flows for each of the years in the three-year period
ended December 31, 1996. These combined financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of KYSR Inc.
and KIBB Inc. as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
March 14, 1997
B-1
<PAGE> 16
KYSR INC. AND KIBB INC.
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Accounts receivable, less allowance
for doubtful accounts of $218 in
1995, $246 in 1996 and $130 in
1997............................... $ 6,253 $ 7,283 $ 5,899
Prepaid expenses and other............ 412 609 1,549
Deferred income taxes (note 5)........ 89 101 101
-------- -------- --------
Total current assets.......... 6,754 7,993 7,549
Property and equipment, net (note 3).... 4,172 4,082 4,104
Intangible assets, net (note 4)......... 116,946 113,644 112,817
Other assets, net....................... 22 22 22
-------- -------- --------
$127,894 $125,741 $124,492
======== ======== ========
LIABILITIES AND EQUITY
Current liabilities -- accounts payable
and accrued expenses.................. $ 3,883 $ 3,624 $ 3,080
Deferred income taxes (note 5).......... 9,683 11,027 11,027
Equity (note 8)......................... 114,328 111,090 110,385
Commitments and contingencies (note
9)....................................
-------- -------- --------
$127,894 $125,741 $124,492
======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
B-2
<PAGE> 17
KYSR INC. AND KIBB INC.
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gross revenues................................... $28,590 $30,571 $33,769 $ 7,039 $ 7,527
Less agency commissions and national rep
fees........................................ 4,490 4,882 5,462 1,106 1,231
------- ------- ------- ------- -------
Net revenues........................... 24,100 25,689 28,307 5,933 6,296
------- ------- ------- ------- -------
Operating expenses:
Station operating expenses, excluding
depreciation and amortization............... 13,407 12,901 13,378 3,034 3,288
Depreciation and amortization.................. 3,640 3,661 3,627 916 912
Corporate general and administrative........... 892 1,094 844 271 151
------- ------- ------- ------- -------
Operating expenses..................... 17,939 17,656 17,849 4,221 4,351
------- ------- ------- ------- -------
Operating income....................... 6,161 8,033 10,458 1,712 1,945
Interest expense (note 7)........................ 6,374 6,374 6,374 1,594 1,594
------- ------- ------- ------- -------
Earnings (loss) before income taxes.... (213) 1,659 4,084 118 351
Income tax expense (benefit) (note 5)............ (70) 699 1,694 49 148
------- ------- ------- ------- -------
Net earnings (loss).................... $ (143) $ 960 $ 2,390 $ 69 $ 203
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
B-3
<PAGE> 18
KYSR INC. AND KIBB INC.
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- ---------------
1994 1995 1996 1996 1997
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Cash flows provided by operating activities:
Net earnings (loss).............................. $ (143) $ 960 $ 2,390 $ 69 $ 203
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation.................................. 338 359 325 91 85
Amortization of intangibles................... 3,302 3,302 3,302 825 827
Deferred tax expense.......................... 1,597 1,412 1,332 -- --
Changes in certain assets and liabilities:
Accounts receivable, net.................... (1,452) (120) (1,030) 1,204 1,384
Prepaid expenses and other current assets... 372 (149) (197) (633) (940)
Accounts payable and accrued expenses....... (345) 265 (259) (583) (544)
------- ------- ------- ------ ------
Net cash provided by operating
activities............................. 3,669 6,029 5,863 973 1,015
------- ------- ------- ------ ------
Cash used by investing activities -- capital
expenditures..................................... (280) (223) (235) (43) (107)
------- ------- ------- ------ ------
Cash flows used by financing
activities -- distributions to Parent............ (3,389) (5,806) (5,628) (930) (908)
------- ------- ------- ------ ------
Increase (decrease) in cash........................ -- -- -- -- --
Cash at beginning of period........................ -- -- -- -- --
------- ------- ------- ------ ------
Cash at end of period.............................. $ -- $ -- $ -- $ -- $ --
======= ======= ======= ====== ======
</TABLE>
See accompanying notes to combined financial statements.
B-4
<PAGE> 19
KYSR INC. AND KIBB INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) ORGANIZATION AND BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of KYSR
Inc. and KIBB Inc. (collectively, the "Company"). The Company owns and operates
two commercial radio stations in the Los Angeles market, KYSR-FM and KIBB-FM,
and is wholly owned by Viacom International Inc. ("Viacom" or "Parent"), a
wholly owned subsidiary of Viacom, Inc. Significant intercompany balances and
transactions have been eliminated in combination.
On February 16, 1997, Viacom entered into a stock purchase agreement to
sell all the issued and outstanding shares of capital stock of WAXQ Inc. and
Riverside Broadcasting Co., Inc. in the New York City market, KYSR Inc. and KIBB
Inc. in the Los Angeles market, Viacom Broadcasting East Inc. and WMZQ Inc. in
the Washington, DC market, WLIT Inc. in the Chicago market and WDRQ Inc. in the
Detroit market (collectively, the "Viacom Radio Properties") to Evergreen Media
Corporation of Los Angeles, ("Evergreen") for $1.075 billion in cash ("Proposed
Transaction"). The Proposed Transaction is expected to close after the
expiration or termination of the applicable waiting periods under the HSR Act
and approval by the Federal Communications Commission ("FCC"). Contemporaneous
with this transaction, Evergreen entered into a joint purchase agreement with
Chancellor Broadcasting Company ("Chancellor") under which Chancellor agreed to
acquire the Chicago, Detroit and Los Angeles Viacom Radio Properties referred to
above for $480 million from Evergreen or from Viacom directly.
The accompanying combined financial statements reflect the carve-out
historical results of operations and financial position of KYSR Inc. and KIBB
Inc. These financial statements are not necessarily indicative of the results
that would have occurred if the Company had been a separate stand-alone entity
during the periods presented.
The combined financial statements do not include Viacom's corporate assets
or liabilities not specifically identifiable to the Company. Corporate overhead
allocations have been included in the accompanying combined statements of
earnings in corporate general and administrative expense and station operating
expenses.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over the estimated useful
lives of the assets. Repair and maintenance costs are charged to expense when
incurred.
(b) Intangible Assets
Intangible assets consist primarily of broadcast licenses. The Company
amortizes such intangible assets using the straight-line method over 40 years.
The Company continually evaluates the propriety of the carrying amount of
intangible assets as well as the amortization period to determine whether
current events or circumstances warrant adjustments to the carrying value and/or
revised estimates of useful lives. This evaluation consists of the projection of
undiscounted operating income before depreciation, amortization, nonrecurring
charges and interest over the remaining amortization periods of the related
intangible assets. At this time, the Company believes that no significant
impairment of intangible assets has occurred and that no reduction of the
estimated useful lives is warranted.
B-5
<PAGE> 20
KYSR INC. AND KIBB INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Barter Transactions
The Company trades commercial air time for goods and services used
principally for promotional, sales and other business activities. An asset and
liability are recorded at the fair market value of the goods or services to be
received. Barter revenue is recorded and the liability relieved when commercials
are broadcast and barter expense is recorded and the asset relieved when goods
or services are received or used.
(d) Revenue Recognition
Revenue is derived primarily from the sale of commercial announcements to
local and national advertisers. Revenue is recognized as commercials are
broadcast.
(e) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount more likely than not to be realized. Income
tax expense is the total of tax payable for the period and the change during the
period in deferred tax assets and liabilities.
(f) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. The adoption of this Statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
(g) Fair Value
The carrying amount of accounts receivable and accounts payable
approximates fair value because of the short maturity of these instruments.
(h) Disclosure of Certain Significant Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In the opinion of management, credit risk with respect to trade receivables
is limited due to the large number of diversified customers in the Company's
customer base. The Company performs ongoing credit evaluations of its customers
and believes that adequate allowances for any uncollectible trade receivables
are maintained. No one advertiser accounted for more than 10% of net revenues in
1994, 1995, or 1996. Certain
B-6
<PAGE> 21
KYSR INC. AND KIBB INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
advertisers purchase the advertising of the stations through a third party
buying service. Approximately 22%, 20% and 19% of total revenue was derived
through the use of this service in 1994, 1995 and 1996, respectively.
(i) Unaudited Interim Financial Information
In the opinion of management, the unaudited interim combined financial
statements as of and for the three months ended March 31, 1996 and 1997, reflect
all adjustments, consisting of only normal and recurring items, which are
necessary for a fair presentation of the results for the interim periods
presented. The results for the interim periods ended March 31, 1996 and 1997 are
not necessarily indicative of results to be expected for any other interim
period or for the full year.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1995 and
1996:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE 1995 1996
----------- ------ ------
<S> <C> <C> <C>
Land.................................... $2,875 $2,875
Building................................ 40 years 474 474
Broadcast facilities.................... 8-20 years 1,501 1,572
Office equipment and other.............. 5-8 years 725 902
Construction in progress................ 36 24
------ ------
5,611 5,847
Accumulated depreciation................ 1,439 1,765
------ ------
$4,172 $4,082
====== ======
</TABLE>
(4) INTANGIBLE ASSETS
Intangible assets at December 31, 1995 and 1996 consist of broadcast
licenses which are being amortized over forty years and are presented net of
accumulated amortization of $15,148 and $18,450, respectively.
(5) INCOME TAXES
The Company's results of operations are included in the combined U.S.
federal and certain combined and separate state income tax returns of Viacom
International Inc.
The tax provisions and deferred tax liabilities presented have been
determined as if the Company were a stand-alone business filing separate tax
returns. Current tax liabilities are recorded through the equity account with
Viacom.
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Current:
Federal............................... $(1,289) $ (551) $ 278
State and local....................... (378) (162) 84
Deferred federal........................ 1,597 1,412 1,332
------- ------ ------
$ (70) $ 699 $1,694
======= ====== ======
</TABLE>
B-7
<PAGE> 22
KYSR INC. AND KIBB INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the U.S. Federal statutory tax rate to the Company's
effective tax rate on earnings (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----- ---- ----
<S> <C> <C> <C>
Statutory U.S. tax rate..................................... (35.0)% 35.0% 35.0%
State and local taxes, net of federal tax benefit........... 6.2 6.2 6.1
Other, net.................................................. (8.3) 0.9 0.4
----- ---- ----
Effective tax rate................................ (32.9)% 42.1% 41.5%
===== ==== ====
</TABLE>
Deferred tax assets and liabilities are computed by applying the U.S.
federal income tax rate in effect to the gross amounts of temporary differences
and other tax attributes. These temporary differences are primarily the result
of fixed asset basis differences and bad debt expense. Deferred tax assets and
liabilities relating to state income taxes are not material.
(6) DEBT AND INTEREST COST
Viacom has not allocated any portion of its debt or related interest cost
to the Company, and no portion of Viacom's debt is specifically related to the
operations of the Company.
(7) RELATED PARTY TRANSACTIONS
Intercompany balances between the Company and Viacom resulting from normal
trade activity are reflected in Equity in the accompanying combined financial
statements (see note 8).
On January 25, 1990, KYSR Inc., formerly KXEZ, Inc., issued an intercompany
demand note to Viacom in the amount of $66,400. The note bears interest at 9.6%
per year payable on the last day of each calendar year. The principal and final
interest payment are payable on January 25, 2000. However, immediately prior to
closing of the Proposed Transaction, all debts between the Company and Viacom
will be canceled. As such, the promissory note issued to Viacom is reflected as
an increase to equity and included in intercompany activity in the amount of
$66,400 at December 31, 1995 and 1996 (see note 8).
Viacom provides services for the Company in management, accounting and
financial reporting, human resources, information systems, legal, taxes and
other corporate services. The allocation of these expenses, which is generally
based on revenue dollars, is reflected in the accompanying combined financial
statements as corporate general and administrative expense. Management believes
that the method of allocation of overhead is reasonable.
Viacom has a noncontributory pension plan covering substantially all of its
employees, including the employees of the Company. Costs related to this plan
are allocated to the Company based on payroll dollars and are included in
station operating expenses. The Company recognized expense related to this plan
in the amounts of $70, $56 and $191 for 1994, 1995 and 1996, respectively. The
assets and the related benefit obligation of the plan will not be transferred to
the Company upon consummation of the Proposed Transaction, therefore, such
assets and obligations are not included in the notes to the Company's combined
financial statements.
Viacom utilizes a centralized cash management system. As a result, the
Company carries minimal cash. Disbursements are funded by the Parent upon demand
and cash receipts are transferred to the Parent daily.
The Company, from time to time, enters into transactions with companies
owned by or affiliated with Viacom. Generally, services received from such
related parties are charged to the Company at amounts which would be incurred in
transactions between unrelated entities.
B-8
<PAGE> 23
KYSR INC. AND KIBB INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(8) EQUITY
Equity represents Viacom's ownership interest in the recorded net assets of
the Company. All cash transactions and intercompany transactions flow through
the equity account. A summary of the activity is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period......................... $122,706 $119,174 $114,328
Net earnings (loss).................................... (143) 960 2,390
Net intercompany activity.............................. (3,389) (5,806) (5,628)
-------- -------- --------
Balance at end of period............................... $119,174 $114,328 $111,090
======== ======== ========
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
The Company has noncancelable operating leases, primarily for office space.
These leases generally contain renewal options for periods ranging from one to
ten years and require the Company to pay all executory costs such as maintenance
and insurance. Rental expense for operating leases (excluding those with lease
terms of one month or less that were not renewed) was approximately $377, $365
and $405 during 1994, 1995 and 1996, respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31, 1996
are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997........................................................ $ 365
1998........................................................ 366
1999........................................................ 312
2000........................................................ 19
Thereafter.................................................. --
------
$1,062
======
</TABLE>
B-9
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Chancellor Broadcasting Company:
We have audited the accompanying balance sheets of WLIT Inc. as of December
31, 1995 and 1996, and the related statements of earnings and cash flows for
each of the years in the three-year period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of WLIT Inc. as of December 31,
1995 and 1996, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
March 14, 1997
C-1
<PAGE> 25
WLIT INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Accounts receivable, less allowance for doubtful accounts
of $79 in 1995, $87 in 1996 and $99 in 1997............ $ 3,110 $ 3,627 $ 3,007
Prepaid expenses and other current assets................. 592 490 957
Deferred income taxes (note 5)............................ 37 44 33
------- ------- -------
Total current assets.............................. 3,739 4,161 3,997
Property and equipment, net (note 3)........................ 461 457 432
Intangible assets, net (note 4)............................. 16,958 16,415 16,280
------- ------- -------
$21,158 $21,033 $20,709
======= ======= =======
LIABILITIES AND EQUITY
Current liabilities -- accounts payable and accrued
expenses.................................................. $ 1,442 $ 1,195 $ 1,105
Deferred income taxes (note 5).............................. 58 53 53
Equity (note 8)............................................. 19,658 19,785 19,551
Commitments and contingencies (note 9)......................
------- ------- -------
$21,158 $21,033 $20,709
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
C-2
<PAGE> 26
WLIT INC.
STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gross revenues............................... $14,367 $16,720 $18,294 $ 3,409 $ 4,340
Less agency commissions and national rep
fees.................................... 2,523 2,848 3,071 555 729
------- ------- ------- ------- -------
Net revenues....................... 11,844 13,872 15,223 2,854 3,611
------- ------- ------- ------- -------
Operating expenses:
Station operating expenses excluding
depreciation and amortization........... 6,555 6,977 7,508 1,756 1,823
Depreciation and amortization.............. 655 653 659 162 166
Corporate general and administrative....... 478 630 479 137 88
------- ------- ------- ------- -------
Operating expenses................. 7,688 8,260 8,646 2,055 2,077
------- ------- ------- ------- -------
Earnings before income taxes....... 4,156 5,612 6,577 799 1,534
Income tax expense (note 5).................. 1,804 2,359 2,728 331 640
------- ------- ------- ------- -------
Net earnings....................... $ 2,352 $ 3,253 $ 3,849 $ 468 $ 894
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
C-3
<PAGE> 27
WLIT INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- ---------------
1994 1995 1996 1996 1997
------- ------- ------- ----- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows provided by operating activities:
Net earnings................................. $ 2,352 $ 3,253 $ 3,849 $ 468 $ 894
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation.............................. 114 114 116 27 31
Amortization of intangibles............... 541 539 543 135 135
Deferred income taxes..................... (13) 5 (8) -- 11
Changes in certain assets and liabilities:
Accounts receivable, net................ (73) (460) (517) 662 620
Prepaid expenses and other current
assets............................... (101) (181) 98 (669) (467)
Accounts payable and accrued expenses... (384) 173 (247) (380) (90)
------- ------- ------- ----- -------
Net cash provided by operating
activities......................... 2,436 3,443 3,834 243 1,134
------- ------- ------- ----- -------
Cash flows used by investing
activities -- capital expenditures........... (180) (110) (112) (3) (6)
------- ------- ------- ----- -------
Cash flows used by financing
activities -- distributions to Parent........ (2,256) (3,333) (3,722) (240) (1,128)
------- ------- ------- ----- -------
Increase (decrease) in cash.................... -- -- -- -- --
Cash at beginning of period.................... -- -- -- -- --
------- ------- ------- ----- -------
Cash at end of period.......................... $ -- $ -- $ -- $ -- $ --
======= ======= ======= ===== =======
</TABLE>
See accompanying notes to financial statements.
C-4
<PAGE> 28
WLIT INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) ORGANIZATION AND BASIS OF PRESENTATION
The accompanying financial statements include the accounts of WLIT Inc.
(the "Company"). The Company owns and operates a commercial radio station in the
Chicago market, WLIT-FM, and is wholly owned by Viacom International Inc.
("Viacom" or "Parent"), a wholly owned subsidiary of Viacom, Inc.
On February 16, 1997, Viacom International Inc. entered into a stock
purchase agreement to sell all the issued and outstanding shares of capital
stock of WAXQ Inc. and Riverside Broadcasting Co., Inc. in the New York City
market, KYSR Inc. and KIBB Inc. in the Los Angeles market, Viacom Broadcasting
East Inc. and WMZQ Inc. in the Washington, DC market, WLIT Inc. in the Chicago
market and WDRQ Inc. in the Detroit market (collectively, the "Viacom Radio
Properties") to Evergreen Media Corporation ("Evergreen") for $1.075 billion in
cash ("Proposed Transaction"). The Proposed Transaction is expected to close
after the expiration or termination of the applicable waiting periods under the
HSR Act and approval by the Federal Communications Commission ("FCC").
Contemporaneous with this transaction, Evergreen entered into a joint purchase
agreement with Chancellor Broadcasting Company ("Chancellor"), under which
Chancellor agreed to acquire the Chicago, Detroit and Los Angeles Viacom Radio
Properties referred to above for $480 million from Evergreen or from Viacom
directly.
The accompanying financial statements reflect the carve-out historical
results of operations and financial position of WLIT Inc. These financial
statements are not necessarily indicative of the results that would have
occurred if the Company had been a separate stand-alone entity during the
periods presented.
The financial statements do not include Viacom's corporate assets or
liabilities not specifically identifiable to the Company. Corporate overhead
allocations have been included in the accompanying statements of earnings in
corporate general and administrative expense and station operating expenses.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over the estimated useful
lives of the assets. Repair and maintenance costs are charged to expense when
incurred.
(b) Intangible Assets
Intangible assets consist primarily of broadcast licenses. The Company
amortizes such intangible assets using the straight-line method over 40 years.
The Company continually evaluates the propriety of the carrying amount of
intangible assets as well as the amortization period to determine whether
current events or circumstances warrant adjustments to the carrying value and/or
revised estimates of useful lives. This evaluation consists of the projection of
undiscounted operating income before depreciation, amortization, nonrecurring
charges and interest over the remaining amortization periods of the related
intangible assets. At this time, the Company believes that no significant
impairment of intangible assets has occurred and that no reduction of the
estimated useful lives is warranted.
(c) Barter Transactions
The Company trades commercial air time for goods and services used
principally for promotional, sales and other business activities. An asset and
liability are recorded at the fair market value of the goods or services to be
received. Barter revenue is recorded and the liability relieved when commercials
are broadcast and barter expense is recorded and the asset relieved when goods
or services are received or used.
C-5
<PAGE> 29
WLIT INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(d) Revenue Recognition
Revenue is derived primarily from the sale of commercial announcements to
local and national advertisers. Revenue is recognized as commercials are
broadcast.
(e) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount more likely than not to be realized. Income
tax expense is the total of tax payable for the period and the change during the
period in deferred tax assets and liabilities.
(f) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. The adoption of this Statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
(g) Fair Value
The carrying amount of accounts receivable and accounts payable
approximates fair value because of the short maturity of these instruments.
(h) Disclosure of Certain Significant Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In the opinion of management, credit risk with respect to trade receivables
is limited due to the large number of diversified customers in the Company's
customer base. The Company performs ongoing credit evaluations of its customers
and believes that adequate allowances for any uncollectible trade receivables
are maintained. No one customer accounted for more than 10% of net revenues in
1994, 1995, or 1996.
(i) Unaudited Interim Financial Information
In the opinion of management, the unaudited interim combined financial
statements as of and for the three months ended March 31, 1996 and 1997, reflect
all adjustments, consisting of only normal and recurring items, which are
necessary for a fair presentation of the results for the interim periods
presented. The results for the interim periods ended March 31, 1996 and 1997 are
not necessarily indicative of results to be expected for any other interim
period or for the full year.
C-6
<PAGE> 30
WLIT INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1995 and
1996:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE 1995 1996
----------- ------ ------
<S> <C> <C> <C>
Broadcast facilities.................... 8-20 years $1,116 $1,141
Office equipment and other.............. 5-8 years 791 868
Construction in progress................ 13 13
------ ------
1,920 2,022
Accumulated depreciation................ 1,459 1,565
------ ------
$ 461 $ 457
====== ======
</TABLE>
(4) INTANGIBLE ASSETS
Intangible assets at December 31, 1995 and 1996 consist of broadcast
licenses which are being amortized over forty years and are presented net of
accumulated amortization of $5,585 and $6,128, respectively.
(5) INCOME TAXES
The Company's results of operations are included in the U.S. federal and
certain combined and separate state income tax returns of Viacom International
Inc.
The tax provisions and deferred tax liabilities presented have been
determined as if the Company were a stand-alone business filing separate tax
returns. Current tax liabilities are recorded through the equity account with
Viacom.
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................... $1,588 $2,058 $2,391
State and local....................... 229 296 345
Deferred federal........................ (13) 5 (8)
------ ------ ------
$1,804 $2,359 $2,728
====== ====== ======
</TABLE>
A reconciliation of the U.S. Federal statutory tax rate to the Company's
effective tax rate on earnings before income taxes is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. tax rate................. 35.0% 35.0% 35.0%
Amortization of intangibles............. 4.7 3.4 2.9
State and local taxes, net of federal
tax benefit........................... 3.6 3.4 3.4
Other, net.............................. 0.2 0.2 0.2
---- ---- ----
Effective tax rate............ 43.5% 42.0% 41.5%
==== ==== ====
</TABLE>
Deferred tax assets and liabilities are computed by applying the U.S.
federal income tax rate in effect to the gross amounts of temporary differences
and other tax attributes. These temporary differences are primarily the result
of fixed asset basis differences and bad debt expense. Deferred tax assets and
liabilities relating to state income taxes are not material.
C-7
<PAGE> 31
WLIT INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) DEBT AND INTEREST COST
Viacom has not allocated any portion of its debt or related interest cost
to the Company, and no portion of Viacom's debt is specifically related to the
operations of the Company. Accordingly, the Company's financial statements
include no charges for interest.
(7) RELATED PARTY TRANSACTIONS
Intercompany balances between the Company and Viacom resulting from normal
trade activity are reflected in Equity in the accompanying financial statements
(see note 8).
Viacom provides services for the Company in management, accounting and
financial reporting, human resources, information systems, legal, tax and other
corporate services. The allocation of these expenses, which is generally based
on revenue dollars, is reflected in the accompanying financial statements as
corporate general and administrative expense. Management believes that the
method of allocation of corporate overhead is reasonable.
Viacom has a noncontributory pension plan covering substantially all of its
employees, including the employees of the Company. Costs related to this plan
are allocated to the Company based on payroll dollars. The Company recognized
expense related to this plan in the amounts of $67, $46 and $126 for 1994, 1995
and 1996, respectively. The assets and the related benefit obligation of the
plan will not be transferred to the Company upon consummation of the Proposed
Transaction, therefore, such assets and obligations are not included in the
notes to the Company's financial statements.
Viacom utilizes a centralized cash management system. As a result, the
Company carries minimal cash. Disbursements are funded by the Parent upon demand
and cash receipts are transferred to the Parent daily.
The Company, from time to time, enters into transactions with companies
owned by or affiliated with Viacom. Generally, services received from such
related parties are charged to the Company at amounts which would be incurred in
transactions between unrelated entities.
(8) EQUITY
Equity represents Viacom's ownership interest in the recorded net assets of
the Company. All cash transactions and intercompany transactions flow through
the equity account. A summary of the activity is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period........................ $19,642 $19,738 $19,658
Net earnings.......................................... 2,352 3,253 3,849
Net intercompany activity............................. (2,256) (3,333) (3,722)
------- ------- -------
Balance at end of period.............................. $19,738 $19,658 $19,785
======= ======= =======
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
The Company has noncancelable operating leases, primarily for office space.
These leases generally contain renewal options for periods ranging from 1 to 10
years and require the Company to pay all executory costs such as maintenance and
insurance. Rental expense for operating leases (excluding those with lease terms
of one month or less that were not renewed) was approximately $319, $337 and
$327 during 1994, 1995 and 1996, respectively.
C-8
<PAGE> 32
WLIT INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31, 1996
are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997.............................................. $ 266
1998.............................................. 291
1999.............................................. 298
2000.............................................. 287
2001.............................................. 296
Thereafter........................................ 103
------
$1,541
======
</TABLE>
C-9
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Chancellor Broadcasting Company:
We have audited the accompanying balance sheets of WDRQ Inc. as of December
31, 1995 and 1996, and the related statements of earnings and cash flows for
each of the years in the three-year period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of WDRQ Inc. as of December 31,
1995 and 1996, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
March 14, 1997, except for note 10,
which is as of April 14, 1997
D-1
<PAGE> 34
WDRQ INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1995 1996 1997
------- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Accounts receivable, less allowance
for doubtful accounts of $82 in
1995, $72 in 1996 and $26 in
1997............................... $ 1,541 $ 809 $ 548
Prepaid expenses and other current
assets............................. 80 90 515
Deferred income taxes (note 5)........ 30 26 26
------- ------ ------
Total current assets.......... 1,651 925 1,089
Property and equipment, net (note 3).... 489 500 488
Intangible assets, net (note 4)......... 8,430 8,174 8,110
------- ------ ------
$10,570 $9,599 $9,687
======= ====== ======
LIABILITIES AND EQUITY
Current liabilities -- accounts payable
and accrued expenses.................. $ 766 $ 792 $ 743
Deferred income taxes (note 5).......... 98 80 80
Equity (note 8)......................... 9,706 8,727 8,864
Commitments and contingencies (note
9)....................................
------- ------ ------
$10,570 $9,599 $9,687
======= ====== ======
</TABLE>
See accompanying notes to financial statements.
D-2
<PAGE> 35
WDRQ INC.
STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------ ---------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gross revenues........................................ $7,461 $8,081 $6,743 $1,721 $1,016
Less agency commissions and national rep fees....... 1,227 1,273 1,055 261 112
------ ------ ------ ------ ------
Net revenues................................ 6,234 6,808 5,688 1,460 904
------ ------ ------ ------ ------
Operating expenses:
Station operating expenses excluding depreciation
and amortization................................. 4,362 4,412 4,530 1,015 886
Depreciation and amortization....................... 300 336 354 85 90
Corporate general and administrative................ 249 308 178 71 21
------ ------ ------ ------ ------
Operating expenses.......................... 4,911 5,056 5,062 1,171 997
------ ------ ------ ------ ------
Earnings (loss) before income taxes......... 1,323 1,752 626 289 (93)
Income tax expense (benefit) (note 5)................. 582 737 326 151 (9)
------ ------ ------ ------ ------
Net earnings (loss)......................... $ 741 $1,015 $ 300 $ 138 $ (84)
====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
D-3
<PAGE> 36
WDRQ INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1994 1995 1996
----- ------- -------
<S> <C> <C> <C>
Cash flows provided by operating
activities:
Net earnings.......................... $ 741 $ 1,015 $ 300
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation....................... 44 80 98
Amortization of intangibles........ 256 256 256
Deferred income tax (benefit)
expense.......................... (4) 3 (14)
Changes in certain assets and
liabilities:
Accounts receivable, net......... (122) (140) 732
Prepaid expenses and other
current assets................ 1 9 (10)
Accounts payable and accrued
expenses...................... (217) 73 26
----- ------- -------
Net cash provided by operating
activities.................. 699 1,296 1,388
----- ------- -------
Cash flows used by investing
activities -- capital expenditures.... (38) (138) (109)
----- ------- -------
Cash flows provided by (used in)
financing activities -- contribution
by (distribution to) parent........... (661) (1,158) (1,279)
----- ------- -------
Increase (decrease) in cash............. -- -- --
Cash at beginning of period............. -- -- --
----- ------- -------
Cash at end of period................... $ -- $ -- $ --
===== ======= =======
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
1996 1997
------- ------
(UNAUDITED)
<S> <C> <C>
Cash flows provided by operating
activities:
Net earnings.......................... $ 138 $ (84)
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation....................... 21 26
Amortization of intangibles........ 64 64
Deferred income tax (benefit)
expense.......................... -- --
Changes in certain assets and
liabilities:
Accounts receivable, net......... 492 261
Prepaid expenses and other
current assets................ (108) (425)
Accounts payable and accrued
expenses...................... (8) (49)
------ -----
Net cash provided by operating
activities.................. 599 (207)
------ -----
Cash flows used by investing
activities -- capital expenditures.... (35) (14)
------ -----
Cash flows provided by (used in)
financing activities -- contribution
by (distribution to) parent........... (564) 221
------ -----
Increase (decrease) in cash............. -- --
Cash at beginning of period............. -- --
------ -----
Cash at end of period................... $ -- $ --
====== =====
</TABLE>
See accompanying notes to financial statements.
D-4
<PAGE> 37
WDRQ INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) ORGANIZATION AND BASIS OF PRESENTATION
The accompanying financial statements include the accounts of WDRQ Inc.
(the "Company"). The Company owns and operates a commercial radio station in
Detroit, WDRQ-FM, and is wholly owned by Viacom International Inc. ("Viacom" or
"Parent"), a wholly owned subsidiary of Viacom, Inc.
On February 16, 1997, Viacom entered into a stock purchase agreement to
sell all the issued and outstanding shares of capital stock of WAXQ Inc. and
Riverside Broadcasting Co., Inc. in the New York City market, KYSR Inc. and KIBB
Inc. in the Los Angeles market, Viacom Broadcasting East Inc. and WMZQ Inc. in
the Washington, DC market, WLIT Inc. in the Chicago market and WDRQ Inc. in the
Detroit market (collectively the "Viacom Radio Properties") to Evergreen Media
Corporation of Los Angeles ("Evergreen") for $1.075 billion in cash ("Proposed
Transaction"). The Proposed Transaction is expected to close after the
expiration or termination of the applicable waiting periods under the HSR Act
and approval by the Federal Communications Commission ("FCC"). Contemporaneous
with this transaction, Evergreen entered into a joint purchase agreement with
Chancellor Broadcasting Company ("Chancellor") under which Chancellor agreed to
acquire the Chicago, Detroit and Los Angeles Viacom Radio Properties referred to
above for $480.0 million from Evergreen or from Viacom directly.
The accompanying combined financial statements reflect the carve-out
historical results of operations and financial position of WDRQ Inc. These
financial statements are not necessarily indicative of the results that would
have occurred if the Company had been a separate stand-alone entity during the
periods presented.
The financial statements do not include Viacom's corporate assets or
liabilities not specifically identifiable to the Company. Corporate overhead
allocations have been included in the accompanying statements of earnings in
corporate general and administrative expense and station operating expenses.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over the estimated useful
lives of the assets. Repair and maintenance costs are charged to expense when
incurred.
(b) Intangible Assets
Intangible assets consist primarily of broadcast licenses. The Company
amortizes such intangible assets using the straight-line method over 40 years.
The Company continually evaluates the propriety of the carrying amount of
intangible assets as well as the amortization period to determine whether
current events or circumstances warrant adjustments to the carrying value and/or
revised estimates of useful lives. This evaluation consists of the projection of
undiscounted operating income before depreciation, amortization, nonrecurring
charges and interest over the remaining amortization periods of the related
intangible assets. At this time, the Company believes that no significant
impairment of intangible assets has occurred and that no reduction of the
estimated useful lives is warranted.
(c) Barter Transactions
The Company trades commercial air time for goods and services used
principally for promotional, sales and other business activities. An asset and
liability are recorded at the fair market value of the goods or services to be
received. Barter revenue is recorded and the liability relieved when commercials
are broadcast and barter expense is recorded and the asset relieved when goods
or services are received or used.
D-5
<PAGE> 38
WDRQ INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(d) Revenue Recognition
Revenue is derived primarily from the sale of commercial announcements to
local and national advertisers. Revenue is recognized as commercials are
broadcast.
(e) Income Taxes
Income taxes are accounted for under the asset and liabilities method.
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount more likely than not to be realized. Income
tax expense is the total of tax payable for the period and the change during the
period in deferred tax assets and liabilities.
(f) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. The adoption of this Statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
(g) Fair Value
The carrying amount of accounts receivable and accounts payable
approximates fair value because of the short maturity of these instruments.
(h) Disclosure of Certain Significant Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In the opinion of management, credit risk with respect to trade receivables
is limited due to the large number of diversified customers in the Company's
customer base. The Company performs ongoing credit evaluations of its customers
and believes that adequate allowances for any uncollectible trade receivables
are maintained. No one customer accounted for more than 10% of net revenues in
1994, 1995, or 1996.
(i) Unaudited Interim Financial Information
In the opinion of management, the unaudited interim combined financial
statements as of and for the three months ended March 31, 1996 and 1997, reflect
all adjustments, consisting of only normal and recurring items, which are
necessary for a fair presentation of the results for the interim periods
presented. The results for the interim periods ended March 31, 1996 and 1997 are
not necessarily indicative of results to be expected for any other interim
period or for the full year.
D-6
<PAGE> 39
WDRQ INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1995 and
1996:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE 1995 1996
----------- ------ ------
<S> <C> <C> <C>
Broadcast facilities.................... 8-20 years $ 754 $ 787
Office equipment and other.............. 5-8 years 333 496
Construction in progress................ 110 23
------ ------
1,197 1,306
Accumulated depreciation................ 708 806
------ ------
$ 489 $ 500
====== ======
</TABLE>
(4) INTANGIBLE ASSETS
Intangible assets at December 31, 1995 and 1996 consist of broadcast
licenses which are being amortized over forty years and are presented net of
accumulated amortization of $1,814 and $2,070, respectively.
(5) INCOME TAXES
The Company's results of operations are included in the U.S. federal and
certain combined and separate state income tax returns of Viacom International
Inc.
The tax provisions and deferred tax liabilities presented have been
determined as if the Company were a stand-alone business filing separate tax
returns. Current tax liabilities are recorded through the equity account with
Viacom.
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal................................. $549 $689 $319
State and local......................... 37 45 21
Deferred.................................. (4) 3 (14)
---- ---- ----
$582 $737 $326
==== ==== ====
</TABLE>
A reconciliation of the U.S. Federal statutory tax rate to the Company's
effective tax rate on earnings before income taxes is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. tax rate..................................... 35.0% 35.0% 35.0%
Amortization of intangibles................................. 6.8 5.1 14.3
State and local taxes, net of federal tax benefit........... 1.8 1.7 2.1
Other, net.................................................. 0.4 0.3 0.7
---- ---- ----
Effective tax rate........................................ 44.0% 42.1% 52.1%
==== ==== ====
</TABLE>
Deferred tax assets and liabilities are computed by applying the U.S.
federal income tax rate in effect to the gross amounts of temporary differences
and other tax attributes. These temporary differences are primarily the result
of fixed asset basis differences and bad debt expense. Deferred tax assets and
liabilities relating to state income taxes are not material.
D-7
<PAGE> 40
WDRQ INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) DEBT AND INTEREST COST
Viacom has not allocated any portion of its debt or related interest cost
to the Company, and no portion of Viacom's debt is specifically related to the
operations of the Company. Accordingly, the Company's financial statements
include no charges for interest.
(7) RELATED PARTY TRANSACTIONS
Intercompany balances between the Company and Viacom resulting from normal
trade activity are reflected in equity in the accompanying financial statements
(see note 8).
Viacom provides services for the Company in management, accounting and
financial reporting, human resources, information systems, legal, taxes and
other corporate services. The allocation of these expenses, which is generally
based on revenue dollars, is reflected in the accompanying financial statements
as corporate general and administrative expense. Management believes that the
method of allocation of corporate overhead is reasonable.
Viacom has a noncontributory pension plan covering substantially all of its
employees, including the employees of the Company. Costs related to these plans
are allocated to the Company based on payroll dollars and are included in
station operating expenses. The Company recognized expense related to these
costs in the amounts of $31, $33 and $82 for 1994, 1995 and 1996, respectively.
The assets and the related benefit obligation of the plans will not be
transferred to the Company upon consummation of the Proposed Transaction,
therefore, such assets and obligations are not included in the notes to the
Company's financial statements.
Viacom utilizes a centralized cash management system. As a result, the
Company carries minimal cash. Disbursements are funded by the Parent upon demand
and cash receipts are transferred to the Parent daily.
The Company, from time to time, enters into transactions with companies
owned by or affiliated with Viacom. Generally, services received from such
related parties are charged to the Company at amounts which would be incurred in
transactions between unrelated entities.
(8) EQUITY
Equity represents Viacom's ownership interest in the recorded net assets of
the Company. All cash transactions and intercompany transactions flow through
the Equity account. A summary of the activity is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Balance at beginning of period.......... $9,769 $ 9,849 $ 9,706
Net earnings............................ 741 1,015 300
Net intercompany activity............... (661) (1,158) (1,279)
------ ------- -------
Balance at end of period................ $9,849 $ 9,706 $ 8,727
====== ======= =======
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
The Company has noncancelable operating leases, primarily for office space.
These leases generally contain renewal options for periods ranging from one to
ten years and require the Company to pay all executory costs such as maintenance
and insurance. Rental expense for operating leases (excluding those with lease
terms of one month or less that were not renewed) was approximately $335, $338
and $347 during 1994, 1995 and 1996, respectively.
D-8
<PAGE> 41
WDRQ INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31, 1996
are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997.................................... $ 336
1998.................................... 346
1999.................................... 355
2000.................................... 364
2001.................................... 323
Thereafter.............................. 183
------
$1,907
======
</TABLE>
The Company is involved with certain claims and lawsuits which are
generally incidental to its business. Management believes that any ultimate
liability resulting from those actions or claims will not have a material
adverse effect on the Company's results of operations, financial position or
cash flows.
(10) SUBSEQUENT EVENT
On April 14, 1997, Evergreen Media Corporation and Chancellor Broadcasting
Company entered into an agreement with ABC Radio ("ABC"), a division of The Walt
Disney Company, whereby ABC will purchase from Evergreen and Chancellor two
radio stations, WDRQ-FM and WJZW-FM for a total of $105 million.
D-9
<PAGE> 42
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CHANCELLOR BROADCASTING COMPANY
Date: June 3, 1997 By: /s/ JACQUES D. KERREST
------------------------------------
Jacques D. Kerrest
Senior Vice President and
Chief Financial Officer
<PAGE> 43
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
23.1 -- Consent of Arthur Andersen LLP, independent auditors.
23.2 -- Consent of KPMG Peat Marwick LLP, independent auditors.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Chancellor Broadcasting Company:
As independent public accountants, we hereby consent to the use of our report
dated March 31, 1997, in this Form 8-K of Chancellor Broadcasting Company dated
June 4, 1997 and to the incorporation by reference of our report in the
Registration Statement on Form S-8 (No. 333-26123) of Chancellor Broadcasting
Company. It should be noted that we have not audited any financial statements of
the Colfax Communications, Inc. Radio Group subsequent to December 31, 1996 or
performed any audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
Washington, D.C.
June 3, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Chancellor Broadcasting Company:
We consent to the incorporation by reference in the Registration Statement
on Form S-8 (No. 333-26123) of Chancellor Broadcasting Company of our reports on
the following financial statements: 1) the balance sheets of WDRQ Inc. as of
December 31, 1995 and 1996 and the related statements of earnings and cash flows
for each of the years in the three-year period ended December 31, 1996; 2) the
balance sheets of WLIT Inc. as of December 31, 1995 and 1996 and the related
statements of earnings and cash flows for each of the years in the three-year
period ended December 31, 1996; 3) the combined balance sheets of KYSR Inc. and
KIBB Inc. as of December 31, 1995 and 1996 and the related combined statements
of operations and cash flows for each of the years in the three-year period
ended December 31, 1996, which reports appear in the Form 8-K of Chancellor
Broadcasting Company dated June 4, 1997.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
June 2, 1997
