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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-36449
PROSPECTUS
DECEMBER 18, 1997
4,000,000 SHARES
BIG CITY RADIO, INC.
CLASS A COMMON STOCK
All of the shares of Class A Common Stock, par value $.01 per share (the
"Class A Common Stock"), of Big City Radio, Inc., a Delaware corporation ("Big
City Radio" or the "Company"), are being offered for sale by the Company (the
"Offering"). The Company's authorized capital stock includes Class A Common
Stock and Class B Common Stock, par value $.01 per share (the "Class B Common
Stock" and, together with the Class A Common Stock, the "Common Stock"). The
rights of holders of Class A Common Stock and Class B Common Stock are
identical, except that each share of Class A Common Stock entitles its holder to
one vote per share on all matters voted upon by the Company's stockholders,
whereas each share of Class B Common Stock entitles its holder to ten votes per
share on all matters voted upon by the Company's stockholders. In addition,
holders of Class B Common Stock vote as a separate class to elect up to 75% of
the members of the Company's Board of Directors. Each share of Class B Common
Stock is convertible at any time into one share of Class A Common Stock. In
addition, at such time as any share of Class B Common Stock ceases to be held by
any of the Principal Stockholders (as defined herein), their affiliates or
relatives, such share of Class B Common Stock shall convert into a share of
Class A Common Stock. After consummation of the Offering, the Principal
Stockholders will own all of the shares of Class B Common Stock, having
approximately 94% of the outstanding voting power of the Common Stock.
Prior to this Offering, there has been no public market for the Class A
Common Stock. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price.
The shares of Class A Common Stock offered hereby have been approved for
listing on the American Stock Exchange ("AMEX") under the symbol "YFM."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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- -----------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................. $7.00 $0.49 $6.51
Total(3).............................. $28,000,000 $1,960,000 $26,040,000
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS (AS DEFINED HEREIN)
AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT
OF 1933, AS AMENDED.
(2) BEFORE DEDUCTING ESTIMATED OFFERING EXPENSES PAYABLE BY THE COMPANY,
ESTIMATED AT $500,000.
(3) THE COMPANY HAS GRANTED TO THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP
TO AN AGGREGATE OF 600,000 ADDITIONAL SHARES OF CLASS A COMMON STOCK AT THE
PRICE TO THE PUBLIC SHOWN ABOVE, LESS UNDERWRITING DISCOUNTS AND
COMMISSIONS, SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF SUCH OPTION IS
EXERCISED IN FULL, THE TOTAL PRICE TO THE PUBLIC, UNDERWRITING DISCOUNTS AND
COMMISSIONS AND PROCEEDS TO THE COMPANY WILL BE $32,200,000, $2,254,000 AND
$29,946,000, RESPECTIVELY. SEE "UNDERWRITING."
The shares of Class A Common Stock are being offered hereby by the several
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters and subject to various prior conditions, including their
right to reject orders in whole or in part. It is expected that delivery of the
shares of Class A Common Stock offered hereby will be made in New York, New
York, or through the facilities of The Depository Trust Company, on or about
December 24, 1997.
DONALDSON, LUFKIN & JENRETTE FURMAN SELZ
SECURITIES CORPORATION
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Map of the Company's Los Angeles radio stations' coverage area following the FCC
Power Increase (as defined herein).
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE
OFFERING AND MAY BID FOR AND PURCHASE SHARES OF CLASS A COMMON STOCK IN THE OPEN
MARKET TO COVER A SYNDICATE SHORT POSITION IN THE CLASS A COMMON STOCK OR FOR
THE PURPOSE OF MAINTAINING OR STABILIZING THE PRICE OF THE CLASS A COMMON STOCK.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY AND SHOULD BE READ IN
CONJUNCTION WITH THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, AND OTHER DATA APPEARING ELSEWHERE IN THIS
PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION INCLUDED IN THIS
PROSPECTUS (I) ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE
EXERCISED, (II) HAS BEEN ADJUSTED TO GIVE EFFECT TO THE EQUITY CONTRIBUTION AND
THE RECLASSIFICATION (EACH AS DEFINED HEREIN) AND (III) HAS BEEN ADJUSTED TO
GIVE EFFECT TO THE CHANGE BY THE COMPANY OF ITS FISCAL YEAR-END FROM SEPTEMBER
30 TO DECEMBER 31 EFFECTIVE AS OF THE CONSUMMATION OF THE OFFERING. FOR A
DEFINITION AND EXPLANATION OF INDUSTRY TERMS AND THE SOURCE OF MARKET DATA CITED
HEREIN, SEE "MARKET DATA AND CERTAIN DEFINITIONS" ON PAGE 72.
THE COMPANY
Big City Radio, Inc. (the "Company") was formed in 1994 to acquire radio
broadcast properties in or adjacent to major metropolitan markets and utilize
innovative engineering techniques and low-cost, ratings-driven operating
strategies to develop these properties into successful metropolitan radio
stations. In order to accomplish this objective, the Company applies a variety
of innovative broadcast engineering techniques to the radio broadcast properties
it acquires, including Synchronized Total Market Coverage ("STMC"). STMC
consists of acquiring two or more stations which broadcast on the same frequency
and simulcasting their signals to achieve broad coverage of a targeted
metropolitan market. In addition to STMC, the Company intends to employ other
broadcast engineering techniques to enter major metropolitan markets at
attractive valuations. These engineering techniques include acquiring suburban
radio stations and moving the station's broadcast antenna closer to the
metropolitan market ("move-ins") and acquiring high-power stations adjacent to
major metropolitan markets and focusing such stations' broadcast signal into the
metropolitan area.
The Company's acquisition/engineering strategies enable it to provide near
seamless coverage of major metropolitan markets at a significantly lower
acquisition cost than typically required to acquire a major market Class B
station. The Company currently owns and operates STMC station combinations in
New York, Los Angeles and Chicago, the three largest radio markets in the United
States in terms of aggregate advertising revenues.
The Company is controlled by Stuart Subotnick, a general partner of
Metromedia Company who will own, subsequent to the Offering, approximately 62%
of the Common Stock, representing 94% of the voting power of the Common Stock
(without giving effect to the exercise of any options to acquire shares of Class
A Common Stock and without giving effect to the Standby Commitment (as defined
below)).
The Company's first targeted market was Los Angeles where the Company
operates a three station combination, which broadcasts as Y-107 ("Y-107 LA"),
featuring a modern rock format on the 107.1-FM frequency. Y-107 LA currently
covers approximately 75% of the Arbitron diaries in the Los Angeles Arbitron
Metro Survey Area ("MSA") and will increase its coverage to over 90% as a result
of an increase in its transmission power pursuant to the FCC Power Increase (as
defined herein), which the Company plans to implement in the fourth quarter of
1997. The Company has demonstrated the success of its strategy in Los Angeles
where Y-107 LA has consistently ranked as one of the top 5 most listened-to
modern rock radio stations in America over the past year, and has achieved a
significant share of 1.3% in the 12+ category as of the summer 1997 Arbitron
book. The Company has successfully translated its strong listenership into
significant revenues as exemplified by the increase in its power ratio (defined
as a station's share of the aggregate radio market revenues divided by its
Arbitron listenership share) from 0.5 in the six month period ended December
1996 to 1.4 in the six month period ended June 1997. The Company's three Los
Angeles stations (the "Los Angeles Stations") were acquired in May 1996 for a
combined purchase price significantly lower than the reported purchase prices of
Class B stations in the Los Angeles MSA, as evidenced by transactions
consummated since the deregulation initiated by the passage of the Telecom Act
in 1996 (as defined herein). See "--Business Strategy" below.
The Company recently completed the acquisitions of three stations in the New
York MSA, which collectively broadcast as Y-107 ("Y-107 NY") on the 107.1-FM
frequency. Y-107 NY commenced
3
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operations in January 1997 as the only country music station covering the New
York City market. Y-107 NY earned a 1.1% share in the 12+category as of the
summer 1997 Arbitron book. Y-107 NY currently covers approximately 75% of the
Arbitron diaries in the New York MSA and will increase its coverage to
approximately 90% as a result of an increase in its transmission power pursuant
to the FCC Power Increase, which the Company plans to implement by the end of
the first quarter of 1998 pending receipt of approval from the Federal
Communications Commission (the "FCC"). See "Risk Factors--Regulatory Matters and
Dependence on Licenses." The Company's three New York stations (the "New York
Stations") were acquired by the Company for a combined purchase price
significantly lower than the reported purchase prices of Class B stations in the
New York MSA, as evidenced by transactions consummated since the passage of the
Telecom Act. See "--Business Strategy" below.
In August 1997, the Company acquired two radio stations in the Chicago MSA
(the "Chicago Stations"). The acquisition of the Chicago Stations secures the
Company's presence in the top three radio markets in the United States, as
measured in terms of aggregate advertising revenues. The Chicago Stations will
broadcast on the 103.1-FM frequency. The Chicago Stations were acquired for a
combined purchase price which is significantly less than the reported purchase
prices of Class B stations in the Chicago MSA, as evidenced by transactions
consummated since the passage of the Telecom Act. See "-- Business Strategy"
below. The Chicago Stations currently cover approximately 70% of the Arbitron
diaries in the Chicago MSA and will increase their coverage to approximately 90%
as a result of the planned increase in their transmission power pursuant to the
FCC Power Increase and other technical improvements, which the Company plans to
implement in the second quarter of 1998 pending receipt of FCC approval. See
"Risk Factors--Regulatory Matters and Dependence on Licenses." The Company has
selected an adult contemporary format for the Chicago Stations and expects to
formally begin broadcasting as a single station during the first quarter of
1998.
BUSINESS STRATEGY
The Company's objective is to achieve a significant presence in selected top
20 radio markets by acquiring radio broadcast properties in or adjacent to major
metropolitan markets and utilizing innovative engineering techniques and
low-cost, ratings-driven operating strategies to develop these properties into
successful metropolitan radio stations. The following are the key elements of
the Company's business strategy:
ENTER TOP-20 MARKETS WITH LOW CAPITAL INVESTMENT
The Company intends to utilize STMC and other innovative acquisition and
engineering strategies to gain low-cost entry into major metropolitan radio
markets and achieve market coverage, which the Company believes is equivalent to
the market coverage of Class B metropolitan stations.
- LOW ACQUISITION COST. Industry research indicates that the prices of Class
B radio stations in major MSAs have increased significantly since the
passage of the Telecom Act. The Company has created radio stations with an
Arbitron market coverage that the Company believes is equivalent to the
Arbitron market coverage of Class B radio stations in the three largest
radio markets, for a substantially lower capital investment. For example,
in the Los Angeles MSA, prices have ranged from $113.0 million to $312.0
million while the Company has created for $26.8 million a Los Angeles
station which, following the FCC Power Increase, will have an Arbitron
market coverage that the Company believes is equivalent to the Arbitron
market coverage of Class B radio stations in the Los Angeles MSA.
Similarly, in the New York MSA where prices have ranged from $83.5 million
to $286.0 million, the Company has created for $19.5 million a New York
station which, following the FCC Power Increase, will have an Arbitron
market coverage that the Company believes is equivalent to the Arbitron
market coverage of Class B radio stations in the New York MSA. In the
Chicago MSA, prices have ranged from $22.0 million to $225.0 million while
the Company has created for $10.6 million a Chicago station which,
following the FCC Power Increase and other technical improvements, will
have an Arbitron market coverage that the Company
4
<PAGE>
believes is equivalent to the Arbitron market coverage of Class B radio
stations in the Chicago MSA. Based on the range of purchase prices in
recently consummated transactions as specified above, achieving entry into
the top three radio markets would have required an aggregate investment of
between $218.5 million and $823.0 million, while the Company has entered
these three markets with an aggregate investment of approximately $56.9
million. All of the foregoing information regarding price ranges of Class
B stations has been derived from published industry reports of sales of
Class B radio stations in the MSAs where the Company operates. The Company
continues to explore similar opportunities in other attractive top 20
markets and believes that there is potential to achieve low-cost entry by
using methods such as STMC, "move-ins" and acquisitions of high power
stations adjacent to major metropolitan markets.
- EFFECTIVE COVERAGE OF ARBITRON RATED METROPOLITAN MARKETS. The Company's
objective is to achieve coverage in excess of 90% of the Arbitron diaries
in its targeted MSAs, which the Company believes is equivalent to the
coverage typically provided by Class B radio stations in major
metropolitan markets. Class B radio stations are defined by the FCC as
those facilities whose signal is predicted to cover a regional urban area.
Accordingly, the Company bases its acquisition strategy primarily on the
location of Arbitron diaries. Furthermore, to enhance the Arbitron diary
coverage of a station, once acquired, the Company's experienced staff
tailors an engineering solution to optimize the Arbitron diary coverage of
each station. Equivalent Arbitron diary coverage is determined by
comparing the coverage of the Company's targeted STMC stations and typical
Class B radio stations located in the same MSAs. This comparison considers
the actual received signal strength of the selected station(s) and the
actual number of Arbitron diaries covered that are predicted to receive a
listenable signal. The coverage of any one station compared to another
station within any MSA will vary due to locations of the transmitter,
generally most Class B radio stations within a targeted MSA will cover
between 90% and 100% of the Arbitron diaries. See "Risk Factors--Risks
Associated with the Company's Strategy."
MAXIMIZE STATION PERFORMANCE
The Company seeks to maximize the operating performance of its stations by
employing a ratings-driven, cash flow-focused operating strategy.
- MAXIMIZE STATION REVENUE. Based on an extensive market research study, the
Company carefully selects the format of the station to maximize
penetration of audience share and advertising revenues in that market. For
example, the Company believes that its carefully selected modern rock
format in Los Angeles and unique country music format in New York City
provide it with a competitive advantage and enhanced listenership in the
respective markets. The Company believes that its strong listenership has
translated into significant revenue as exemplified by the increase in its
power ratio from 0.5 in the six month period ended December 1996 to 1.4 in
the six month period ended June 1997 in the Los Angeles market.
- MAXIMIZE BROADCAST CASH FLOW. Another key aspect of the Company's
operating strategy will be to maximize its broadcast cash flow by
controlling its operating costs. The Company has not historically, and
does not intend at present, to expend the significant costs associated
with hiring highly compensated on-air personalities. The Company maintains
operating costs at a relatively low level and focuses on core programming
content to achieve high ratings.
GENERAL
HISTORY AND DEVELOPMENT
The Company was formed by its chairman, Stuart Subotnick and its president
and chief executive officer, Michael Kakoyiannis. Mr. Subotnick contributes his
financial, strategic and operational expertise gained through the development
and operation of the numerous media and communications businesses that he and
longtime partner John Kluge have controlled through Metromedia Company and its
predecessor. Michael Kakoyiannis, the Company's president and chief executive
officer, has been involved in the
5
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radio broadcasting industry for over 25 years in various functions including
sales, marketing and general management. In addition to Mr. Subotnick and Mr.
Kakoyiannis, the Company has numerous experienced radio executives involved in
all aspects of its operations, including engineering, sales, marketing,
programming and finance. The Company believes that its quality management team
will be instrumental in successfully implementing its business strategy.
EQUITY CONTRIBUTION, RECLASSIFICATION AND OTHER INFORMATION
Immediately prior to the consummation of the Offering, Stuart and Anita
Subotnick (the "Principal Stockholders") will either contribute the entire
amount of certain outstanding stockholders' loans made to the Company to the
Company's capital or contribute cash in an amount sufficient to repay a portion
of the outstanding stockholders' loans made to the Company and will contribute
the remaining balance of such loans to the Company's capital (all such
outstanding stockholders' loans aggregated $13.2 million at September 30, 1997)
(the "Equity Contribution"). Simultaneously with the Equity Contribution, each
share of the Company's Common Stock, par value $.01 per share (the "Old Common
Stock") outstanding or to be issued upon exercise of options granted under the
1997 Incentive Stock Plan (as defined herein), will be reclassified into 7,610
shares of Class A Common Stock and the Principal Stockholders will exchange each
share of Class A Common Stock held by them for one share of Class B Common Stock
(the foregoing reclassification and exchange is hereinafter referred to as the
"Reclassification"). On December 18, 1997, Mr. Subotnick entered into a Standby
Commitment Agreement (the "Standby Commitment") with the Company pursuant to
which Mr. Subotnick agreed that if the net proceeds from the Offering, including
proceeds from the exercise, if any, of the Underwriters' over-allotment option,
do not aggregate at least $29.0 million, Mr. Subotnick will purchase such number
of shares of Class A Common Stock at a price of $7.00 per share as may be
necessary to increase the aggregate net proceeds of the Standby Commitment and
the Offering to $29.0 million (494,286 shares of Class A Common Stock if the
Underwriters' over-allotment option is not exercised). The net proceeds of the
Standby Commitment will be used to repay amounts outstanding under the Existing
Credit Facility. In addition, the Company revoked its S-Corporation status and
converted to a C-Corporation, effective as of September 30, 1997, and will
change its fiscal year-end from September 30 to December 31, effective as of the
consummation of the Offering. The principal executive offices of the Company are
located at 11 Skyline Drive, Hawthorne, New York, New York 10532 and its
telephone number is (914) 592-1071.
RISK FACTORS
See "Risk Factors" beginning on page 9 for a discussion of certain factors
that should be considered by potential investors.
6
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THE OFFERING
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Common Stock offered......................... 4,000,000 shares of Class A Common Stock
Common Stock to be outstanding after the
Offering(1)
Class A Common Stock..................... 5,619,348 shares
Class B Common Stock..................... 8,250,458 shares
Total.................................. 13,869,806 shares
Use of proceeds.............................. The net proceeds of the Offering and the
Standby Commitment, estimated to be
approximately $29.0 million (approximately
$29.4 million if the Underwriters'
over-allotment option is exercised in full
and as a result the Standby Commitment is
eliminated), will be used by the Company to
repay existing indebtedness under the
Existing Credit Facility (as defined herein).
Voting rights................................ The holders of Class A Common Stock generally
have rights identical to holders of Class B
Common Stock, except that holders of Class A
Common Stock are entitled to one vote per
share on all matters voted upon by the
Company's stockholders and holders of Class B
Common Stock are entitled to ten votes per
share on all matters voted upon by the
Company's stockholders and holders of Class B
Common Stock vote as a separate class to
elect up to 75% of the members of the
Company's Board of Directors. Holders of
Class A Common Stock and Class B Common Stock
will vote as a single class on most other
matters. Each share of Class B Common Stock
is convertible at any time into one share of
Class A Common Stock. In addition, at such
time as any share of Class B Common Stock
ceases to be held by any of the Principal
Stockholders, their affiliates or relatives,
such share of Class B Common Stock shall
convert into a share of Class A Common Stock.
AMEX symbol.................................. YFM
</TABLE>
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(1) Based on the number of shares outstanding, as of December 18, 1997, after
giving effect to the Reclassification and the exercise of the Standby
Commitment. Does not include (i) shares of Class A Common Stock that may be
issued upon exercise of the entire Underwriters' over-allotment option, (ii)
an aggregate of 150,000 shares of Class A Common Stock issuable upon
exercise of outstanding options granted to certain officers and directors of
the Company under the 1997 Incentive Stock Plan at an exercise price of
$6.00 per share, (iii) an aggregate of 402,500 shares of Class A Common
Stock granted to certain officers and directors of the Company under the
1997 Incentive Stock Plan, to be effective only immediately prior to the
consummation of the Offering, at an exercise price per share equal to the
initial public offering price per share in the Offering, and (iv) options to
acquire an aggregate of 147,500 shares of Class A Common Stock available for
grant under the 1997 Incentive Stock Plan. See "Management--1997 Incentive
Stock Plan" and "Principal Stockholders."
7
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SUMMARY FINANCIAL AND OPERATING DATA
The following table presents selected financial and operating data of the
Company which is derived from the audited and unaudited financial statements of
the Company (i) as reported and (ii) on a pro forma basis to reflect (a) the
acquisitions of the assets of WZVU-FM and WVVX-FM, Inc.; (b) the sale of the Q
stations (as defined herein) and KWIZ-FM; (c) the consummation of the Offering
at a price of $7.00 per share and the application of the net proceeds therefrom;
(d) the conversion of the Company from a S-Corporation to a C-Corporation; and
(e) the Equity Contribution and Reclassification. See "Pro Forma Financial
Statements." The data is qualified by reference to and should be read in
conjunction with the financial statements of the Company and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. The historical
financial results of the Company are not comparable from period to period
because of the acquisition and sale of various broadcasting properties by the
Company during the periods covered.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------- NINE MONTHS ENDED SEPTEMBER 30,
PRO FORMA --------------------------------------
AS PRO FORMA
ADJUSTED AS ADJUSTED
1995 1996(2)(4) 1996(7) 1996(4) 1997(3) 1997(7)
----------- ------------ ---------- ----------- ------------ -----------
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(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net revenues.................................. $ 5,225 $ 7,944 $ 8,852 $ 5,870 $ 7,538 $ 8,198
Station operating expenses.................... 7,185 12,253 9,797 9,726 9,834 9,806
Corporate general and administrative
expenses.................................... 425 1,201 3,095 804 1,104 1,493
Employment incentive(5)....................... -- -- -- -- 3,713 3,713
Depreciation and amortization................. 798 1,388 1,629 867 1,316 1,635
----------- ------------ ---------- ----------- ------------ -----------
Operating (loss).............................. (3,183) (6,898) (5,642) (5,527) (8,429) (8,298)
----------- ------------ ---------- ----------- ------------ -----------
Net income (loss)............................. $ (4,005) $ (3,098) $ (9,671) $ (798) $ (11,435) $ (13,190)
----------- ------------ ---------- ----------- ------------ -----------
----------- ------------ ---------- ----------- ------------ -----------
Pro forma as reported and pro forma as
adjusted net loss per common share (6)...... (.33) (.70) (1.22) (.95)
Pro forma as reported and pro forma as
adjusted weighted average shares
outstanding(6).............................. 9,397 13,891 9,397 13,891
OTHER OPERATING DATA:
Broadcast cash flow(1)........................ $ (1,960) $ (4,309) $ (3,856) $ (2,296)
Operating cash flow........................... (2,942) (7,448) (5,793) (6,662)
Investing cash flow........................... (3,883) (24,235) (29,867) (22,194)
Financing cash flow........................... 7,779 30,851 34,779 28,938
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------
ACTUAL PRO FORMA
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BALANCE SHEET DATA:
Working capital................................................................................... $ 395 $ 395
Net intangible assets............................................................................. 54,439 54,439
Total assets...................................................................................... 60,996 60,996
Notes payable..................................................................................... 13,163 --
Long-term debt.................................................................................... 56,700 27,700
Stockholders' equity (deficit).................................................................... (11,522) 27,291
</TABLE>
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(1) Broadcast cash flow is defined as operating loss plus depreciation and
amortization plus corporate general and administrative expenses, including
employment incentive. Although not calculated in accordance with generally
accepted accounting principles, broadcast cash flow is widely used in the
broadcast industry as a measure of a broadcast company's operating
performance. Nevertheless, this measure would not be considered in isolation
or as a substitute for operating loss, cash flows from operating activities
or any other measure for determining the Company's operating performance or
liquidity which is calculated in accordance with generally accepted
accounting principles.
(2) The Company acquired substantially all of the assets of the Los Angeles
Stations and KWIZ-FM on May 30, 1996 and commenced operations of these
stations under a LMA on March 26, 1996. The financial statements include the
operations of these stations from commencement of the LMA period. KWIZ-FM
was sold on December 20, 1996. No gain or loss was recognized on the sale of
KWIZ-FM.
(3) The Company acquired substantially all of the assets of WWHB-FM on April 1,
1997 and WZVU-FM on June 5, 1997 and commenced operations of these stations
under a LMA during December 1996. WWHB-FM and WZVU-FM together with WRGX-FM
broadcast as "Y-107 NY". The financial statements include the operations of
Y107 NY since December 1996.
(4) The statement of operations data for the year ended December 31, 1996 and
for the nine months ended September 30, 1996 include (i) the operations of
WSTC-AM and WKHL-FM (referred to herein as the Q stations) to May 30, 1996,
the date on which they were sold; and (ii) a gain on sale of stations of
$6,608 in the year ended December 31, 1996 which represents the gain on sale
of the Q stations.
(5) As of July 1, 1997, the Principal Stockholders transferred 68 shares of Old
Common Stock to the Company's Chief Executive Officer as an employment
incentive. The statement of operations for the nine months ended September
30, 1997 reflects an accounting charge of $3,713 relating to this award
which has been reflected as a capital contribution in Stockholders' Equity.
The charge represents the approximate fair market value of the stock
transferred, for accounting purposes only, and was estimated at 80% of the
assumed initial public offering price of $9.00 per share.
(6) Pro forma as reported weighted average shares outstanding equals the sum of
9,375,520 shares outstanding immediately prior to the Offering and the
Standby Commitment (and after the Equity Contribution and the
Reclassification), plus 21,400 shares relating to 150,000 stock options
granted on December 1, 1997 with an exercise price of $6.00 per share
computed using the treasury stock approach (at an initial public offering
price of $7.00 per share) and pro forma, as adjusted further, includes the
4,494,286 shares deemed to be sold by the Company in the Offering and the
Standby Commitment.
(7) Reference is made to pro forma financial statements on pages 19 through 24.
8
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION AND FINANCIAL DATA SET FORTH ELSEWHERE
IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE SHARES OF CLASS A
COMMON STOCK OFFERED HEREBY.
LIMITED HISTORY OF OPERATIONS; NET LOSSES AND NEGATIVE CASH FLOW FROM
OPERATIONS; EXPECTED FUTURE NET LOSSES AND NEGATIVE CASH FLOW FROM OPERATIONS
The Company was formed in August 1994 and has a limited operating history.
Accordingly, prospective investors have limited operating history and limited
historical financial information upon which to base an evaluation of the
Company's performance and an investment in shares of Class A Common Stock. The
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development.
Since inception, the Company has not generated significant revenue, has
incurred substantial net losses and has never generated positive cash flow from
operations. The Company had net losses of $3.1 million and $4.0 million for the
years ended December 31, 1996 and 1995, respectively, and a net loss of $11.4
million for the nine months ended September 30, 1997. In addition, as of
September 30, 1997, the Company had a deficiency of stockholders' equity of
approximately $11.5 million. The Company believes that losses will continue
while the Company pursues its strategy of acquiring and developing radio
stations. The Company will also incur losses during the initial reformatting and
assimilation process with respect to the radio stations that it acquires. There
can be no assurance that an adequate revenue base will be established or that
the Company's radio stations will become profitable or generate positive cash
flow. Continued losses and negative cash flow may prevent the Company from
pursuing its strategies for growth and may have a material adverse effect on the
Company.
RISKS ASSOCIATED WITH GROWTH THROUGH FUTURE ACQUISITIONS; FUTURE CAPITAL
REQUIREMENTS;
ASSIMILATION OF ACQUIRED RADIO STATIONS
One of the Company's principal growth strategies is to acquire additional
radio stations. Any future acquisitions, investments, strategic alliances or
related efforts will be accompanied by various associated risks, such as the
difficulty of identifying appropriate acquisition candidates, the competition
among buyers of radio stations, the difficulty of assimilating the operations of
the respective entities, the potential disruption of the Company's ongoing
business, the inability of management to capitalize on the opportunities
presented by acquisitions, investments, strategic alliances or related efforts,
the failure to successfully incorporate licensed or acquired technology and
rights into the Company's services, the inability to maintain uniform standards,
controls, procedures and policies and the impairment of relationships with
employees and customers as a result of changes in management. There can be no
assurance that the Company will be successful in overcoming these risks or any
other problems encountered with such acquisitions, investments, strategic
alliances or related efforts. See "Business--Business Strategy" and
"Business--Litigation." In addition, entities acquired by the Company may have
liabilities, including contingent liabilities, for which the Company may become
responsible.
Additional debt or equity financing may be required in order to complete
future acquisitions. The Company's ability to arrange financing and the cost of
such financing are dependent upon numerous factors, including general economic
and capital market conditions, conditions in the radio broadcasting industry,
regulatory developments, credit availability from banks or other lenders,
investor confidence in the industry and the Company, the success of the
Company's radio stations, and provisions of tax and securities laws that are
conducive to raising capital. There can be no assurance that financing will be
available to the Company on acceptable terms in the future or that, if the form
of any such future financing is through the direct or indirect issuance and sale
of equity securities, investors in the Offering will not be
9
<PAGE>
diluted. If the Company cannot arrange such financing, it may be forced to
curtail its acquisition of additional radio stations which may have an adverse
effect on its long-term business strategy.
The number of radio stations operated by the Company has increased with the
recent acquisition of the Chicago Stations. See "Business--Recently Completed
Radio Station Acquisitions." Management will be required to devote significant
time to assimilate these radio stations into the Company's business structure.
There can be no assurance that this assimilation can be accomplished in the
manner which management has planned or that the Company will be able to operate
these radio stations profitably. See "--Limited History of Operations; Net
Losses and Negative Cash Flow from Operations; Expected Future Net Losses and
Negative Cash Flow from Operations."
RISKS ASSOCIATED WITH THE COMPANY'S STRATEGY
The Company's business strategy is, in part, based upon the implementation
of engineering solutions such as STMC to create value. There are no significant
barriers preventing other persons from implementing strategies similar to STMC
and otherwise creating value by applying engineering solutions to radio
stations. Also, there can be no assurance that the broadcast engineering
techniques used by the Company enable it to provide clear and listenable signal
in the entire Arbitron diary coverage areas covered by the broadcast signals of
its radio stations. In addition, while the Company's purchase price for the Los
Angeles Stations, New York Stations and Chicago Stations is significantly lower
than the reported purchase prices of Class B stations in those markets since the
passage of the Telecom Act, the Company did not have access to detailed data as
to the financial performance, signal characteristics, listener profile and
consumer satisfaction of the radio stations used for comparison to the Company's
broadcast properties. Investors are urged to consider this limitation on
available information in evaluating the success of the Company's acquisition
strategy and its prospects. In addition, the recent consolidation in the radio
broadcasting industry has resulted in an increase in the reported purchase
prices paid for Class B radio stations and may limit the availability of Class B
radio stations, which may subsequently increase the acquisition costs of Class A
radio stations.
SUBSTANTIAL LEVERAGE; PLEDGE OF ASSETS; COVENANTS
At September 30, 1997, after giving pro forma effect to the Offering and the
Standby Commitment and the application of the net proceeds therefrom, the
Company's total long-term debt would have been approximately $27.7 million.
Because of the Company's substantial indebtedness, a significant portion of the
Company's broadcast cash flow is required for debt service. The Company's
significant leverage could make it vulnerable to a downturn in the economic
performance of its radio stations or a downturn in economic conditions. In
addition, after giving effect to the application of the net proceeds from the
Offering and the Standby Commitment as set forth under "Use of Proceeds" herein,
the amount of additional borrowings available to the Company under the Amended
and Restated Credit Agreement, to be entered into simultaneously with the
consummation of this Offering between the Company and The Chase Manhattan Bank
("Chase") (as amended and restated, the "Credit Facility") will be approximately
$7.3 million. See "Description of Credit Facility." Such amount may not be
sufficient to support the Company's growth strategy and as a result the Company
may require additional financing in order to acquire additional radio stations
and accomplish its long-term business strategies. In addition, Mr. Subotnick has
agreed to guarantee up to $6.0 million of amounts outstanding under the Credit
Facility. No assurance can be given that Mr. Subotnick will continue to
guarantee the Company's obligations.
Substantially all of the Company's assets will be pledged to secure the
performance by the Company of its obligations under the Credit Facility. In
addition, the Credit Facility will impose on the Company various financial and
non-financial restrictions, including limitations on additional indebtedness,
liens, sale of assets, payment of dividends, guarantee obligations, investments
and capital expenditures. Compliance with such covenants is a condition
precedent to borrowing under the Credit Facility. The Credit Facility and the
pledge of the Company's assets may adversely affect the Company's ability to
seek additional
10
<PAGE>
financing and pursue its strategy of further growth through acquisitions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Credit
Facility."
REGULATORY MATTERS AND DEPENDENCE ON LICENSES
Each of the Company's radio stations operates pursuant to one or more
broadcast licenses issued by the FCC that presently have a maximum term of eight
years. The Company's broadcast licenses expire at various times from 1998 to
2005. Although the Company may apply to renew these licenses, third parties may
challenge the Company's renewal applications. While the Company is not aware of
facts or circumstances that would prevent the Company from having its current
licenses renewed, there can be no assurance that the licenses will be renewed.
Failure to obtain the renewal of any of the Company's broadcast licenses, to
obtain FCC approval for an assignment or transfer to the Company of a license in
connection with a radio station acquisition or to obtain and comply with FCC
authorization for the construction of required facilities or modification of
technical parameters or specifications for operations may have a material
adverse effect on the Company. Moreover, while the Company believes that recent
changes to FCC rules and policies will enable it to obtain FCC authorizations to
increase the operating power of several of the company's radio stations, the
applications to the FCC for such power increases, which the Company has filed or
plans to file, are subject to prior FCC approval, and there can be no assurance
that the FCC will approve these applications. Failure of the FCC to approve
these applications may have a material adverse effect on the Company by limiting
the Company's ability to expand its coverage. See "Business--Federal Regulation
of Radio Broadcasting--FCC Power Increase." In addition, if the Company or any
of its officers, directors or significant stockholders violates the FCC's rules
and regulations or the Communications Act of 1934, as amended (the
"Communications Act"), is convicted of a felony, or is otherwise found to be
disqualified from being a party to a FCC license, the FCC may in response to a
petition from a third party or on its own motion, in its discretion, commence a
proceeding to impose sanctions against the Company which could involve the
imposition of monetary penalties, the revocation of the Company's broadcast
licenses or other sanctions. In addition, the FCC has the ability upon the
occurrence of certain events to revoke outstanding licenses.
The radio broadcasting industry is subject to extensive and changing
regulation. Among other things, the Communications Act and FCC rules and
policies limit the number of stations that one individual or entity can own, or
in which that individual or entity can hold an attributable interest, in a
market and require FCC approval for transfers of control of FCC licensees and
assignments of FCC licenses. The filing of petitions or complaints against the
Company or other FCC licensees could result in the FCC delaying the grant of, or
refusing to grant, its consent to the assignment of FCC licenses to or from an
FCC licensee or the transfer of control of an FCC licensee. The Communications
Act and FCC rules operate to impose limitations on ownership by Aliens (as
defined in the Communications Act). No corporation owning a broadcast license
may be more than one-fifth directly, or one-fourth indirectly, owned by Aliens,
foreign governments or their representatives. The FCC rules also require, in
certain circumstances, prior approval for changes in voting rights of the Common
Stock and changes in the Board of Directors of the Company. There can be no
assurance that there will not be changes in the current regulatory scheme, the
imposition of additional regulations or the creation of new regulatory agencies,
which changes could restrict or curtail the ability of the Company to acquire,
operate and dispose of radio stations or, in general, to compete profitably with
other operators of radio and other media properties. Moreover, there can be no
assurance that there will not be other regulatory changes, including aspects of
deregulation, that will result in a decline in the value of broadcast licenses
held by the Company or adversely affect the Company's competitive position. See
"--Federal Regulation of Radio Broadcasting."
ANTITRUST MATTERS
An important element of the Company's growth strategy involves the
acquisition of additional radio stations, several of which are likely to require
preacquisition antitrust review by the Federal Trade
11
<PAGE>
Commission (the "FTC") and the Antitrust Division of the United States
Department of Justice (the "Antitrust Division"). Following passage of the
Telecom Act, the Antitrust Division has more frequently reviewed proposed
acquisitions of radio stations and radio station networks, particularly in
instances where the proposed acquiror already owns one or more radio stations in
a particular market and the acquisition involves another radio station in the
same market. In the past, the Antitrust Division has obtained consent decrees
requiring an acquiror to dispose of at least one radio station in a particular
market where the acquisition otherwise would have resulted in a concentration of
radio advertising market share or domination of programming formats reaching
certain listeners by the acquiror.
COMPETITION; DEPENDENCE ON AUDIENCE SHARE RATINGS AND TECHNOLOGY CHANGES
Radio broadcasting is a highly competitive business. The financial success
of each of the Company's radio stations depends, to a significant degree, upon
its audience ratings, its share of the overall radio advertising revenue within
its geographic market and the economic health of the market. The audience
ratings and advertising revenue of the Company's individual stations are subject
to change and any adverse change in a particular market could have a material
adverse effect on the Company. The Company's radio stations compete for audience
share and advertising revenue directly with other FM and AM radio stations and
with other media within their respective markets, such as newspapers, broadcast
and cable television, magazines, billboard advertising, transit advertising, and
direct mail advertising. Many of these entities are larger and have
significantly greater resources than the Company. While the Company already
competes with other radio stations with comparable programming formats in each
of its markets, if another radio station in the market which currently does not
have the same programming format as the Company's stations were to convert its
programming format to a format similar to one of the Company's stations, if a
new station were to adopt a competitive format, or if an existing competitor
were to strengthen its operations, the Company's stations could suffer a
reduction in ratings and/or advertising revenue and could require increased
promotional and other expenses. The Telecom Act facilitates the entry of other
radio broadcasting companies into the markets in which the Company operates or
may operate in the future, some of which may be larger and have more financial
resources than the Company. In addition, certain of the Company's stations
compete, and in the future other stations of the Company may compete, with
combinations of stations operated by a single operator. There can be no
assurance that the Company's radio stations will be able to maintain or increase
their current audience ratings and radio advertising revenue. See
"Business--Competition."
Radio broadcasting is also subject to competition from new media
technologies that are being developed or have been introduced, such as digital
audio broadcasting ("DAB"). DAB may provide a medium for the delivery by
satellite (digital audio radio satellite service, or "DARS") or terrestrial
means of multiple multi-channel, multi-format digital radio services with sound
quality equivalent to compact-discs to local and national audiences. In
addition, cable television operators are introducing a new service commonly
referred to as "cable radio," which provides cable television subscribers with
several high-quality channels of music, news and other information. The Company
cannot predict the effect, if any, that any such new technologies may have on
the radio broadcasting industry or on the Company. See "Business--Competition."
The profitability of the Company's radio stations is subject to various
other factors which influence the radio broadcasting industry as a whole. The
Company's radio stations may be adversely affected by changes in audience
tastes, priorities of advertisers, new laws and governmental regulations and
policies, changes in broadcast technical requirements, proposals to limit the
tax deductibility of expenses incurred by advertisers and changes in the
willingness of financial institutions and other lenders to finance radio station
acquisitions and operations. The Company cannot predict which, if any, of these
factors might have a significant impact on the radio broadcasting industry in
the future, nor can it predict what impact, if any, the occurrence of these
events might have on the Company.
12
<PAGE>
EFFECTS OF ECONOMIC RECESSION
The Company derives substantially all of its revenue from the sale of
advertising time on its radio stations. The Company's broadcasting revenue could
be adversely affected by a future national recession. In addition, because a
substantial portion of the Company's revenue is derived from local advertisers,
the Company's ability to generate advertising revenue in specific markets could
be adversely affected by local or regional economic downturns. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RELIANCE ON KEY PERSONNEL
The Company's business is managed by a small number of key management and
operating personnel, the loss of certain of whom could have a material adverse
effect on the Company. The Company believes that its future success will depend
in large part on its ability to attract and retain highly skilled and qualified
personnel and to expand, train and manage its employee base. The Company has
entered into an employment agreement with Mr. Kakoyiannis which includes
provisions restricting the ability of Mr. Kakoyiannis to compete against the
Company in certain circumstances. In addition, the Company maintains "key-man"
insurance on the life of Mr. Kakoyiannis in the amount of $2.0 million. See
"Management--Employment Agreements."
CONCENTRATION OF VOTING POWER BY PRINCIPAL STOCKHOLDERS
The holders of Class A Common Stock are entitled to one vote per share on
all matters voted upon by the Company's stockholders. Holders of Class B Common
Stock are entitled to ten votes per share on all matters voted upon by the
Company's stockholders. In addition, holders of Class B Common Stock are
entitled to vote as a separate class to elect up to 75% of the members of the
Company's Board of Directors. Each share of Class B Common Stock is convertible
at any time into one share of Class A Common Stock, and with limited exceptions
converts automatically upon any sale or transfer to a party unaffiliated with,
or unrelated to, the Principal Stockholders. The Principal Stockholders will,
upon consummation of the Offering, own all of the outstanding shares of Class B
Common Stock, which represent approximately 94% of the combined voting power of
the Common Stock (without giving effect to the exercise of outstanding options
to acquire shares of Class A Common Stock and without giving effect to the
Standby Commitment). Accordingly, the Principal Stockholders will be able to
control the Board of Directors and all stockholders decisions and, in general,
to determine (without the consent of the Company's other stockholders) the
outcome of any corporate transaction or other matter submitted to the
stockholders for approval, including mergers, consolidations and the sale of all
or substantially all of the Company's assets. See "Description of Capital
Stock," "Principal Stockholders" and "Certain Relationships and Related
Transactions." In addition, the Credit Facility will provide that an event of
default will occur upon the occurrence of a "change of control" as defined in
the Credit Facility. For purposes of the Credit Facility, a change of control
will occur when (i) any person or group other than the Principal Stockholders
and their affiliates obtains the power to elect a majority of the Board of
Directors, (ii) the Company fails to own 100% of the capital stock of its
subsidiaries owning any of the FCC broadcast licenses, or when (iii) the Board
of Directors does not consist of a majority of continuing directors. Mr.
Subotnick has also agreed to guarantee up to $6.0 million of amounts outstanding
under the Credit Facility. There is no assurance that Mr. Subotnick will agree
to guarantee any additional amounts of the Company's obligations.
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK
PRICE
Prior to the Offering, there has been no public market for the Class A
Common Stock. The initial public offering price of the Class A Common Stock was
determined by negotiations among the Company and the Underwriters, and may bear
no relationship to the price at which the Class A Common Stock will trade after
completion of the Offering. The Class A Common Stock has been approved for
listing, subject to notice of issuance, on the AMEX; however, there can be no
assurance that an active trading market will
13
<PAGE>
develop or be maintained for the Class A Common Stock following the Offering or
that the Class A Common Stock will trade in the public market at or above the
initial public offering price. For factors considered in determining the initial
public offering price, see "Underwriting." After completion of the Offering, the
market price of the Class A Common Stock will be subject to fluctuations in
response to various factors and events, including, among others, the liquidity
of the market for the Class A Common Stock, variations in the Company's
operating results, regulatory or other changes, both domestic and international,
affecting the radio broadcasting industry generally or the Company specifically,
announcements of business developments by the Company or its competitors,
changes in operating results and changes in general market conditions. See
"--Limited History of Operations; Negative Losses and Negative Cash Flow from
Operations; Expected Future Net Losses and Negative Cash Flow from Operations,"
"--Regulatory Matters and Dependence on Licenses," "--Concentration of Voting
Power by Principal Stockholders," and "--Competition; Dependence on Audience
Share Ratings and Technology Changes."
SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL ADVERSE EFFECT ON STOCK PRICE;
REGISTRATION RIGHTS
Sales of a substantial number of shares of Class A Common Stock in the
public market, or the perception that such sales may occur could adversely
affect prevailing market prices for the Class A Common Stock and the ability of
the Company to raise capital in the future. Upon completion of the Offering and
after giving effect to the Standby Commitment, the Company will have outstanding
5,619,348 shares of Class A Common Stock. Of such shares, the 4,000,000 shares
of Class A Common Stock being sold in the Offering (together with any shares
sold upon exercise of the Underwriters' over-allotment option) will be
immediately eligible for sale in the public market without restriction, except
for shares purchased by or issued to any affiliate (an "Affiliate") of the
Company (within the meaning of the Securities Act of 1933, as amended (the
"Securities Act")). For so long as any stockholder remains an Affiliate of the
Company, any shares of Common Stock held by such person will only be available
for public sale if such shares are registered under the Securities Act or sold
in accordance with an applicable exemption from registration, such as Rule 144
("Rule 144") of the Securities Act, and any sales by an Affiliate under Rule 144
would be subject to the volume and other limitations under such rule. Upon the
expiration or waiver of certain lock-up agreements with the Underwriters,
approximately 10,422,306 shares of Class A Common Stock (including 8,250,458
shares issuable upon conversion of shares of Class B Common Stock, up to 494,286
shares that may be issued pursuant to the Standby Commitment and 552,500 shares
of Class A Common Stock issuable upon exercise of options granted under the 1997
Incentive Stock Plan) will be eligible for sale in the public market pursuant to
Rule 144. The Company has granted certain registration rights to Mr. Kakoyiannis
for all shares of Class A Common Stock held by him on the date of this
Prospectus or to be issued to him pursuant to his employment agreement with the
Company, and to the Principal Stockholders with respect to all shares of Class A
Common Stock that may be issued to them under the Standby Commitment or upon
conversion of the shares of Class B Common Stock issued to them in the
Reclassification, only following the one year anniversary of the effectiveness
of this Offering. Registration of such shares under the Securities Act would
result in such shares becoming available for sale by non-Affiliates in the
public securities market without limitation, and by Affiliates, subject to the
limitations of Rule 144, immediately upon the effectiveness of such
registration. If the holders, by exercising their demand registration rights,
cause a large number of securities to be registered and sold in the public
market, such sales could have an adverse effect on the market price for the
Class A Common Stock. If the Company were to include in a Company-initiated
registration, any registrable securities pursuant to the exercise of piggy-back
registration rights, such sales may have an adverse effect on the Company's
ability to raise needed capital. See "Description of Capital Stock--Registration
Rights." Pursuant to lock-up agreements with the Underwriters, the Company, the
executive officers and the directors of the Company have agreed not to offer,
sell, contract to sell or otherwise dispose of, directly or indirectly, any
shares of Class A Common Stock or any securities that are convertible into or
exercisable or exchangeable for shares of Class A Common Stock (other than
pursuant to employee or director stock or stock option plans existing on the
date of this Prospectus) or file any registration statement with respect to
14
<PAGE>
any shares of Class A Common Stock or any securities convertible into or
exercisable or exchangeable for shares of Class A Common Stock, or make any
demand for, or exercise any right with respect to the registration of any shares
of Class A Common Stock or any securities convertible into or exchangeable for
shares of Class A Common Stock, for a period of 180 days after the date of this
Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), except for the shares of Class A Common Stock
offered in connection with the Offering. Promptly after completion of the
Offering, the Company intends to file with the Commission a registration
statement on Form S-8, covering the shares of Class A Common Stock underlying
options granted or to be granted under the 1997 Incentive Stock Plan and the
shares that may be issued to Mr. Kakoyiannis pursuant to his employment
agreement with the Company. Such registration statement will become effective
immediately upon filing with the Commission. As a result, the shares of Class A
Common Stock so registered and issued pursuant to the 1997 Incentive Stock Plan
or Mr. Kakoyiannis' employment agreement will be immediately available for sale
by non-Affiliates in the public market without limitation, and by Affiliates,
subject to the limitations of Rule 144. See "Certain Relationships and Related
Transactions," "Description of Capital Stock" and "Shares Eligible for Future
Sale."
ABSENCE OF DIVIDENDS
The Company anticipates that all of its earnings in the foreseeable future
will be retained to finance the continued growth and expansion of its business
and has no current intention to pay cash dividends on its Common Stock and will
be restricted from so doing by the Credit Facility. See "Dividend Policy" and
"Description of Credit Facility."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Class A Common Stock in the Offering will experience immediate
and substantial dilution of $9.00 per share in the net tangible book value per
share of Class A Common Stock. See "Dilution."
USE OF PROCEEDS
The net proceeds from the Offering and the Standby Commitment are estimated
to be approximately $29.0 million (approximately $29.4 million if the
Underwriters' over-allotment option is exercised in full and as a result, the
Standby Commitment is eliminated) after deducting underwriting discounts and
commissions and estimated expenses of the Offering payable by the Company. Such
net proceeds will be used by the Company to repay approximately $29.0 million
under its Existing Credit Facility. The Existing Credit Facility bears interest
at a rate based, at the option of the Company, on the participating bank's prime
rate, or upon the London Interbank Borrowing Rate and matures on May 30, 2001.
The Company's net borrowings under the Existing Credit Facility during the
twelve months ending September 30, 1997 were $24.4 million, primarily for the
acquisition of radio stations. After giving effect to the Offering and the
Standby Commitment and application of the net proceeds therefrom, the Company
will have approximately $7.3 million of borrowing capacity available under the
Credit Facility. See "Description of Credit Facility."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not expect to do so in the foreseeable future. The Company
anticipates that all future earnings, if any, generated from operations will be
retained to finance the expansion and continued development of its business. Any
future determination with respect to the payment of dividends will be within the
sole discretion of the Company's Board of Directors and will depend upon, among
other things, the Company's earnings, capital requirements, the terms of then
existing indebtedness, applicable requirements of the General Corporation Law of
the State of Delaware (the "DGCL"), general economic conditions and such other
factors considered relevant by the Company's Board of Directors. The Credit
Facility will prohibit the payment of dividends. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Description
of Credit Facility."
15
<PAGE>
DILUTION
As of September 30, 1997, the net tangible book value (deficit) of the
Company was approximately $(66.5) million, or $(7.10) per share of outstanding
Common Stock (taking into account the Reclassification). The net tangible book
value per share of Common Stock represents the total amount of tangible assets
of the Company, less the total amount of liabilities of the Company, divided by
the number of shares of Common Stock outstanding. After giving effect to the
Equity Contribution, the Reclassification, the sale by the Company of the
4,000,000 shares of Class A Common Stock offered hereby at an initial public
offering price of $7.00 per share and the application of the net proceeds
therefrom (after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company and after giving effect to the sale by
the Company of 494,286 shares of Class A Common Stock pursuant to the Standby
Commitment and the application of the net proceeds therefrom), the as adjusted
net tangible book value of the Company as of September 30, 1997 would have been
approximately $(27.7) million, or $(2.00) per share, representing an immediate
increase in net tangible book value of approximately $5.10 per share to existing
stockholders and an immediate dilution in net tangible book value of
approximately $9.00 per share to persons purchasing shares of Class A Common
Stock in the Offering. The following table illustrates this per share dilution
to the new investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share(1)............................. $ 7.00
---------
Net tangible book value per share of Common Stock at September 30, 1997
(adjusted for the Reclassification but excluding the Equity
Contribution and the Offering)....................................... $ (7.10)
---------
Increase in net tangible book value per share of Common Stock
attributable to net proceeds of the Offering and the Standby
Commitment and the application of the proceeds therefrom, the Equity
Contribution and Reclassification and conversion of the Company from
an S-Corporation to a C-Corporation.................................. 5.10
---------
Pro forma net tangible book value per share of Common Stock after
giving effect to the Offering........................................ (2.00)
---------
Dilution per share to new investors in Class A Common Stock in the
Offering............................................................. $ 9.00
---------
---------
</TABLE>
- ------------------------
(1) Before deduction of underwriting discounts and commissions and estimated
offering expenses.
The following table sets forth, on a pro forma basis as of September 30,
1997, and after giving effect to the Equity Contribution, the Reclassification,
the Offering and the Standby Commitment, the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and the
average price per share of Common Stock paid by existing stockholders and to be
paid by new investors in the Offering, assuming that shares purchased in the
Offering are sold at an initial offering price of $7.00 per share, before
deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... 9,375,520 68% $ 23,365,000 43% $ 2.49
New investors............................... 4,494,286 32 31,460,000 57% 7.00
------------ --- ------------- ---
Total..................................... 13,869,806 100% $ 54,825,000 100%
------------ --- ------------- ---
------------ --- ------------- ---
</TABLE>
The foregoing tables do not give effect to the exercise of any options
outstanding under the 1997 Incentive Stock Plan. At December 2, 1997, an
aggregate of 150,000 shares of Class A Common Stock was subject to outstanding
options granted to certain officers and directors of the Company, at an exercise
price of $6.00 per share, and an aggregate of 402,500 shares of Class A Common
Stock was subject to options granted to certain officers and directors of the
Company, to be effective only immediately prior to the consummation of the
Offering, at an exercise price per share equal to the initial public offering
price per share in the Offering. To the extent outstanding options are
exercised, there will be further dilution to new investors in the Offering. See
"Management--1997 Incentive Stock Plan" and "Principal Stockholders."
16
<PAGE>
CAPITALIZATION
The following table sets forth the Company's capitalization as of September
30, 1997 (i) as reported, (ii) on a pro forma basis after giving effect to the
Equity Contribution, the Reclassification and the Company's conversion from
S-Corporation status to C-Corporation status and (iii) on a pro forma basis, as
further adjusted to give effect to the Offering and the Standby Commitment and
the application of the estimated net proceeds therefrom as described in "Use of
Proceeds." This table should be read in conjunction with the Financial
Statements of the Company, including the Notes thereto, and the other financial
data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt under the credit facilities.................................. $ 56,700 $ 56,700 $ 27,700
Notes payable to stockholders............................................... 13,163 -- --
---------- ----------- -----------
Total debt.............................................................. 69,863 56,700 27,700
---------- ----------- -----------
Stockholders' equity (deficit):
Class A Common Stock, par value $.01 per share; no shares authorized and,
as adjusted, 80,000,000 shares authorized; no shares issued and
outstanding and, as adjusted, 5,619,348 shares issued and outstanding
(1)..................................................................... -- 11 56
Class B Common Stock, par value $.01 per share; no shares authorized and,
as adjusted, 20,000,000 shares authorized; no shares issued and
outstanding and, as adjusted, 8,250,458 shares issued and outstanding... -- 83 83
Preferred Stock, par value $.01 per share; no shares authorized and, as
adjusted, 20,000,000 shares authorized; no shares issued and outstanding
and, as adjusted, no shares issued and outstanding...................... -- -- --
Common Stock, par value $.01 per share; 2,000 authorized shares; 1,232
shares issued and outstanding as of September 30, 1997 and, as adjusted,
no shares authorized, issued and outstanding............................ -- -- --
Additional paid-in capital................................................ 10,202 (1,803) 27,152
Accumulated (deficit)..................................................... (21,724) -- --
---------- ----------- -----------
Total stockholders' equity (deficit).................................... (11,522) (1,709) 27,291
---------- ----------- -----------
Total capitalization........................................................ $ 58,341 $ 54,991 $ 54,991
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
(1) Excludes an aggregate of 150,000 shares of Class A Common Stock subject to
options granted under the 1997 Incentive Stock Plan to certain officers and
directors of the Company, at an exercise price of $6.00 per share, and an
aggregate of 402,500 shares of Class A Common Stock subject to options
granted to certain officers and directors of the Company under the 1997
Incentive Stock Plan, to be effective only immediately prior to the
consummation of the Offering, at an exercise price per share equal to the
initial public offering price per share in the Offering. See
"Management--1997 Incentive Stock Plan" and "Principal Stockholders."
17
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma balance sheet at September 30, 1997 is presented as
if, at such date, (i) the Equity Contribution and the Reclassification had been
consummated, and the Company had converted from an S-Corporation to a
C-Corporation, and (ii) the Offering and the application of the net proceeds
therefrom had been consummated.
The unaudited pro forma statement of operations for the nine months ended
September 30, 1997 is presented as if, at the beginning of the period, (i) the
Company had completed the acquisition of the assets of WZVU-FM (which
acquisition was completed in June 1997), (ii) the Company had completed the
acquisition of the assets of WVVX-FM, Inc. (which acquisition was completed in
August 1997), (iii) the Equity Contribution and the Reclassification had been
consummated, and the Company had converted from an S-Corporation to a
C-Corporation, and (iv) the Offering and the Standby Commitment and the
application of the net proceeds therefrom had been consummated.
The unaudited pro forma statement of operations for the year ended December
31, 1996 is presented as if, at the beginning of the period, (i) the Company had
completed the acquisition of the assets of WZVU-FM, (ii) the Company had
completed the acquisition of the assets of WVVX-FM, Inc., (iii) the Equity
Contribution and the Reclassificaion had been consummated, and the Company had
converted from an S-Corporation to a C-Corporation, and (iv) the Offering and
the Standby Commitment and the application of the net proceeds therefrom had
been consummated. Furthermore, the unaudited pro forma statement of operations
for the year ended December 31, 1996 is presented as if, throughout the period,
the Company did not own the assets of KWIZ-FM and the Q stations.
These pro forma financial statements should be read in conjunction with the
Company's Financial Statements and the Notes thereto and the Financial
Statements and Notes thereto of WZVU-FM, and WVVX-FM included elsewhere in this
Prospectus. The pro forma information is not necessarily indicative of the
results that would have been reported had such events actually occurred on the
dates specified, nor is it indicative of the Company's future results.
18
<PAGE>
BIG CITY RADIO, INC.
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash.................................................................... $ 316 $ -- $ 316
Accounts receivable, net of allowance for doubtful accounts............. 2,263 -- 2,263
Other current assets.................................................... 471 -- 471
----------- ----------- -----------
Total current assets.................................................. 3,050 -- 3,050
Property and equipment, net............................................... 2,672 -- 2,672
Intangible assets, net.................................................... 54,439 -- 54,439
Deferred financing fees................................................... 563 -- 563
Other assets.............................................................. 272 -- 272
----------- ----------- -----------
Total assets.......................................................... $ 60,996 $ -- $ 60,996
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities....................................................... $ 2,655 $ -- $ 2,655
Deferred income taxes..................................................... -- $ 3,350(3) 3,350
Long-term debt............................................................ 56,700 (29,000)(1) 27,700
Notes payable to stockholders............................................. 13,163 (13,163)(2)
Stockholders' equity (deficit)............................................ (11,522) 29,000(1) 27,291
13,163(2) --
(3,350)(3) --
----------- ----------- -----------
Total liabilities and stockholders' equity (deficit).................. $ 60,996 $ -- $ 60,996
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
(1) To reflect net proceeds to the Company from the Offering and the Standby
Commitment at the initial public offering price of $7.00 per share and the
use of such proceeds to repay a portion of the Existing Credit Facility (see
"Use of Proceeds").
(2) Reflects the Equity Contribution, based on the balance of Notes payable to
stockholders at September 30, 1997.
(3) To reflect the deferred tax liabilities in connection with the conversion
from S-Corporation status to C-Corporation status.
19
<PAGE>
BIG CITY RADIO, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION OF
SALE OF SALE OF OF WVVX-FM, PRO FORMA
HISTORICAL Q(1) KWIZ-FM(1) WZVU-FM(2) INC.(3) ADJUSTMENTS PRO FORMA
----------- --------- ------------- ------------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross revenues....... $ 8,567 $ (2,226) $ (1,106) $ 3,174 $ 1,138 $ -- $ 9,547
Less: commissions and
fees............... 623 (176) -- 247 1 -- 695
----------- --------- ------------- ------------- ------ ------------- -----------
Net revenues......... 7,944 (2,050) (1,106) 2,927 1,137 -- 8,852
Station operating
expenses excluding
depreciation and
amortization....... 12,253 (3,586) (313) 1,044 399 -- 9,797
----------- --------- ------------- ------------- ------ ------------- -----------
Station operating
income(loss)
excluding
depreciation and
amortization....... (4,309) 1,536 (793) 1,883 738 -- (945)
Depreciation and
amortization....... 1,388 (204) (217) 141 306 215(4) 1,629
Corporate general and
administrative
expenses........... 1,201 -- -- 1,651 243 -- 3,095
Reimbursement of
operating expenses
under LMA.......... -- -- -- (27) -- -- (27)
----------- --------- ------------- ------------- ------ ------------- -----------
Operating income
(loss)............. (6,898) 1,740 (576) 118 189 (215) (5,642)
Interest expense..... 2,827 (391) (473) 2,498 343 (4,170)(5) 634
Gain on sale......... 6,608 (6,608) -- -- -- -- --
Other (income)
expense............ (19) 82 (5) (29) 16 -- 45
----------- --------- ------------- ------------- ------ ------------- -----------
(Loss) before income
taxes.............. (3,098) (4,559) (98) (2,351) (170) 3,955 (6,321)
Provision for
(benefit from)
income
taxes(6)(7)........ -- -- -- -- (35) 3,350(7) 3,350
35(6) --
----------- --------- ------------- ------------- ------ ------------- -----------
Net loss............. $ (3,098) $ (4,559) $ (98) $ (2,351) $ (135) $ 570 $ (9,671)
----------- --------- ------------- ------------- ------ ------------- -----------
----------- --------- ------------- ------------- ------ ------------- -----------
Pro forma net loss
per share of Common
Stock(10).......... $ (1.29)
-----------
-----------
Pro forma weighted
average shares of
Common Stock
outstanding(10).... 9,397
Pro forma as adjusted
Net loss per share
of Common
Stock(10).......... $ (.70)
-----------
-----------
Pro forma as adjusted
weighted average
shares of Common
Stock
outstanding(10).... 13,891
-----------
-----------
</TABLE>
See notes to unaudited pro forma statement of operations
20
<PAGE>
BIG CITY RADIO, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
(1) Removes the reported historical results of operations of KWIZ-FM, for the
period from the date of its acquisition, May 30, 1996, to its date of sale,
December 20, 1996, and the reported operations of the Q stations for the
period October 1, 1995 to May 30, 1996 included in the historical Company
results.
(2) Reflects historical results of operation for the period January 1, 1996 to
December 31, 1996 of WZVU-FM, Long Branch, New Jersey, acquired from K&K
Radio Broadcasting, L.L.C. on June 5, 1997.
(3) Reflects historical results of operation for the period January 1, 1996 to
December 31, 1996 of WVVX-FM, Highland Park, Illinois, acquired from Douglas
Broadcasting, Inc. on August 8, 1997. The ownership of WVVX-FM changed
during the year ended December 31, 1996. Accordingly, operating results for
the year ended December 31, 1996 were derived by combining the information
for the period from January 1, 1996 to June 13, 1996 (Predecessor) with
those for the period June 14, 1996 to December 31, 1996 (Successor).
(4) Adjustment of historical depreciation and amortization expense of the
acquired businesses to reflect the new allocations of purchase prices to the
assets acquired.
(5) Reflects pro forma adjustments to reduce reported interest expense by
$1,090,000, $2,437,000, and $643,000 resulting from: (a) indebtedness
incurred to finance the WZVU-FM and WVVX-FM acquisitions, net of historical
interest expense; (b) the retirement of $29,000,000 indebtedness under the
Existing Credit Facility from the use of net proceeds of the Offering and
the Standby Commitment; and (c) the Equity Contribution.
(6) Pro forma adjustment relating to the elimination of taxes due to net
operating losses.
(7) To reflect the deferred tax liabilities in connection with the conversion
from S-Corporation status to C-Corporation status.
(8) In connection with the consummation of the Offering, the Company's Chief
Executive Officer will be entitled to receive 93,755 shares of Class A
Common Stock for every 20% increase in the average closing price of the
Class A Common Stock following the consummation of the Offering; provided
that such increase remains in effect for six months (up to a maximum of
281,265 shares). If the Company's Chief Executive Officer earns these grants
of Class A Common Stock, the Company will record minimum future non-cash
charges aggregating approximately $2,867,000 based on an initial public
offering price of $7.00 per share. These non-cash charges have not been
included in the accompanying Pro Forma Financial Statements.
(9) In December 1997, the Company granted options to purchase an aggregate of
150,000 shares of Class A Common Stock to certain officers and directors at
an exercise price of $6.00 per share. These shares will result in the
Company recording a future non-cash charge of $150,000 based on an initial
public offering price of $7.00 per share. These non-cash charges have not
been included in the accompanying pro forma financial statements.
(10) Net loss per share is presented (i) on a pro forma basis after giving
effect to the Equity Contribution, the Reclassification, the Company's
conversion from S-Corporation status to C-Corporation status and the
acquisitions and dispositions noted above and (ii) on a pro forma basis, as
further adjusted to give effect to the Offering and the Standby Commitment
and the application of the estimated net proceeds therefrom.
21
<PAGE>
BIG CITY RADIO, INC
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACQUISITION OF
ACQUISITION OF WVVX-FM, PRO FORMA
HISTORICAL WZVU-FM (1) INC. (2) ADJUSTMENTS PRO FORMA
---------- --------------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Gross revenues.......................... $ 8,485 $ 414 $ 623 $ (375)(3) $ 9,147
Less: commissions and fees.............. 947 1 1 949
---------- ----- ----- ----------- ------------
Net revenues.......................... 7,538 413 622 (375) 8,198
Station operating expenses excluding
depreciation and amortization......... 9,834 92 255 (375)(3) 9,806
---------- ----- ----- ----------- ------------
Station operating income (loss)
excluding depreciation and
amortization.......................... (2,296) 321 367 0 (1,608)
Depreciation and amortization........... 1,316 51 169 99(4) 1,635
Corporate, general and administrative
expenses.............................. 1,104 220 169 -- 1,493
Employment incentive.................... 3,713 -- -- -- 3,713
Reimbursement of operating expenses
under LMA............................. -- (151) -- -- (151)
---------- ----- ----- ----------- ------------
Operating income (loss)................. (8,429) 201 29 (99) (8,298)
Interest expense........................ 3,062 180 231 (1,875)(5) 1,598
Other (income) expense.................. (56) -- -- -- (56)
---------- ----- ----- ----------- ------------
Income (Loss) before income taxes....... (11,435) 21 (202) 1,776 (9,840)
Provision for (benefit from) income
taxes................................. -- -- (66) 3,350(7) 3,350
66(6) --
---------- ----- ----- ----------- ------------
Net income (loss)....................... $ (11,435) $ 21 $ (136) $ (1,640) $ (13,190)
---------- ----- ----- ----------- ------------
---------- ----- ----- ----------- ------------
Pro forma net loss per
share of Common Stock(10)............. $ (1.58)
------------
------------
Pro forma weighted average
shares of Common Stock
outstanding(10)....................... 9,397
------------
------------
Pro forma as adjusted net loss per share
of Common Stock(10)................... $ (.95)
------------
------------
Pro forma as adjusted weighted average
shares of Common Stock
outstanding(10)....................... 13,891
------------
------------
</TABLE>
See notes to unaudited pro forma statement of operations.
22
<PAGE>
BIG CITY RADIO, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997
(1) Reflects historical results of operation for the period January 1, 1997 to
May 31, 1997 of WZVU-FM, Long Branch, New Jersey, acquired from K&K Radio
Broadcasting, L.L.C. on June 5, 1997.
(2) Reflects historical results of operation for the period January 1, 1997 to
July 31, 1997 of WVVX-FM, Highland Park, Illinois, acquired from Douglas
Broadcasting, Inc. on August 8, 1997.
(3) Eliminates LMA fees and expenses in the period January 1, 1997 to June 5,
1997, the period during which the Company managed WZVU-FM prior to ownership
(see "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations"). These fees and expenses were reported
in the Company's historical results as station operating expenses and in the
historical results of the acquired businesses as Other Income.
(4) Adjustment of historical depreciation and amortization expense of the
acquired businesses to reflect the new allocations of purchase prices to the
assets acquired.
(5) Reflects pro forma adjustments to (increase) decrease reported interest
expense by $(418,000), $1,675,000 and $618,000 resulting from: (a)
indebtedness incurred to finance the WZVU-FM and WVVX-FM acquisitions, net
of historical interest expense; (b) the retirement of $29,000,000 in
indebtedness under the Existing Credit Facility from the use of net proceeds
of the Offering and the Standby Commitment; and (c) the Equity Contribution.
(6) Pro forma adjustment relating to the elimination of taxes due to net
operating losses.
(7) To reflect the deferred tax liabilities in connection with the conversion
from
S-Corporation status to C-Corporation status.
(8) In connection with the consummation of the Offering, the Company's Chief
Executive Officer will be entitled to receive 93,755 shares of Class A
Common Stock for every 20% increase in the average closing price of the
Common Stock following consummation of the Offering; provided that such
increase remains in effect for six months (up to a maximum of 281,265
shares). If the Company's Chief Executive Officer earns these grants of
Class A Common Stock, the Company will record minimum future non-cash
charges aggregating approximately $2,867,000 based on an initial public
offering price of $7.00 per share. These non-cash charges have not been
included in the accompanying pro forma financial statements.
(9) In December 1997, the Company granted options to purchase an aggregate of
150,000 shares of Class A Common Stock to certain officers and directors at
an exercise price of $6.00 per share. These shares will result in the
Company recording a future non-cash charge of $150,000 based on an initial
public offering price of $7.00 per share. These non-cash charges have not
been included in the accompanying pro forma financial statements.
(10) Net loss per share is presented (i) on a pro forma basis after giving
effect to the Equity Contribution, the Reclassification, the Company's
conversion from S-Corporation status to C-Corporation status and the
acquisitions noted above and (ii) or a pro forma basis as further adjusted
to give effect to the Offering and the Standby Commitment and the
application of the estimated net proceeds therefrom.
23
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table presents selected financial and operating data and
should be read in conjunction with the Company's Financial Statements and
related Notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein. The
selected balance sheet data as of December 31, 1995 and 1994, and September 30,
1994 and Statement of Operations data for the year ended December 31, 1995, the
three months ended December 31, 1994 and the year ended September 30, 1994 are
derived from the Company's financial statements which have been audited by Holtz
Rubenstein & Co., LLP, Certified Public Accountants. The selected balance sheet
data as of December 31, 1996 and Statement of Operations data for the year ended
December 31, 1996 are derived from the Company's financial statements which have
been audited by KPMG Peat Marwick LLP, Independent Certified Public Accountants.
The selected balance sheet data as of September 30, 1996, and 1997 have been
derived from the Company's unaudited financial statements, which in the opinion
of management, include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of financial condition and results
of operations. The historical financial results of the Company are not
comparable from period to period because of the acquisition and sale of various
broadcasting properties by the Company during the periods covered.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED THREE MONTHS YEARS ENDED SEPTEMBER
SEPTEMBER 30, ENDED DECEMBER 31, 30,
--------------------------------- DECEMBER 31, ------------------------- -----------
1992(1) 1993 1994 1994 1995(2) 1996(3)(4) 1996(4)
----------- --------- --------- --------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Gross revenues................. $ 257 $ 1,511 $ 2,267 $ 654 $ 5,655 $ 8,567 $ 6,296
Net revenues................... 233 1,383 2,074 604 5,225 7,944 5,870
Station operating expenses..... 373 2,325 2,326 687 7,185 12,253 9,726
Corporate, general and
administrative expenses...... -- -- -- -- 425 1,201 804
Depreciation and
amortization................. 74 622 524 113 798 1,388 867
Employment incentive........... -- -- -- -- -- -- --
Operating loss................. (215) (1,563) (776) (196) (3,183) (6,898) (5,527)
Gain on sale................... -- -- -- -- -- (6,608) (6,608)
Interest expense............... (4) 258 439 120 842 2,827 1,880
Net (loss)..................... (215) (1,807) (1,163) (298) (4,005) (3,098) (798)
Pro forma as reported net loss
per common share............. (.33)
Cash dividends per common
share........................
Pro forma as reported weighted
average shares
outstanding(8)............... 9,397
OTHER OPERATING DATA:
Broadcast cash flow(6)........... $ (140) $ (942) $ (252) $ (83) $ (1,960) $ (4,309) $ (3,856)
Operating cash flow.............. (324) (1,228) (1,007) (227) (2,942) (7,448) (5,793)
Investing cash flow.............. (4,248) (92) (23) (1) (3,883) (24,235) (29,867)
Financing cash flow.............. 4,616 1,296 1,066 172 7,779 30,851 34,779
<CAPTION>
1997(5)
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Gross revenues................. $ 8,485
Net revenues................... 7,538
Station operating expenses..... 9,834
Corporate, general and
administrative expenses...... 1,104
Depreciation and
amortization................. 1,316
Employment incentive........... 3,713
Operating loss................. (8,429)
Gain on sale................... --
Interest expense............... 3,062
Net (loss)..................... (11,435)
Pro forma as reported net loss
per common share............. (1.22)
Cash dividends per common
share........................
Pro forma as reported weighted
average shares
outstanding(8)............... 9,397
OTHER OPERATING DATA:
Broadcast cash flow(6)........... $ (2,296)
Operating cash flow.............. (6,662)
Investing cash flow.............. (22,194)
Financing cash flow.............. 28,938
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
------------------------------------- ----------------------------------- --------------------
1992 1993 1994 1994 1995 1996 1996 1997
--------- --------- --------------- ------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............. $ (129) $ 204 $ 606 $ 600 $ 1,442 $ 294 $ 308 $ 395
Net intangible assets........ 3,201 2,942 2,666 2,600 6,040 29,230 40,436 54,439
Total assets................. 4,587 4,037 4,044 3,863 9,433 38,963 44,660 60,996
Notes payable................ 3,291 4,923 6,028 6,219 13,477 12,544 12,343 13,163
Long-term debt............... -- -- -- -- -- 28,200 32,300 56,700
Stockholder's equity
(deficit).................. 784 (1,022) (2,185) (3,484) (5,821) (3,800) (1,502) (11,522)
</TABLE>
(FOOTNOTES APPEAR ON FOLLOWING PAGE)
24
<PAGE>
- ------------------------------
(1) The financial statements for the 12 months ended December 31, 1995 include
three months (October, November and December 1994) of operations of Q
Broadcasting, Inc. that were included in the three months ended December 31,
1994 financial statements. Revenues and net income for the duplicate period
are $604 and $298, respectively.
(2) The Company acquired substantially all of the assets of WRGX-FM and WRKL-AM
effective December 31, 1994 and commenced operations on January 1, 1995. The
financial statements include the operations of these stations since January
1, 1995.
(3) The Company acquired substantially all of the assets of the Los Angeles
Stations and KWIZ-FM on May 30, 1996 and commenced operations of these
stations under a LMA on March 26, 1996. The financial statements include the
operations of these stations from commencement of the LMA period. KWIZ-FM
was sold on December 31, 1996. No gain or loss was recognized on the sale of
KWIZ-FM.
(4) The Company acquired WSTC-AM and WKHL-FM during 1992. The financial
statements include the operations of these stations from their date of
acquisition to May 30, 1996, the date on which they were sold. For the year
ended December 31, 1996, the gain on sale of stations represents the gain on
sale of WSTC-AM and WKHL-FM.
(5) The Company acquired substantially all of the assets of WWHB-FM on April 1,
1997 and WZVU-FM on June 5, 1997 and commenced operations of these stations
under a LMA during December 1996. WWHB-FM and WZVU-FM together with WRGX-FM
form Y-107 NY. The financial statements include the operations of Y-107 NY
since December 1996.
(6) Although not calculated in accordance with generally accepted accounting
principles, broadcast cash flow is widely used in the broadcast industry as
a measure of a broadcasting company's operating performance. Nevertheless,
the measure should not be considered in isolation or as a substitute for
operating loss, net loss, cash flows from operating activities or any other
measure for determining the Company's operating performance or liquidity
calculated in accordance with generally accepted accounting principles.
Broadcast cash flow is defined as operating loss plus depreciation and
amortization plus corporate general and administrative expenses, including
employment incentive.
(7) As of July 1, 1997, the Principal Stockholders transferred 68 shares of Old
Common Stock to the Company's Chief Executive Officer as an employment
incentive. The statement of operations for the nine months ended September
30, 1997 reflects an accounting charge of $3,713 relating to this award
which has been reflected as a capital contribution in Stockholders' Equity.
The charge represents the approximate fair market value of the stock
transferred for accounting purposes only and was estimated at 80% of the
assumed initial public offering price of $9.00 per share.
(8) Pro forma as reported weighted average shares outstanding is the sum of
9,375,520 shares outstanding immediately prior to the Offering and the
Standby Commitment (and after the Equity Contribution and the
Reclassification) plus 21,400 shares relating to 150,000 stock options
granted on December 1, 1997 with an exercise price of $6.00 per share
computed using the treasury stock approach (at an initial public offering
price of $7.00 per share).
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH "SELECTED
FINANCIAL AND OPERATING DATA" AND THE PRO FORMA FINANCIAL STATEMENTS OF THE
COMPANY, INCLUDING THE NOTES THERETO, AND THE OTHER FINANCIAL DATA APPEARING
ELSEWHERE IN THIS PROSPECTUS. CERTAIN INFORMATION INCLUDED HEREIN CONTAINS
STATEMENTS THAT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SEE "CAUTIONARY NOTE
REGARDING FORWARD-LOOKING STATEMENTS."
GENERAL
The Company was incorporated in August 1994 and commenced operations on
January 1, 1995, having acquired WRGX-FM, Briarcliff Manor, New York, and
WRKL-AM, New City, New York (together, the "Original New York Stations"), on
December 31, 1994. On May 30, 1996 the Company merged with Q Broadcasting, Inc.
("Q") in a transaction accounted for as a combination of entities under common
control. As a result of this merger the two entities are deemed to be combined
since inception (see notes to the financial statements included elsewhere in
this Prospectus). Q owned and operated the Q stations in Stamford, Connecticut,
from July 1992 up to the date of the combination with the Company. The Company
reports on the basis of a December 31 year-end and Q reported on the basis of a
September 30 year-end. As a result, the December 31, 1996 and 1995 financial
statements reflect the operations of Q on the basis of the eight month period
ended May 30, 1996 (the date of sale of the Q stations) and the 12 months ended
September 30, 1995, respectively.
The Q stations were operated in one facility, with one sales and support
staff. Their financial performance is combined for purposes of the discussions
that follow. Y-107 LA, Y-107 NY, WRKL-AM, and the stand-alone operations of
WRGX-FM were operated with separate staffs and facilities, therefore their
performance is separately identified.
Between March 26, 1996 and May 30, 1996, when the stations were acquired,
the Company operated the Los Angeles Stations and KWIZ-FM under a LMA. On March
26, all of the existing operations of the Los Angeles Stations were terminated,
and the Company debuted Y-107 LA under a modern rock format with new staffing
and no existing advertiser base. Although commencing with no revenues, Y-107 LA
revenues had surpassed all other Company revenues combined by November 1996.
During the LMA period, station operating expenses include significant LMA fees
and other reimbursed expenses to the seller. KWIZ-FM was sold on December 20,
1996.
On December 5, 1996, the Company commenced operation of WWZY-FM (formerly,
WZVU-FM), Long Branch, New Jersey, under a LMA, changing its format to country
music. On that date, WWXY-FM (formerly, WRGX-FM), Briarcliff Manor, New York,
which the Company had operated as a stand-alone FM since its acquisition on
January 1, 1995, changed format to broadcast Y-107 NY as a new country music
station with WWZY-FM. Furthermore, on December 30, 1996 the Company began
operating WWVY-FM (formerly, WWHB-FM), Hampton Bays, New York, under a LMA.
Since that date, the New York Stations have operated as Y-107 NY. Y-107 NY
retained certain advertisers and staff from all three of the previously
stand-alone stations. WWVY-FM and WWZY-FM were subsequently acquired on April 1,
1997 and June 5, 1997, respectively.
On August 8, 1997 the Company acquired WVVX-FM, Highland Park, Illinois, and
WJDK-FM, Morris, Illinois.
RESULTS OF OPERATIONS
The Company's financial results are dependent on a number of factors,
including the general strength of the local and national economies, local market
competition, the relative efficiency and effectiveness of radio broadcasting
compared to other advertising media, government regulation and policies and the
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Company's ability to provide popular programming. The performance of a radio
station group is customarily measured by its ability to generate broadcast cash
flow, calculated as station operating income or loss excluding depreciation and
amortization and corporate overhead. This measure, although widely used in the
broadcast industry as a measure of operating performance, is not calculated in
accordance with generally accepted accounting principles. Broadcast cash flow
should not be considered in isolation or as a substitute for operating income,
net income, cash flows from operating activities, or any other measure for
determining the Company's operating performance or liquidity calculated in
accordance with generally accepted accounting principles.
The Company's primary source of revenue is the sale of advertising. Total
revenue is determined by the number of advertisements aired by the station and
the advertising rates that the stations are able to charge. See
"Business--Advertising Sales."
Given the fact that the Company's strategy involves developing a brand new
metropolitan area radio station, the initial revenue base is zero and subject to
factors other than ratings and radio broadcasting seasonality. After the
start-up period, as is typical in the radio broadcasting industry, the Company's
first calendar quarter generally will produce the lowest revenues for the year,
and the fourth quarter generally will produce the highest revenues for the year.
The Company's operating results in any period may be affected by the incurrence
of advertising and promotion expenses that do not produce commensurate revenues
in the period in which the expenses are incurred.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
NET REVENUES in the nine months ended September 30, 1997 were $7,538,000 as
compared to $5,870,000 for the nine months ended September 30, 1996, an increase
of $1,668,000, or 28%. This increase was due primarily to an increase of
$4,021,000 in the net revenues of Y-107 LA in the 1997 period when compared to
the prior year and an increase of the Y-107 NY net revenues in the nine months
ended September 30, 1997 of $664,000, or 51%, compared to the net revenues of
the stand-alone WWXY-FM in the corresponding period of 1996. These increases in
net revenues were partially offset by (a) the absence of net revenues for the Q
stations and KWIZ-FM in the nine months ended September 30, 1997 compared to
$2,050,000 and $770,000 net revenues, respectively, for the nine months ended
September 30, 1996, and (b) the fact that WRKL-AM net revenues in the nine
months ended September 30, 1997 were down $248,000, or 21%, when compared to the
same period in 1996. The Y-107 LA increase was principally due to the fact that
(a) the 1997 net revenues include nine months of Y-107 LA operations, whereas
the 1996 net revenues include only six months of Y-107 LA operations, and (b)
the 1996 period net revenues were the first six months of operation of the Los
Angeles Stations which was commenced with no existing business. The Y-107 NY
increase reflects growth resulting from the commencement of the initial
broadcast of Y-107 NY in January 1997.
STATION OPERATING EXPENSES excluding depreciation and amortization in the
nine months ended September 30, 1997 were $9,834,000, as compared to $9,726,000
in the nine months ended September 30, 1996, an increase of $108,000, or 1.1%.
This small increase is due to the inclusion of the expenses of Y-107 LA and
Y-107 NY offset by the absence of operating expenses of the Q Stations. The
increase in Y-107 LA operating expenses reflects the fact that (a) the 1997
period station operating expenses represent nine months of operations as
compared to six months operations reported in the 1996 period, and (b) the six
month operations in the 1996 period were the first six months of operation of
the station, reflecting incomplete staffing and the absence of significant
marketing initiatives, offset by the expense of LMA fees and expenses of
$650,000 incurred in the same period in 1996. The increase in the Y-107 NY
operating expenses when compared to the prior year period operating expenses of
the stand-alone WWXY-FM are due to (a) $640,000 of non-recurring LMA fees and
expenses for WWZY-FM and WWVY-FM, (b) significantly increased advertising and
promotional expenditures incurred to launch Y-107 NY and (c) increased selling
and general and administrative expenses in developing the Y-107 NY
infrastructure.
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DEPRECIATION AND AMORTIZATION EXPENSES for the nine months ended September
30, 1997 were $1,316,000, as compared to $867,000 for the corresponding period
in the prior year, an increase of $449,000, or 52%. This increase was due
primarily to the amortization of intangibles and depreciation of capital assets
related to the acquired stations.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES for the nine months ended
September 30, 1997 were $1,104,000, as compared to $804,000 for the
corresponding period in the prior year, an increase of $300,000, or 37%. This
increase is primarily due to increases in administrative staff to support the
growth of the Company.
INTEREST EXPENSE for the nine months ended September 30, 1997 was $3,062,000
as compared to $1,880,000 for the corresponding period in the prior year, an
increase of $1,182,000, or 63%. This increase reflects borrowings under the
Existing Credit Facility made to fund the Company's acquisitions, and (b)
increased stockholders' loans throughout the 1997 period compared to the
corresponding period in 1996. In the nine months ended September 30, 1997 and
1996, the average outstanding total debt for the Company was $53,058,000 and
$28,585,000, respectively. The average rate of interest on the outstanding debt
was 7.7% and 8.8%, respectively.
NET LOSSES for the nine months ended September 30, 1997 were $11,435,000, as
compared to $798,000 for the corresponding period in the prior year. The
increase in the net loss of $10,637,000 is primarily attributable to (a) 1996
period gain of $6,608,000 on the sale of the Q stations, (b) higher interest
expense and depreciation and amortization expenses incurred as part of the radio
station acquisitions of the Company, and (c) a charge of $3,713,000 in the 1997
period relating to awards under an employment incentive arrangement offset by
the absence of the Q stations operations in 1997 and improvement in the Y-107 LA
performance.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET REVENUES in the year ended December 31, 1996 were $7,944,000 as compared
to $5,225,000 for the year ended December 31, 1995, an increase of $2,719,000,
or 52%. This increase was primarily due to (a) net revenues of $1,567,000 and
$1,106,000 from the Company's LMA operation and acquisition of the Los Angeles
Stations and KWIZ-FM, respectively, and (b) an increase in net revenues of
WRKL-AM of $320,000 for the year ended December 31, 1996 compared to the prior
year. This increase was partially offset by decreases in net revenues of the Q
stations of $237,000 due to their shorter period of operation and a small
decrease in net revenues of $36,000 at WRGX-FM.
STATION OPERATING EXPENSES excluding depreciation and amortization for the
year ended December 31, 1996 were $12,253,000, as compared to $7,185,000 in the
year ended December 31, 1995, an increase of $5,068,000, or 71%. This increase
was primarily due to (a) station operating expenses of $3,870,000 and $359,000
from the Company's LMA operation and acquisition of Y-107 LA and KWIZ-FM,
respectively, (b) an increase in WRKL-AM station operating expenses of $412,000
for the year ended December 31, 1996 compared to the prior year and (c) an
increase of $476,000 in the Q stations operating expenses. The 1996 Y-107 LA
operating costs of $3,870,000 include $650,000 of non-recurring LMA expenses
incurred during the two-month period ended May 30, 1996. The increased WRKL-AM
and Q stations operating costs in 1996 when compared to 1995 reflect significant
investments in sales, marketing, programming and administrative support to grow
the stations' ratings.
DEPRECIATION AND AMORTIZATION EXPENSES for the year ended December 31, 1996
were $1,388,000, as compared to $798,000 for the year ended December 31, 1995,
an increase of $590,000, or 74%. This increase was due primarily to the
amortization of intangibles and the depreciation of capital assets acquired
related to the Y-107 LA and KWIZ-FM acquisitions.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES for the year ended December
31, 1996 were $1,201,000, as compared to $425,000 for the year ended December
31, 1995, an increase of $776,000, or 182%. This
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increase is due to the establishment of a corporate staff during 1995 and early
1996 to support implementation of the Company's business plan.
INTEREST EXPENSE for the year ended December 31, 1996 was $2,827,000, as
compared to $842,000 for the year ended December 31, 1995, an increase of
$1,985,000, or 236%. This increase reflects (a) the initial borrowings of $31
million under the Existing Credit Facility made to fund, in part, the
acquisition of Y-107 LA and KWIZ-FM on May 30, 1996, and (b) increased
stockholders' loans throughout 1996 compared to 1995. In the year ended December
31, 1996 and 1995, the average outstanding total debt for the Company was
$37,026,000 and $11,390,000, respectively. The average rate of interest on the
outstanding debt was 7.6% and 7.4%, respectively.
NET LOSSES for the year ended December 31, 1996 were $3,098,000, as compared
to $4,005,000 for the year ended December 31, 1995, a decrease of $907,000, or
23%. The net decrease is primarily attributable to the gain on the sale by the Q
stations of $6,608,000 and increased net revenue, offset by (a) higher interest
expense and depreciation and amortization expenses incurred as part of the radio
station acquisitions of the Company, and (b) an increase in station operating
expenses as the Company reconfigured and developed the Los Angeles Stations.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1994
NET REVENUES in the year ended December 31, 1995 were $5,225,000 as compared
to $2,074,000 for the year ended September 30, 1994, an increase of $3,151,000,
or 152%. This increase was primarily due to (a) net revenues of $2,938,000 at
the Original New York Stations in the year ended December 31, 1995, and (b) an
increase in net revenues of $213,000 at the Q stations for the year ended
September 30, 1995 compared to the prior year.
STATION OPERATING EXPENSES, excluding depreciation and amortization for the
year ended December 31, 1995 were $7,185,000 as compared to $2,326,000 for the
year ended September 30, 1994, an increase of $4,859,000, or 209%. This increase
was primarily due to (a) station operating expenses of $4,075,000 at the Company
stations in the year ended December 31, 1995, and (b) an increase in station
operating expenses of $784,000 at the Q stations for the year ended September
30, 1995 compared to the prior year. The increased Q stations' operating
expenses reflect investments made to improve programming and marketing.
DEPRECIATION AND AMORTIZATION EXPENSE for year ended December 31, 1995 was
$798,000 as compared to $524,000 for the year ended September 30, 1994, an
increase of $274,000, or 52%. This increase was primarily due to the acquisition
of the Company stations on January 1, 1995.
CORPORATE, GENERAL AND ADMINISTRATIVE EXPENSES for the year ended December
31, 1995 were $425,000, as compared to zero for the year ended September 30,
1994. This increase is due to the establishment of corporate resources for
programming, finance and engineering in 1995 to oversee the Company and Q
stations, and to commence implementation of the Company's business plan.
INTEREST EXPENSE for the year ended December 31, 1995 was $842,000 as
compared to $439,000 for the year ended September 30, 1994, an increase of
$403,000, or 92%. This increase was primarily due to increased interest on
stockholders' loans advanced to complete the acquisition of the Company stations
on January 1, 1995. In the years ended December 31, 1995 and 1994, the average
outstanding total debt for the Company was $11,390,000 and $5,476,000,
respectively. The average rate of interest for the outstanding debt was 7.4% and
8.0%.
NET LOSSES for the year ended December 31, 1995 were $4,005,000, as compared
to $1,163,000 for the year ended September 30, 1994, an increase of $2,842,000,
or 244%. The net loss increase is primarily attributable to (a) higher interest
expense and depreciation and amortization expenses incurred as part of the
Company stations' acquisition, and (b) an increase in station operating expenses
as the Company began operations of the Company stations, offset by an increase
in net revenues.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has reported net losses since inception primarily due to
broadcast cash flow deficits characteristic of the start up of Y-107 LA and
Y-107 NY, and depreciation and amortization charges relating to the Company's
acquisition of radio stations, as well as interest charges on its outstanding
debt. There can be no assurance that losses will not be incurred in the future.
See "Risk Factors--Limited History of Operations; Net Losses and Negative Cash
Flow from Operations; Expected Future Net Losses and Negative Cash Flow from
Operations." The Company believes that it will report significant operating
losses for the year ended December 31, 1997. In addition, because its properties
are in the early stages of development, the Company expects to generate
significant net losses as it continues to expand its presence in major markets.
Accordingly, the Company expects to generate consolidated net losses for the
foreseeable future. As a result, working capital needs have been met by
borrowings, including loans from the Principal Stockholders (which borrowings
are to be contributed to the capital of the Company immediately prior to the
consummation of the Offering) and borrowings under the Existing Credit Facility.
See "Risk Factors--Limited History of Operations; Net Losses and Negative Cash
Flow from Operations; Expected Future Net Losses and Negative Cash Flow from
Operations". The Company has entered into various employment contracts with
eleven individuals comprised of officers and senior management that provide for
minimum salaries and incentives based upon specified levels of performance. The
minimum payments under these contracts are $1,459,000 in 1997, $1,401,000 in
1998, $326,000 in 1999 and $182,000 in 2000.
The Company has never paid cash or stock dividends on shares of its Common
Stock. The Company will continue to report net losses throughout the start up
period for the Chicago Stations. Furthermore, it intends to retain future
earnings for use in its business and does not anticipate paying dividends on
shares of its Common Stock in the foreseeable future.
CASH FLOWS FROM OPERATING ACTIVITIES
In each of the years ended September 30, 1994, December 31, 1995 and 1996,
and in each of the nine-month periods ended September 30, 1996 and 1997, the
Company reported cash used in operations. In the year ended December 31, 1996
and the nine months ended September 30, 1996 these losses were predominantly due
to the funding of start-up operations at Y-107 LA, together with an increase in
interest expense in both periods, as borrowings under the Existing Credit
Facility were used to fund the Y-107 LA radio station acquisition. In the nine
months ended September 30, 1997, the deficit was predominantly due to the
start-up operating losses of Y-107 NY and increased interest expense for
borrowings under the Existing Credit Facility to finance the Y-107 LA and Y-107
NY radio station acquisitions.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excluding acquisitions of radio stations) were
$653,000 and $398,000 in the year ended December 31, 1996, and the nine months
ended September 30, 1997, respectively. These expenditures reflect the need to
upgrade and expand the studio and broadcast facilities, computer support
equipment, and to purchase promotional vehicles for the newly formed trimulcast
stations. The Company has no commitments for capital expenditures at September
30, 1997, but does anticipate capital expenditures to upgrade office and studio
facilities in the next twelve months.
Under the terms of the Credit Facility, the Company will have a $35.0
million reducing revolving loan facility, of which amount Mr. Subotnick will
guarantee the payment of up to $6.0 million. The Credit Facility will mature on
the fifth anniversary of the closing of the Offering. At September 30, 1997, the
Company had $56.7 million outstanding under the Existing Credit Facility, $29.0
million of which will be repaid with the net proceeds of the Offering and the
Standby Commitment. Outstanding amounts under the Credit Facility will bear
interest at an applicable margin that will vary based upon the Company's ratio
of debt to EBITDA plus a rate based, at the option of the Company, on the
participating bank's prime rate
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(in which case the applicable margin will vary from .50% to 2.00%), or the
London Interbank Borrowing Rate (in which case the applicable margin will vary
from 1.50% to 3.00%).
Chase's revolving credit commitment under the Credit Facility will be
reduced by 20% of the total commitment on the second, third and fourth
anniversary of the closing date and the remaining 40% on the fifth anniversary
of the closing date. On each April 30, commencing April 30, 1999, Chase's total
commitment amount under the Credit Facility will also be reduced by 50% of the
Company's excess cash flow (as defined in the Credit Facility) during the most
recently completed fiscal year, which reduction will be applied in inverse order
to the remaining scheduled reductions mentioned above. In addition, Chase's
commitment shall also be reduced upon receipt of certain net cash proceeds in
excess of specified amounts from the sale of assets of the Company which are not
applied to purchase additional assets, which reductions will be applied to the
remaining scheduled reductions mentioned above, ratably, in accordance with the
amounts of such scheduled reductions. The Company will pay fees of one half of
one percent per annum, on the aggregate unused portion of the facility. See
"Risk Factors--Substantial Leverage; Pledge of Assets; Covenants."
In addition to the guarantee by Mr. Subotnick of up to $6.0 milion of the
Credit Facility, substantially all of the Company's assets will be pledged to
secure the performance of the obligations of the Company under the Credit
Facility.
The Credit Facility will contain certain financial and operational covenants
and other restrictions with which the Company must comply, including, among
others, limitations on capital expenditures, the incurrence of additional
indebtedness, restrictions on the use of borrowings, limitations on paying cash
dividends and redeeming or repurchasing capital stock of the Company, and
requirements to maintain certain financial ratios, including but not limited to,
minimum EBITDA for 1998 and each year thereafter, maximum total leverage,
minimum interest coverage and minimum fixed charge coverage. The Company is
currently in compliance with all covenants and other restrictions under the
Existing Credit Facility, and anticipates that it will meet the requirements of
the Credit Facility. See "Risk Factors--Substantial Leverage; Pledge of Assets;
Covenants."
The Credit Facility will contain customary events of default, including
material misrepresentations, payment defaults and default in the performance of
other covenants, certain bankruptcy defaults, events having a material and
adverse effect on the Company and revocation of any of the Company's broadcast
licenses. The Credit Facility will also provide that an event of default will
occur upon the occurrence of a "change of control" as defined in the Credit
Facility. For purposes of the Credit Facility, a change of control will occur
when (i) any person or group other than the Principal Stockholders and their
affiliates obtains the power to elect a majority of the Board of Directors, (ii)
the Company fails to own 100% of the capital stock of its subsidiaries owning
any of the FCC broadcast licenses, or when (iii) the Board of Directors does not
consist of a majority of continuing directors.
The Company is actively reviewing potential STMC, and other station
acquisition candidates. As of the date of this Prospectus, the Company has no
commitments for any such acquisitions. After giving effect to the Offering and
the Standby Commitment and application of the net proceeds therefrom and the
guarantee by Mr. Subotnick of up to $6.0 million of the Credit Facility, the
Company will have available approximately $7.3 million of borrowing capacity
under the Credit Facility, which can be used for general corporate purposes,
including financing these acquisitions. Amounts available under the Credit
Facility may not be sufficient to support the Company's growth strategy and as a
result the Company may require additional debt or equity financing in order to
acquire additional radio stations and accomplish its long-term business
strategies. There can be no assurance any such financing will be available or
available on acceptable terms. There also can be no assurance that Mr. Subotnick
will guarantee any additional amounts of the Company's obligations. In addition,
because of the Company's substantial indebtedness, a significant portion of the
Company's broadcast cash flow is required for debt service.
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The Company anticipates that the net proceeds of the Offering, its available
borrowing capacity and its broadcast cash flow from operations will be
sufficient to finance its capital expenditure programs, as well as existing
operational and debt service requirements through December 31, 1998. Management
believes that its long term liquidity needs will be satisfied through a
combination of (i) the Company's successful implementation and execution of its
growth strategy to acquire and build a major market broadcast group; and (ii)
the Company's properties achieving positive operating results and cash flows
through revenue growth and control of operating expenses. If the Company is
unable to successfully implement its strategy, the Company may be required to
(i) obtain, in addition to the Offering, financing through public or private
sale of debt or equity securities of the Company or (ii) otherwise restructure
its capitalization.
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BUSINESS
GENERAL
The Company was formed in 1994 to acquire radio broadcast properties in or
adjacent to major metropolitan markets and utilize innovative engineering
techniques and low-cost, ratings-driven operating strategies to develop these
properties into successful metropolitan radio stations. In order to accomplish
this objective, the Company applies a variety of innovative broadcast
engineering techniques to the radio broadcast properties it acquires, including
STMC. STMC consists of acquiring two or more stations which broadcast on the
same frequency and simulcasting their signals to achieve broad coverage of a
targeted metropolitan market. In the future, the Company may apply STMC to first
adjacent frequencies. In addition to STMC, the Company intends to employ other
broadcast engineering techniques to enter major metropolitan markets at
attractive valuations. These engineering techniques include acquiring suburban
radio stations and moving the station's broadcast antenna closer to the
metropolitan area ("move-ins") and acquiring high-power stations adjacent to
major metropolitan markets and focusing such stations' broadcast signal into the
metropolitan area.
The Company's acquisition/engineering strategies enable it to provide near
seamless coverage of major metropolitan markets at a significantly lower
acquisition cost than typically required to acquire a major market Class B
station. The Company currently owns and operates STMC station combinations in
New York, Los Angeles and Chicago, the three largest radio markets in the United
States in terms of aggregate advertising revenues.
The Company is controlled by Stuart Subotnick, a general partner of
Metromedia Company, who will own, subsequent to the Offering, approximately 62%
of the Common Stock, representing 94% of the voting power of the Common Stock
(without giving effect to the exercise of any options to acquire shares of Class
A Common Stock and without giving effect to the Standby Commitment).
The Company's first targeted market was Los Angeles where the Company
operates a three station combination, which broadcasts as Y-107 LA, featuring a
modern rock format on the 107.1-FM frequency. Y-107 LA consists of three
stations in the Los Angeles metropolitan area, KLYY-FM, KVYY-FM, and KSYY-FM.
Y-107 LA currently covers approximately 75% of the Arbitron diaries in the Los
Angeles MSA and will increase its coverage to over 90% as a result of an
increase in its transmission power pursuant to the FCC Power Increase, which the
Company plans to implement in the fourth quarter of 1997. The Company has
demonstrated the success of its strategy in Los Angeles where Y-107 LA has
consistently ranked as one of the top 5 most listened-to modern rock radio
stations in America over the past year, and has achieved a significant share of
1.3% in the 12+ category as of the summer 1997 Arbitron book. The Company has
successfully translated its strong listenership into significant revenues as
exemplified by the increase in its power ratio (defined as a station's share of
the aggregate radio market revenues divided by its Arbitron listenership share)
from 0.5 in the six month period ended December 1996 to 1.4 in the six month
period ended June 1997. The Los Angeles Stations were acquired by the Company in
May 1996 for a combined purchase price significantly lower than the reported
purchase prices of Class B stations in the Los Angeles MSA, as evidenced by
transactions consummated since the deregulation initiated by the passage of the
Telecom Act in 1996. See "--Business Strategy" below.
The Company recently completed the acquisitions of three stations in the New
York MSA, which collectively broadcast as Y-107 NY a country music format on the
107.1-FM frequency. Y-107 NY consists of WWVY-FM, WWXY-FM and WWZY-FM. Y-107 NY
commenced operations in January 1997 as the only country music station covering
the New York City market. Y-107 NY earned a 1.1% share in the 12+category as of
the summer 1997 Arbitron book. Y-107 NY currently covers approximately 75% of
the Arbitron diaries in the New York MSA and will increase its coverage to
approximately 90% as a result of an increase in its transmission power pursuant
to the FCC Power Increase, which the Company plans to implement by the end of
the first quarter of 1998 pending receipt of FCC approval. See "Risk Factors--
Regulatory Matters and Dependence on Licenses." The New York Stations were
acquired by the Company
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for a combined purchase price significantly lower than the reported purchase
prices of Class B stations in the New York MSA, as evidenced by transactions
consummated since the passage of the Telecom Act. See "--Business Strategy"
below.
In August 1997, the Company acquired two radio stations, WVVX-FM and
WJDK-FM, in the Chicago MSA. The acquisition of the Chicago Stations secures the
Company's presence in the top three radio markets in the United States, as
measured in terms of aggregate advertising revenues. The Chicago Stations will
broadcast on the 103.1-FM frequency. The Chicago Stations were acquired for a
combined purchase price which is significantly less than the reported purchase
prices of Class B stations in the Chicago MSA, as evidenced by transactions
consummated since the passage of the Telecom Act. See "-- Business Strategy"
below. The Chicago Stations currently cover approximately 70% of the Arbitron
diaries in the Chicago MSA and will increase their coverage to 90% as a result
of the planned increase in their transmission power pursuant to the FCC Power
Increase and other technical improvements, which the Company plans to implement
in the second quarter of 1998 pending receipt of FCC approval. See "Risk
Factors--Regulatory Matters and Dependence on Licenses." The Company has
selected an adult contemporary format for the Chicago Stations and expects to
formally begin broadcasting as a single station during the first quarter of
1998.
BUSINESS STRATEGY
The Company's objective is to achieve a significant presence in selected top
20 radio markets by acquiring radio broadcast properties in or adjacent to major
metropolitan markets and utilizing innovative engineering techniques and
low-cost, ratings-driven operating strategies to develop these properties into
successful metropolitan radio stations. The following are the key elements of
the Company's business strategy:
ENTER TOP-20 MARKETS WITH LOW CAPITAL INVESTMENT
The Company intends to utilize STMC and other innovative acquisition and
engineering strategies to gain low-cost entry into major metropolitan radio
markets and achieve market coverage, which the Company believes is equivalent to
the market coverage of Class B metropolitan stations.
- LOW ACQUISITION COST. Industry research indicates that the prices of Class
B radio stations in major MSAs have increased significantly since the
passage of the Telecom Act. The Company has created radio stations with an
Arbitron market coverage that the Company believes is equivalent to the
Arbitron market coverage of Class B radio stations in the three largest
radio markets, for a substantially lower capital investment. For example,
in the Los Angeles MSA, prices have ranged from $113.0 million to $312.0
million while the Company has created for $26.8 million a Los Angeles
station which, following the FCC Power Increase, will have an Arbitron
market coverage that the Company believes is equivalent to the Arbitron
market coverage of Class B radio stations in the Los Angeles MSA.
Similarly, in the New York MSA where prices have ranged from $83.5 million
to $286.0 million, the Company has created for $19.5 million a New York
station which, following the FCC Power Increase, will have an Arbitron
market coverage that the Company believes is equivalent to the Arbitron
market coverage of Class B radio stations in the New York MSA. In the
Chicago MSA, prices have ranged from $22.0 million to $225.0 million while
the Company has created for $10.6 million a Chicago station which,
following the FCC Power Increase and other technical improvements, will
have an Arbitron market coverage that the Company believes is equivalent
to the Arbitron market coverage of Class B radio stations in the Chicago
MSA. Based on the range of purchase prices in recently consummated
transactions as specified above, achieving entry into the top three radio
markets would have required an aggregate investment of between $218.5
million and $823.0 million, while the Company has entered these three
markets with an aggregate investment of approximately $56.9 million. All
of the foregoing information regarding price ranges of Class B stations
has been derived from published industry reports of
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sales of Class B radio stations in the MSAs where the Company operates.
The Company continues to explore similar opportunities in other attractive
top 20 markets and believes that there is potential to achieve low-cost
entry by using methods such as STMC, "move-ins" and acquisitions of high
power stations adjacent to major metropolitan markets.
- EFFECTIVE COVERAGE OF ARBITRON RATED METROPOLITAN MARKETS. The Company's
objective is to achieve coverage in excess of 90% of the Arbitron diaries
in its targeted MSAs, which the Company believes is equivalent to the
coverage typically provided by Class B radio stations in major
metropolitan markets. Class B radio stations are defined by the FCC as
those facilities whose signal is predicted to cover a regional urban area.
Accordingly, the Company bases its acquisition strategy primarily on the
location of Arbitron diaries. Furthermore, to enhance the Arbitron diary
coverage of a station, once acquired, the Company's experienced staff
tailors an engineering solution to optimize the Arbitron diary coverage of
each station. Equivalent Arbitron coverage is determined by comparing the
coverage of the Company's targeted STMC stations and typical Class B radio
stations located in the MSAs. This comparison considers the actual
received signal strength of the selected station(s) and the actual number
of Arbitron diaries covered that are predicted to receive a listenable
signal. The coverage of any one station compared to another station within
any MSA will vary due to locations of the transmitter, generally most
Class B radio stations within a targeted MSA will cover between 90% and
100% of the Arbitron diaries. See "Risk Factors--Risks Associated with the
Company's Strategy."
MAXIMIZE STATION PERFORMANCE
The Company seeks to maximize the operating performance of its stations by
employing a ratings-driven, cash flow-focused, operating strategy.
- MAXIMIZE STATION REVENUE. Based on an extensive market research study, the
Company carefully selects the format of the station to maximize
penetration of audience share and advertising revenues in that market. For
example, the Company believes that its carefully selected modern rock
format in Los Angeles and unique country music format in New York City
provide it with a competitive advantage and enhanced listenership in the
respective markets. The Company believes that its strong listenership has
translated into significant revenue as exemplified by the increase in its
power ratio from 0.5 in the six month period ended December 1996 to 1.4 in
the six month period ended June 1997 in the Los Angeles market.
- MAXIMIZE BROADCAST CASH FLOW. Another key aspect of the Company's
operating strategy will be to maximize its broadcast cash flow by
controlling its operating costs. The Company has not historically, and
does not intend at present, to expend the significant costs associated
with hiring highly compensated on-air personalities. The Company maintains
operating costs at a relatively low level and focuses on core programming
content to achieve high ratings.
STATION OPERATIONS
The Company currently owns station groups in Los Angeles, New York and
Chicago, the three largest markets in the United States in terms of aggregate
radio advertising revenues. Y-107 LA and Y-107 NY have each exhibited
significant increases in Arbitron ratings and net revenue since their respective
launches. The Company has selected an adult contemporary format for the Chicago
Stations and expects to formally begin broadcasting the Chicago Stations as a
single station in the first quarter of 1998.
LOS ANGELES
The Los Angeles market is the second largest Arbitron market in terms of
population and the largest in terms of aggregate radio market revenues in the
United States, with 1996 revenues of $540.0 million. Los Angeles is the first
market in which the Company implemented STMC, with its acquisitions of three
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radio stations for an aggregate purchase price of $26.8 million. Subsequent to
the planned increase in the power of one of the Los Angeles Stations pursuant to
the FCC Power Increase, which the Company expects to complete in the fourth
quarter of 1997, the Arbitron diary coverage of Y-107 LA will increase to over
90%. The Company believes that this coverage is substantially similar to the
Arbitron diary coverage of many of the highest-ranked Los Angeles Class B
stations. In addition to its coverage of the Los Angeles market, Y-107 LA covers
parts of the Ventura, Orange, Riverside-San Bernardino and San Diego markets.
The Company believes that identifying the appropriate format in a particular
market is crucial to the station's ability to achieve meaningful penetration of
the market's listening audience and aggregate advertising revenues. After
extensive research of the Los Angeles market, the Company launched a modern rock
format, as it believed that there was no comparable station that offered a
lively mix of modern rock music that primarily targets the important 25-54
demographic. The Company has demonstrated the success of its strategy in Los
Angeles where Y-107 LA has consistently ranked as one of the top 5 most
listened-to modern rock radio stations in America over the past year and has
achieved a significant share of 1.3% in the 12+ category as of the summer 1997
Arbitron book. The Company has successfully translated its strong listenership
into significant revenues as exemplified by the increase in its power ratio from
0.5 in the six month period ended December 1996 to 1.4 in the six month period
ended June 1997. Y-107 LA's cume (the estimated number of different persons who
listened to a station for a minimum of five minutes in a quarter-hour of a
reported daypart) grew from 50,000 to 574,500 in just 6 months.
The Company believes that to achieve Class B station equivalent Arbitron
coverage and broadcast quality requires extensive engineering expertise. In Los
Angeles, the Company uses several advanced techniques to achieve what the
Company believes to be substantially full coverage. In addition to the three
stations, the Company uses a booster located in the San Fernando Valley to
enhance its coverage of the market. The Company believes these engineering
solutions have resulted in significantly broader coverage than traditional
simulcasting.
NEW YORK
The New York MSA is the largest Arbitron market in terms of population and
the second largest in terms of aggregate radio market revenues in the United
States, with 1996 revenues of $507.2 million. From 1991 to 1996, radio
advertising revenue in the New York MSA grew from $349.0 million to $507.2
million, a compound annual growth rate of 7.8%. New York is the second market
which the Company entered with its acquisitions of three radio stations for an
aggregate purchase price of approximately $19.5 million. The Company has
implemented STMC in New York as well, and believes that it has created the
equivalent of a New York Class B station. Subsequent to the implementation of
the planned power increase of the New York Stations pursuant to the FCC Power
Increase, which the Company expects to complete by the end of the first quarter
of 1998 pending receipt of FCC approval, the Arbitron diary coverage of Y-107 NY
will increase to approximately 90%. See "Risk Factors--Regulatory Matters and
Dependence on Licenses." The Company believes that this coverage is
substantially similar to the Arbitron diary coverage of many of the
highest-ranked New York Class B stations.
Y-107 NY has an exclusive format presence in New York, as the Company
believes there are no other country music stations covering substantially all of
the New York MSA. Country music is traditionally a very strong 25-54 demographic
format, which routinely generates high power ratios relative to other formats.
As the only country music station covering substantially all of the New York
market, Y-107 NY's recognition and popularity was significantly enhanced
recently when the station broadcasted live the Garth Brooks concert in Central
Park in New York City. Y-107 NY commenced operations on January 1, 1997 and has
already earned a share of 1.1% in the 12+category as of the summer 1997 Arbitron
book. As in Los Angeles, the Company does not intend to incur the high costs
associated with highly compensated on-air personalities or mainstream syndicated
programming.
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The major technical enhancements planned for the New York operation are the
installation of a new digital audio delay system that will allow precise
adjustment of the audio delay between the transmitters to reduce received noise,
installation of new transmitting antennas that will be optimized to provide the
strongest signal possible over populated areas of the New York MSA and new
transmitters to accommodate the FCC Power Increase.
ADVERTISING SALES
The rates a station can charge are in large part dictated by the station's
ability to attract audiences in the demographic groups targeted by its
advertisers, as measured principally by Arbitron Radio Market Reports. The
Company believes that identifying the appropriate format in a particular market
is crucial to the station's ability to achieve meaningful penetration of the
listening audience of the market. In each market entered by the Company, an
extensive competitive analysis is performed to select the format with the
greatest audience and revenue potential.
Virtually all of the Company's revenues are generated from the sale of local
and national advertising for broadcast on its radio stations. The Company
believes that radio is one of the most efficient and cost-effective means for
advertisers to reach specific demographic groups. Advertising rates charged by
radio stations are based primarily on (i) a station's share of the audience in
the demographic groups targeted by advertisers, (ii) the number of stations in
the market competing for the same demographic groups, and (iii) the supply of
and demand for radio advertising time. Rates are generally highest during
morning and afternoon commuting hours.
The number of advertisements that can be broadcast without jeopardizing
listening levels (and the resulting ratings) is limited in part by the format of
a particular station. The Company's stations strive to maximize revenue by
constantly managing the number of commercials available for sale and adjusting
prices based upon local market conditions. In the broadcasting industry, radio
stations often utilize trade (or barter) agreements to generate advertising time
sales in exchange for goods or services (such as travel and lodging) instead of
for cash. The Company minimizes its use of trade agreements. The Company
determines the number of advertisements broadcast hourly, which maximizes
available revenue dollars without jeopardizing listening levels. Although the
number of advertisements broadcast during a given time period varies, the total
number of advertisements broadcast on a particular station generally does not
vary significantly from year to year. As is typical of the radio broadcasting
industry, the Company's stations respond to changing demand for advertising
inventory by varying prices rather than by varying the target inventory level
for a particular station.
Most advertising contracts are short-term and run only for a few weeks.
Ninety percent of the Company's gross revenue is generated from local
advertising, which is sold primarily by a station's sales staff. To achieve
greater control over advertising dollars, the Company's sales force focuses on
establishing direct relationships with local advertisers. To generate national
advertising sales, the Company has recruited in-house staff to represent it in
the largest national sales markets of New York City, Boston, Philadelphia,
Chicago, Atlanta, Dallas, Detroit and San Francisco. This also helps to contain
commission costs as large national representative firms tend to have higher
commission rates than an in-house national sales representative.
COMPETITION
Radio broadcasting is a highly competitive business. Within their respective
markets, each of the Company's radio stations competes for audience share and
advertising revenue directly with other radio stations, as well as with other
media such as television, print media, billboards, compact discs and music
videos. There are a number of other better-capitalized companies competing in
the same geographic markets as the Company, many of which have greater financial
resources. In addition, recently the radio industry has experienced significant
consolidation which has resulted in several radio station groups that
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have a large number of radio stations throughout the United States and vastly
greater financial resources and access to capital than the Company.
The financial success of each of the Company's radio stations is dependent
principally upon its share of the overall radio advertising revenue within its
geographic market, its promotion and other expenses incurred to obtain that
revenue and the economic health of the geographic market. Radio advertising
revenues are, in turn, highly dependent upon audience share. Radio station
operators are subject to the possibility of another station changing programming
formats to compete directly for listeners and advertisers or launching an
aggressive promotional campaign in support of an already existing competitive
format. If a competitor, particularly one with substantial financial resources,
were to attempt to compete in either of these fashions, the broadcast cash flow
of the Company's affected station could decrease due to increased promotional
and other expenses and/or lower advertising revenues resulting from lower
ratings. There can be no assurance that any one of the Company's radio stations
will be able to maintain or increase its current audience ratings and radio
advertising revenue market share.
The Company will also face competition from other radio stations that
attempt to replicate the engineering techniques of the Company to cover a
metropolitan area and from stations that simply simulcast on the same or first
adjacent frequencies. While simulcasting has been employed by other broadcast
radio operators in the past, the primary purpose has been to reduce programming
costs for the individual stations. The Company believes that most broadcast
radio operators that have employed simulcasting have done so on different
frequencies. The Company believes that few operators have successfully used
simulcasting to effectively cover an entire MSA.
Radio broadcasting is also subject to competition from new media
technologies that are being developed or introduced, such as the delivery of
audio programming by cable television systems or the introduction of DAB. DAB
may deliver by satellite or terrestrial means multi-channel, multi-format
digital radio services with sound quality equivalent to compact discs to
nationwide and regional audiences. The Company cannot predict the effect, if
any, that any such new technologies may have on the radio broadcasting industry.
RECENTLY COMPLETED RADIO STATION ACQUISITIONS
Since its incorporation in August 1994, the Company has acquired the assets
of ten radio stations and has disposed of one station. The following is a
summary of the acquisitions of radio stations which the Company has consummated
since its incorporation. All of these transactions were with non-affiliated
persons.
NEW YORK
In December 1994, the Company acquired the assets of radio station WRGX-FM
(now WWXY-FM), Briarcliff Manor, New York, from West-Land Communicators, Inc.
("West-Land") for a purchase price of $2.5 million and the issuance of a
promissory note in the amount of $1.0 million to West-Land. In April 1997, the
Company acquired the assets of radio station WWHB-FM (now WWVY-FM), Hampton
Bays, New York, from South Fork Broadcasting Corporation ("South Fork") for a
purchase price of $4.0 million. In June 1997, the Company acquired the assets of
radio station WZVU-FM (now WWZY-FM), Long Branch, New Jersey, including a radio
tower, a radio antenna and a building, from K&K Radio Broadcasting L.L.C. and
K&K Tower, L.L.C. for an aggregate purchase price of $12.0 million and certain
payments under existing leases of the building facilities. K&K Radio
Broadcasting, L.L.C., K&K Tower, L.L.C. and each of their controlling members
and the general manager of WZVU-FM entered into a covenant not to compete with
the Company for a period of three years. Also, in December 1994, the Company
acquired the assets of radio station WRKL-AM, New City, New York, from Rockland
Communicators, Inc. for a purchase price of $1.0 million. The Company intends to
dispose of this station.
LOS ANGELES
In May 1996, the Company acquired four radio stations in the Los Angeles
area from Douglas Broadcasting, Inc. ("Douglas"). The Company acquired the
assets of radio station KMAX-FM (now KLYY-FM), Arcadia, California, KAXX-FM (now
KVYY-FM), Ventura, California, KBAX-FM (now
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KSYY-FM) Fallbrook, California, and KWIZ-FM, Santa Ana, California, for an
aggregate purchase price of $38.0 million. The Company also acquired FM
Translator station K252BF, Temecula, California, which rebroadcasts on 98.3 MHz
the signal of KSYY-FM, and FM Booster station KLYY-FM, Burbank, California,
which boosts on 107.1 MHz the broadcast of the signal of KLYY-FM. In December
1996, the Company sold radio station KWIZ-FM to Liberman Broadcasting, Inc. for
a price of $11.2 million.
CHICAGO
In August 1997, the Company acquired the assets of radio station WVVX-FM,
Highland Park, Illinois, from WVVX License, Inc., for a purchase price of $9.5
million. Douglas, WVVX, Inc. and WVVX License, Inc. agreed not to compete for a
period of eighteen months. In August 1997, the Company acquired the assets of
radio station WJDK-FM, Morris, Illinois, from DMR Media, Inc., for a purchase
price of $1.1 million. In addition, the Company agreed not to compete with DMR
Media, Inc.'s operations of radio station WCSJ-AM, Morris, Illinois, for a
period of five years.
PROPOSED RADIO STATION DISPOSITION
The Company intends to dispose of the assets of radio station WRKL-AM, New
City, New York. Completion of this disposition will be subject to certain
conditions, including receipt of FCC approval. There can be no assurance that
this disposition will be consummated.
EMPLOYEES
At September 30, 1997, the Company had approximately 106 full-time employees
and 87 part-time employees. Seven full-time employees of radio station WRKL-AM
are represented by a union. The Company believes that its relations with its
employees are good.
The Company employs several on-air personalities and generally enters into
employment agreements with certain of these personalities to protect its
interests in those relationships that it believes to be valuable. The loss of
certain of these personalities could result in a short term loss of audience
share but the Company does not believe that any such loss would have a material
adverse effect on the Company.
FEDERAL REGULATION OF RADIO BROADCASTING
The ownership, operation and sale of radio stations are subject to the
jurisdiction of the FCC, which acts under authority granted by the
Communications Act. Among other things, the FCC assigns frequency bands for
broadcasting; determines the particular frequencies, locations and power of
stations; issues, renews, revokes and modifies station licenses; determines
whether to approve changes in ownership or control of station licenses;
regulates equipment used by stations; imposes regulations and takes other action
to prevent harmful interference between stations; adopts and implements
regulations and policies that directly or indirectly affect the ownership,
management, programming, operation and employment practices of stations; and has
the power to impose penalties for violations of its rules or the Communications
Act. In February 1996, Congress enacted the Telecommunications Act of 1996 (the
"Telecom Act") to amend the Communications Act. The Telecom Act, among other
measures, directed the FCC, which has since conformed its rules, to (a)
eliminate the national radio ownership limits; (b) increase the local radio
ownership limits as specified in the Telecom Act; (c) issue broadcast licenses
for periods of eight years; and (d) eliminate the opportunity for the filing of
competing applications against broadcast license renewal applications.
Congress, via the recently enacted Balanced Budget Act of 1997, authorized
the FCC for the first time to conduct auctions for the awarding of initial
broadcast licenses or construction permits for commercial radio and television
stations. To facilitate the settlement without auctions of already pending
mutually exclusive applications, Congress directed the FCC to waive existing
rules as necessary. While the Company is not a participant in any such
proceeding, this recent action should result in the awarding of construction
permits for additional radio stations, some of which might have the potential to
compete with the Company's radio stations.
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LICENSE GRANTS AND RENEWALS
The Communications Act provides that a broadcast license may be granted to
an applicant if the grant would serve the public interest, convenience and
necessity, subject to certain limitations referred to below. In making licensing
determinations, the FCC considers the legal, technical, financial and other
qualifications of the applicant, including compliance with the Communications
Act's limitations on alien ownership, compliance with various rules limiting
common ownership of broadcast, cable and newspaper properties, and the
"character" of the licensee and those persons holding "attributable" interests
in the licensee. Broadcast licenses are granted for specific periods of time
and, upon application, are renewable for additional terms. The Telecom Act
amended the Communications Act to provide that broadcast licenses be granted,
and thereafter renewed, for a term not to exceed eight years, if the FCC finds
that the public interest, convenience, and necessity would be served.
Generally, the FCC renews broadcast licenses without a hearing. The Telecom
Act amended the Communications Act to require the FCC to grant an application
for renewal of a broadcast license if: (1) the station has served the public
interest, convenience and necessity; (2) there have been no serious violations
by the licensee of the Communications Act or the rules and regulations of the
FCC; and (3) there have been no other violations by the licensee of the
Communications Act or the rules and regulations of the FCC which, taken
together, would constitute a pattern of abuse. Competing applications against
broadcast license renewal applications are therefore not entertained. The
Telecom Act provided that if the FCC, after notice and an opportunity for a
hearing, decides that the requirements for renewal have not been met and that no
mitigating factors warrant lesser sanctions, it may deny a renewal application.
Only thereafter may the FCC accept applications by third parties to operate on
the frequency of the former licensee. The Communications Act continues to
authorize the filing of petitions to deny against broadcast license renewal
applications during particular periods of time following the filing of renewal
applications. Petitions to deny can be used by interested parties, including
members of the public, to raise issues concerning the qualifications of the
renewal applicant.
The Company's Chicago Stations' broadcast licenses were renewed in 1996 and
will expire in 2003. The Los Angeles Stations' broadcast licenses were renewed
on November 25, 1997 and will expire on December 31, 2005. The New York
Stations' and WRKL-AM's broadcast licenses will expire on June 1, 1998. Renewal
applications are due on February 1, 1998, for the Company's New York Stations
and WRKL-AM. The Company does not anticipate any material difficulty in
obtaining license renewals for full terms in the future.
The action of the FCC or its staff granting a renewal application may be
reconsidered during specified time periods by the FCC or its staff on their own
motion or by request of the petitioner, and the petitioner may also appeal
within a certain period actions by the FCC to the U.S. Court of Appeals. If the
FCC does not, on its own motion, or upon a request by an interested party for
reconsideration or review, review a staff grant or its own action within the
applicable time periods, and if no further reconsideration, review or appeals
are sought within the applicable time periods, an action by the FCC or its staff
becomes a "Final Order."
LICENSE ASSIGNMENTS AND TRANSFERS OF CONTROL
The Communications Act prohibits the assignment of an FCC license or the
transfer of control of a corporation holding such a license without the prior
approval of the FCC. Applications to the FCC for such assignments or transfers
are subject to petitions to deny by interested parties and must satisfy
requirements similar to those for renewal and new station applicants. Many
transactions involving radio stations provide, as a waivable pre-condition to
closing, that the FCC consent to the transaction has become a "Final Order."
In connection with the Company's acquisition of the broadcast licenses of
several radio stations, the Company has recently requested that the FCC issue to
the Company authorizations for auxiliary stations of use to the Company's radio
stations. The Company expects to receive such authorization by or in early 1998.
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OWNERSHIP RULES
Rules of the FCC limit the number and location of broadcast stations in
which one licensee (or any party with a control position or attributable
ownership interest therein) may have an attributable interest. The FCC, pursuant
to the Telecom Act, eliminated the previously existing "national radio ownership
rule." Consequently, there now is no limit imposed by the FCC to the number of
radio stations one party may own nationally.
The "local radio ownership rule" limits the number of stations in a radio
market in which any one individual or entity may have a control position or
attributable ownership interest. Pursuant to the Telecom Act, the FCC revised
its rules to set the local radio ownership limits as follows: (a) in markets
with 45 or more commercial radio stations, a party may own up to eight
commercial radio stations, no more than five of which are in the same service
(AM or FM); (b) in markets with 30-44 commercial radio stations, a party may own
up to seven commercial radio stations, no more than four of which are in the
same service; (c) in markets with 15-29 commercial radio stations, a party may
own up to six commercial radio stations, no more than four of which are in the
same service; and (d) in markets with 14 or fewer commercial radio stations, a
party may own up to five commercial radio stations, no more than three of which
are in the same service, provided that no party may own more than 50% of the
commercial stations in the market. FCC cross-ownership rules also prohibit one
party from having attributable interests in a radio station as well as in a
local television station or daily newspaper, although such limits are waived by
the FCC under certain circumstances. In addition, the FCC has a "cross interest"
policy that may prohibit a party with an attributable interest in one station in
a market from also holding either a "meaningful" non-attributable equity
interest (e.g., non-voting stock, voting stock, limited partnership interests)
or key management position in another station in the same market, or which may
prohibit local stations from combining to build or acquire another local
station. The FCC is presently evaluating its radio/television, radio/newspaper
and cross-interest rules and policies as well as policies governing attributable
ownership interests. The Company cannot predict whether the FCC will adopt any
changes in these policies or, if so, what the new policies will be or how they
might affect the Company.
ATTRIBUTION RULES
All holders of attributable interests must comply with, or obtain waivers
of, the FCC's multiple and cross-ownership rules. Under the current FCC rules,
an individual or other entity owning or having voting control of 5% or more of a
corporation's voting stock is considered to have an attributable interest in the
corporation and its stations, except that banks holding such stock in their
trust accounts, investment companies, and certain other passive interests are
not considered to have an attributable interest unless they own or have voting
control over 10% or more of such stock. The FCC is currently evaluating whether
to raise the foregoing benchmarks to 10% and 20%, respectively. An officer or
director of a corporation or any general partner of a partnership also is deemed
to hold an attributable interest in the media license. At present, when a single
shareholder holds a majority of the voting stock of a corporate licensee, the
FCC considers other shareholders, unless they are also officers or directors,
exempt from attribution. The FCC has asked for comments as to whether it should
continue the single majority shareholder exemption. Holders of non-voting stock
generally will not be attributed an interest in the issuing entity, and holders
of debt and instruments such as warrants, convertible debentures, options, or
other non-voting interests with rights of conversion to voting interests
generally will not be attributed such an interest unless and until such
conversion is effected. The FCC is currently considering whether it should
expand its attribution rules to reach certain of these interests in certain
circumstances. The Company cannot predict whether the FCC will adopt these or
any other proposals to change its attribution policies.
Under current FCC rules, any stockholder of the Company with 5% or more of
the outstanding votes (except for qualified institutional investors, for which
the 10% benchmark is applicable), will be considered to hold attributable
interests in the Company. Such holders of attributable interests must comply
with or obtain waivers of the FCC's multiple and cross-ownership rules. At
present, none of the attributable
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stockholders, officers and directors of the Company have any other media
interests besides those of the Company that implicate the FCC's multiple
ownership limits. In the event that the Company learns of a new attributable
stockholder and if such stockholder holds interests that exceed the FCC limits
on media ownership, under the Company's Amended and Restated Certificate of
Incorporation (as defined herein), the Board of Directors of the Company has the
corporate power to redeem stock of the Company's stockholders to the extent
necessary to be in compliance with FCC and Communications Act requirements,
including limits on media ownership by attributable parties.
The FCC will consider a radio station providing programming and sales on
another local radio station pursuant to a LMA to have an attributable ownership
interest in the other station for purposes of the FCC's radio multiple ownership
rules. In particular, a radio station is not permitted to enter into a LMA
giving it the right to program more than 15% of the broadcast time, on a weekly
basis, of another local radio station which it could not own under the FCC's
local radio ownership rules.
ALIEN OWNERSHIP LIMITS
Under the Communications Act, broadcast licenses may not be granted,
transferred or assigned to any corporation of which more than one-fifth of the
capital stock is owned of record or voted by non-U.S. citizens or foreign
governments or their representatives or by foreign corporations. Where the
corporation owning the license is controlled by another corporation, the parent
corporation cannot have more than one-fourth of the capital stock owned of
record or voted by Aliens, unless the FCC finds it in the public interest to
allow otherwise. The FCC has issued interpretations of existing law under which
these restrictions in modified form apply to other forms of business
organizations, including general and limited partnerships. The FCC also
prohibits a licensee from continuing to control broadcast licenses if the
licensee otherwise falls under Alien influence or control in a manner determined
by the FCC to be in violation of the Communications Act or contrary to the
public interest. At present, one of the Company's officers is known by the
Company to be an Alien and no other officers, directors or stockholders are
known to be Aliens. In the event that the Company learns that Aliens own,
control or vote stock in the Company in excess of the Communications Act limit,
under the Amended and Restated Certificate of Incorporation, the Board of
Directors of the Company has the corporate power to redeem stock of the
Company's stockholders to the extent necessary to be in compliance with FCC and
Communications Act requirements on alien ownership.
PROGRAMMING REQUIREMENTS
While the FCC has relaxed or eliminated many of its regulatory requirements
related to programming and content, radio stations are still required to
broadcast programming responsive to the problems, needs and interests of the
stations' service areas and must comply with various rules promulgated under the
Communications Act that regulate political broadcasts and advertisements,
sponsorship identifications, indecent programming and other matters. Affirmative
action requirements also exist. Failure to observe these or other FCC rules can
result in the imposition of monetary forfeitures, in the grant of a "short"
(less than full term) license term or, where there have been serious or a
pattern of violations, license revocation.
TECHNICAL AND INTERFERENCE RULES
FCC rules specify technical and interference requirements and parameters
that govern the signal strength and coverage area of radio stations, and which,
unless waived, must be complied with in order to obtain FCC consent to modify a
station's service area or other technical operations. The FCC allots specific FM
radio frequencies and class designations to particular communities of license.
The FM class designations, which vary by geographic location, include (in order
of increasing potential coverage area) Class A, B1, C3, B, C2, C1 and C. (The C
Class designations are generally not allocated to communities in the more
densely-populated regions of the United States, such as the Northeast and
California.) Each FM class has minimum and maximum power specifications and must
not cause interference to the protected
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service areas of other radio stations, domestic or international, operating on
the same or adjacent frequencies. Under FCC rules, a radio station must transmit
a minimum predicted signal strength to its allocated community of license, and
therefore must locate its transmitting antenna at a site providing such coverage
while also being within a specified power and height range for that station's
class designation, and at specified minimum distances from the transmitting
sites of nearby radio stations operating on the same or adjacent frequencies.
The combination of these requirements sets limits on the ability of a particular
radio station to relocate in certain directions and to increase signal coverage.
Stations may petition the FCC to change a particular station's community of
license and/or class, which changes are granted by the FCC when its service
priorities are met and conflicting reallotment proposals, if any, are resolved.
As to minimum distance separation requirements designed to afford interference
protection to other FM stations, the FCC rarely waives such specifications.
However, the FCC permits radio stations in certain circumstances to relocate to
a site not meeting the minimum distance separation rule when the station
demonstrates that the service contours of neighboring radio stations will be
protected from interference. Because STMC uses radio stations that operate on
the same or adjacent frequencies, the STMC stations' transmitting sites must be
sufficiently distant from each other to comply with the FCC's interference
protection guidelines, unless such stations are exempt from compliance by their
grandfathered status.
FCC POWER INCREASE
In most instances, changes to the technical specifications of radio
stations, such as increases in the power (effective radiated power, or "ERP")
and subsequent increased coverage area, may be made only after application to
the FCC, and grant by the FCC of a construction permit for the modification of
the station. The Company currently has pending applications before the FCC for
modifications of WRKL-AM, New City, New York, WWXY-FM, Briarcliff Manor, New
York, WWVY-FM, Hampton Bays, New York, and WWZY-FM, Long Branch, New Jersey. The
WRKL-AM modification application requests a "major" change in power, and as such
is subject to mutually exclusive applications. The FCC has not yet issued a
notice accepting the WRKL-AM modification application, which would also trigger
the deadline for the filing of any mutually exclusive applications. Such filings
would result in the delay and potential denial of the WRKL-AM modification
application, and the Company cannot predict the ultimate outcome of that
application. Similarly, the FCC has not yet issued a public notice accepting the
WWXY-FM, the WWVY-FM and the WWZY-FM modification applications for filing. The
WWXY-FM, the WWVY-FM and the WWZY-FM modification applications request increases
in the authorized power of the stations from the current equivalent 3 kilowatt
to maximum 6 kilowatt level permitted for the stations' FCC classification. The
Company withheld filing these applications while the FCC was considering changes
to its policy relating to modifications of "grandfathered short-spaced" FM
stations, such as WWXY-FM, WWVY-FM and WWZY-FM. Grandfathered short-spaced
stations are those that do not meet the current FCC's requirements for distance
separation of FM radio stations operating on the same or adjacent frequencies as
the stations were authorized before the adoption of the current rules. In the
past, power increases or relocations of such grandfathered stations often did
not comply with the FCC's current technical rules, and would be authorized by
the FCC only in limited circumstances. In August 1997, the FCC adopted a new
policy, which the Company believes will permit it to increase the power of its
radio stations to the maximum 6 kilowatt level (the "FCC Power Increase"). Until
the grant of the subject modification applications, the Company cannot be
certain that the new policy will serve to permit the increases in the Company's
coverage areas. There can be no assurance that the FCC will approve the
Company's modification applications. See "Risk Factors--Regulatory Matters and
Dependence on Licenses." KLYY-FM, Arcadia, California was granted a construction
permit by the FCC on October 23, 1997 to increase its ERP from its current 3
kilowatts to the maximum 6 kilowatts level permitted for the station's FCC
classification.
43
<PAGE>
AGREEMENTS WITH OTHER BROADCASTERS
Over the past several years a significant number of broadcast licensees,
including the Company, have entered into cooperative agreements with other
stations in their markets. One typical example is a local marketing agreement
("LMA") between two separately or co-owned stations, whereby the licensee of one
station programs substantial portions or all of the broadcast day on the other
licensee's station, subject to ultimate editorial and other controls being
exercised by the latter licensee, and sells advertising time during such program
segments for its own account. The FCC has held that LMAs do not per se
constitute a transfer of control and are not contrary to the Communications Act
provided that the licensee of the station maintains ultimate responsibility for
and control over operations of its broadcast station. As is the case of the
Company, typically the LMA is entered into in anticipation of the sale of the
station, with the proposed acquirer providing programming for the station while
the parties are awaiting the necessary regulatory approvals to the transaction.
The FCC's rules also prohibit a radio licensee from simulcasting more than
25% of its programming on other radio stations in the same broadcast service
(i.e., AM-AM or FM-FM), whether it owns both stations or operates one or both
through a LMA, where such stations serve substantially the same geographic area
as defined by the stations' principal community contours. The Company's stations
are not subject to this limitation.
PROPOSED REGULATORY CHANGES
The FCC has not yet formally implemented certain of the changes to its rules
necessitated by the Telecom Act. Moreover, the Congress and the FCC have under
consideration, and may in the future consider and adopt, new laws, regulations
and policies regarding a wide variety of matters that could, directly or
indirectly, (i) affect the operation, programming, technical requirements,
ownership and profitability of the Company and its radio broadcast stations,
(ii) result in the loss of audience share and advertising revenues of the
Company's radio broadcast stations, (iii) affect the ability of the Company to
acquire additional radio broadcast stations or finance such acquisitions, (iv)
affect cooperative agreements and/or financing arrangements with other radio
broadcast licensees, (v) affect the Company's competitive position in
relationship to other advertising media in its markets, or (vi) affect the
Company's ability to exploit its unique technical capabilities and innovative
approach to acquiring and using radio broadcast stations. Such matters include,
for example, changes to the license authorization and renewal process; proposals
to revise the FCC's equal employment opportunity rules and other matters
relating to minority and female involvement in broadcasting; proposals to alter
the benchmarks or thresholds for attributing ownership interest in broadcast
media; proposals to change rules or policies relating to political broadcasting;
changes to technical and frequency allocation matters, including those relative
to the implementation of digital audio broadcasting on both a satellite and
terrestrial basis; proposals to restrict or prohibit the advertising of beer,
wine and other alcoholic beverages on radio; changes in the FCC's
cross-interest, multiple ownership, alien ownership and cross-ownership
policies; and proposals to limit the tax deductibility of advertising expenses
by advertisers.
Although the Company believes the foregoing discussion is sufficient to
provide the reader with a general understanding of all material aspects of FCC
regulations that affect the Company, it does not purport to be a complete
summary of all provisions of the Communications Act or FCC rules and policies.
Reference is made to the Communications Act, FCC rules and the public notices
and rulings of the FCC for further information.
PATENTS AND TRADEMARKS
The Company owns registered trademark rights for STMC and domestic trademark
registrations related to the business of the Company and does not own any
patents or patent applications. The Company does not believe that any of its
trademarks are material to its business or operations.
44
<PAGE>
PROPERTIES/FACILITIES
The Company leases approximately 3,200 square feet in Hawthorne, New York,
where its corporate offices are located.
The type of properties required to support each of the Company's radio
stations includes offices, studios, transmitter sites, booster sites, translator
sites and antenna sites. The Company owns, leases or licenses the properties
required to operate its radio stations. The Company owns facilities for the New
York Stations in Long Branch (approximately 6,500 square feet) and for WRKL-AM
in Pomona (approximately 5,100 square feet). The Company leases or licenses
facilities for the Los Angeles Stations in Arcadia, Fallbrook (approximately 355
square feet), Los Angeles, Pasadena (approximately 4,896 square feet), Ventura
(approximately 758 square feet), Temecula and Burbank. The Company leases
facilities for the New York Stations in Hampton Bays (approximately 1,260 square
feet), Hawthorne, East Quoque and Westchester. The Company leases facilities for
the Chicago Stations in Highland Park (approximately 2,120 square feet) and
Morris. The Company considers its facilities to be suitable and of adequate
sizes for its current and intended purposes and does not anticipate any
difficulties in renewing those leases or licenses or in leasing or licensing
additional space, if required.
The Company owns substantially all its other equipment, consisting
principally of transmitting antennae, transmitters, studio equipment and general
office equipment. The Company owns towers in Long Branch, NJ, Highland Park, IL,
and Morris, IL. The towers, antennae and other transmission equipment used in
the Company's stations are generally in good condition.
The following table sets forth the location of the Company's principal
properties:
<TABLE>
<CAPTION>
LOCATION FACILITY
- --------------------------------------- ----------------------------------------------------
<S> <C>
Y107--LOS ANGELES
Arcadia, CA............................ FM tower(4)
Fallbrook, CA.......................... FM tower, studio, transmitter site(1)
Pasadena, CA........................... Studio, business offices(1)
Ventura, CA............................ FM tower(4), studio, transmitter site(1)
Temecula, CA........................... Translator site(1)
Burbank, CA............................ Booster site(1)
Los Angeles, CA........................ Booster site(1)
Y107--NEW YORK
Hampton Bays, NY....................... Business offices(1)
Hawthorne, NY.......................... Studio, corporate offices(1)
Long Branch, NJ........................ FM tower, studio(2)
Westchester, NY........................ FM tower(1)
East Quoque, NY........................ FM tower, transmitter site(1)
CHICAGO STATIONS
Highland Park, IL...................... FM tower(4), studio(1)
Morris, IL............................. Studio(1), FM tower, transmitter site(2)
WRKL-AM
Pomona, NY............................. Tower, studio(3)
</TABLE>
- -------------------
(1) Leased.
(2) Owned.
(3) Held for sale--See "--Proposed Station Disposition."
(4) Tower owned by the Company while the property is leased.
45
<PAGE>
LITIGATION
The Company is involved in litigation from time to time in the ordinary
course of its business. In management's opinion, the outcome of all pending
legal proceedings, individually and in the aggregate, will not have a material
adverse effect on the Company.
In December 1996, Mr. Kim Nguyen Son d.b.a. Khoa Ky Thuat Radio Station
filed an action before the Superior Court of the State of California for the
County of Orange for breach of contract against Liberman Broadcasting, Inc. and
Leonard D. Liberman (together, "Liberman") in connection with the cancellation
by the Company of four broadcasting contracts with Mr. Kim Nguyen Son for a
Vietnamese speaking radio show on KWIZ-FM, which cancellation was subsequently
confirmed by Liberman after its purchase of KWIZ-FM and the reformatting of the
radio station to Spanish language. In July, 1997, the plaintiff filed a second
amended complaint for damages for, among other things, (i) breach of contract
against the Company, Michael Kakoyiannis and Keith James and for (ii)
intentional interference with contract against Liberman, Jose Liberman, Mr.
Kakoyiannis and Mr. James. In his amended complaint, the plaintiff is asking for
compensatory damages in the amount of $500,000 plus interest and costs, as well
as punitive damages. The action against Mr. Kakoyiannis was dismissed in July,
1997. This litigation is set for trial on January 20, 1998 and the Company does
not believe that it will have a material adverse effect on its financial
condition and results of operations.
46
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company as of December 18, 1997.
<TABLE>
<CAPTION>
NAME AGE OFFICE OR POSITION HELD
- ------------------------------------ ----------- ---------------------------------------------------------------------
<S> <C> <C>
Stuart Subotnick.................... 55 Chairman of the Board
Michael Kakoyiannis................. 55 Chief Executive Officer, President and Director
Anita Subotnick..................... 54 Director
Steven G. Blatter................... 31 Vice President--Programming
Alan D. Kirschner................... 46 Vice President--Engineering
Bryan Subotnick..................... 33 Executive Vice President--Corporate Development
Paul R. Thomson..................... 41 Vice President, Chief Financial Officer and Treasurer
Silvia Kessel....................... 47 Executive Vice President and Director
Arnold L. Wadler.................... 54 Executive Vice President, General Counsel, Secretary and Director
Leonard White....................... 58 Director
</TABLE>
Each director is elected to serve until a successor is elected and qualified
or, if earlier, until the director's death, resignation or removal. Officers,
subject to the terms of their respective employment agreements, serve at the
pleasure of the Board of Directors. See "--Employment Agreements."
Set forth below is the background of each of the Company's executive
officers and directors.
STUART SUBOTNICK founded the Company in 1994 and has served as Chairman of
the Board of Directors since the Company's inception. Mr. Subotnick has spent
approximately 30 years at Metromedia Company ("Metromedia") (and its
predecessor) and together with long-time partner John W. Kluge, has overseen
Metromedia's investments in numerous media, entertainment and communications
businesses. Mr. Subotnick has served since 1996 as Vice Chairman, President and
Chief Executive Officer of Metromedia International Group, Inc. ("MIG"), an
international media and communications company that owns radio stations in
Eastern Europe and Russia. Mr. Subotnick has also served as Executive Vice
President of Metromedia and its predecessor for over five years. Metromedia and
its predecessor owned and operated radio stations, television stations, an
outdoor advertising business, and cellular telephone and paging operations
throughout the United States. Mr. Subotnick is also a director of Carnival
Cruise Lines, Inc., RDM Sports Group, Inc. ("RDM"), a diversified sporting goods
company and of Metromedia Fiber Network, Inc., a provider of high bandwidth,
fiber optic transmission capacity ("Metromedia Fiber"). Mr. Subotnick is married
to Anita Subotnick. Stuart and Anita Subotnick are the parents of Bryan
Subotnick.
MICHAEL KAKOYIANNIS founded the Company in 1994 and has served as Chief
Executive Officer, President and a Director of the Company since its inception.
Mr. Kakoyiannis has over 25 years of experience in the radio broadcasting
business in major metropolitan markets. Prior to joining the Company, Mr.
Kakoyiannis was Executive Vice President of the Westwood One Stations Group
("Westwood One"), which operated three stations in Los Angeles and New York:
WNEW-AM and WYNY-FM in New York and KQLZ-FM, known as "Pirate Radio," in Los
Angeles. Additionally, Mr. Kakoyiannis was Vice President and General Manager of
all three stations. Prior to his tenure at Westwood One, Mr. Kakoyiannis was an
Executive Vice President from 1986 to 1989 at Metropolitan Broadcasting, a
47
<PAGE>
company that was owned by Metromedia and its predecessor, and controlled nine
stations that were generally located in major metropolitan markets.
ANITA SUBOTNICK founded the Company in 1994 and has been serving as a
Director since the Company's inception. Mrs. Subotnick has been a private
investor for more than the last five years.
STEVEN G. BLATTER has been serving as Vice President in charge of
Programming for the Company since 1995. Mr. Blatter served as Program Director
for the radio station WRGX(FM), which is owned by the Company, from 1993 to 1995
and as Director of Programming for MJI Broadcasting from 1991 to 1993. Mr.
Blatter served as Music Director for the radio station WYNY(FM) owned by
Westwood One Stations Group, from 1988 to 1991.
ALAN D. KIRSCHNER has been a Vice President of the Company since September
1997 and a Director of Engineering since July 1995. Mr. Kirschner has been
serving as radio technical consultant for AM and FM radio stations since 1972.
Mr. Kirschner served as Chief Engineer responsible for technical operations of
radio station WYNY owned by Broadcasting Partners, Inc. and Evergreen Media, in
New York from 1993 to 1995 and a Director of Engineering for Westwood One
Stations Group in New York from 1988 to 1993.
BRYAN SUBOTNICK has served as Executive Vice President--Corporate
Development of the Company since September 1997. Mr. Subotnick served as Vice
President of the Company from January 1997, and Director of Operations from May
1995 to December 1996. Prior to joining the Company, Mr. Subotnick was Vice
President and General Counsel of Papamarkou & Company, an international finance
and investment company, in 1995, and as a General Partner in the law firm of
Shanker & Subotnick, which specialized in entertainment law, from 1992 to 1994.
PAUL R. THOMSON has served as Vice President of the Company since September
1997 and as Chief Financial Officer of the Company since January 1996. Prior to
joining the Company, Mr. Thomson served as Corporate Controller of Herbalife
International, Inc. from 1993 to 1996, as Chief Financial Officer of Bernard
Salick Companies from 1992 to 1993 and as Controller--Radio Stations Group of
Westwood One, Inc. from 1989 to 1992. Prior to 1992, Mr. Thomson worked with
Price Waterhouse LLP for 12 years in London, Caracas and Los Angeles. He is a
certified public accountant and a member of the Institute of Chartered
Accountants in England and Wales.
SILVIA KESSEL was elected as a Director of the Company as of the effective
date of this Prospectus and has served as Executive Vice President of the
Company since September 1997. Ms. Kessel has served as Executive Vice President
of Metromedia Fiber since October 1997, Chief Financial Officer and Treasurer of
MIG since 1995 and Executive Vice President of MIG since 1996. In addition, Ms.
Kessel served as Executive Vice President of Orion Pictures Corporation
("Orion") from January 1993 through July 1997, Senior Vice President of
Metromedia since 1994 and President of Kluge & Company since January 1994. Prior
to that time, Ms. Kessel served as Senior Vice President and a Director of Orion
from June 1991 to November 1992 and Managing Director of Kluge & Company from
April 1990 to January 1994. Ms. Kessel is a member of the Board of Directors of
MIG, Metromedia Fiber and RDM.
ARNOLD L. WADLER was elected as a Director and as General Counsel of the
Company as of the effective date of this Prospectus and has served as Executive
Vice President and Secretary of the Company since September 1997. Mr. Wadler has
served as Director of Metromedia Fiber since July 1997, General Counsel of
Metromedia Fiber since August 1997, Secretary of Metromedia Fiber since October
1997, Executive Vice President, General Counsel and Secretary of MIG since
August 29, 1996 and, from November 1, 1995 until that date, as Senior Vice
President, General Counsel and Secretary of MIG. In addition, Mr. Wadler serves
as a director of MIG and has served as a Director of Orion from 1991 until July
1997 and as Senior Vice President, Secretary and General Counsel of Metromedia
for over five years.
LEONARD WHITE was elected as a Director of the Company as of the effective
date of this Prospectus. Mr. White is currently a private investor. Mr. White
served as President and Chief Executive Officer of Orion from 1992 until 1997
and as President and Chief Executive Officer of Orion Home Entertainment
48
<PAGE>
Corporation from 1987 to 1992. Mr. White is also a Director of MIG, American
Film Technologies, Inc. and Metromedia Fiber.
BOARD; ELECTION OF DIRECTORS; AGREEMENTS REGARDING BOARD POSITIONS
From and after the Company's first annual meeting of stockholders, 25% of
the members of the Board of Directors of the Company will be elected by a
majority of the votes cast by holders of shares of Class A Common Stock, voting
as a separate class, at the annual meeting of stockholders and hold office until
their successors have been duly elected and qualified or until their death,
resignation or removal. Holders of shares of Class B Common Stock will vote as a
separate class to elect up to 75% of the Board of Directors. Directors may be
removed, with or without cause, only by the holders of the class of Common Stock
or series of Preferred Stock that, as of the date such removal is effected,
would be entitled to elect such directors at the next annual meeting of
stockholders. Vacancies in a directorship may be filled only by (a) the
remaining directors elected by holders of each class of Common Stock or series
of Preferred Stock that (x) elected such director and (y) as of the date such
vacancy is filled, would be entitled to elect such director at the next annual
meeting of the stockholders or (b) if there are no such remaining directors,
then by the vote of the holders of the class or classes of Common Stock or
series of Preferred Stock that, as of the date such vacancy is filled, would be
entitled to elect such director at the next annual meeting of stockholders,
voting as a separate class at a meeting, special or otherwise, of the holders of
Common Stock of such class or series of Preferred Stock. Within 90 days of the
consummation of the Offering, the Board of Directors will elect one additional
independent director to serve on the Board of Directors.
COMMITTEES OF THE BOARD
Within 90 days of the consummation of the Offering, the Board of Directors
will establish an Executive Committee, a Compensation Committee and an Audit
Committee. The Executive Committee will have all of the powers of the Board of
Directors in the management and affairs of the Corporation as provided under
Delaware laws. The Compensation Committee will make recommendations concerning
the salaries and incentive compensation of employees of and consultants to the
Company. The Audit Committee, a majority of which will be directors who are not
employees of the Company, will be responsible for reviewing the results and
scope of audits and other services provided by the Company's independent
auditors.
EXECUTIVE COMPENSATION
The following table sets forth in summary form all compensation for all
services rendered in all capacities to the Company for the year ended December
31, 1996 of the Chairman of the Board of
49
<PAGE>
Directors, the Chief Executive Officer of the Company and the other most highly
compensated executive officers of the Company (collectively, the "Named
Executive Officers"):
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------- ---------------
SALARY BONUS OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) SARS COMPENSATION ($)
- --------------------------------------------------- --------- --------- --------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
Stuart Subotnick................................... 1996 $ -- $ -- $ -- $ --
Chairman of the Board
Michael Kakoyiannis................................ 1996 230,000 -- -- 8,000
Chief Executive Officer and President
Paul R. Thomson.................................... 1996 165,000 25,000 -- 8,400
Vice President and Chief Financial Officer
Steven G. Blatter.................................. 1996 150,000 25,000 -- 6,665
Vice President--Programming
</TABLE>
COMPENSATION OF DIRECTORS
Directors who are officers, employees or affiliates of the Company receive
no compensation for their services as directors. Each director of the Company
who is not also an officer, employee or affiliate of the Company (an "outside
director") will be entitled to receive annual directors' fees of $20,000, plus
$1,200 for each Board of Directors meeting attended ($500 if attended
telephonically) and $500 for each committee meeting attended. Outside directors
will be eligible to participate in the 1997 Incentive Stock Plan pursuant to
which options to purchase 2,500 shares of Class A Common Stock will be granted
to each outside director immediately upon such director's initial election and
qualification for the Board of Directors. Options to purchase 2,500 shares of
Class A Common Stock will be granted annually on the day of each annual
stockholders' meeting. Each outside director will be eligible to receive options
to purchase a maximum of 25,000 shares of Class A Common Stock pursuant to the
1997 Incentive Stock Plan. Each option will have an exercise price equal to the
fair market value of a share of Class A Common Stock on the date of grant. All
such options granted to outside directors will be immediately exercisable.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Michael
Kakoyiannis, Paul R. Thomson, Steven G. Blatter and Alan D. Kirschner.
EMPLOYMENT AGREEMENT WITH MICHAEL KAKOYIANNIS
In connection with the consummation of the Offering, the Company will amend
the employment agreement of Mr. Kakoyiannis. As amended, Mr. Kakoyiannis'
employment agreement will terminate on December 31, 2000 and will provide Mr.
Kakoyiannis with a base salary of $300,000 a year. In addition to his base
salary, Mr. Kakoyiannis will also be entitled to an annual bonus as determined
by the Compensation Committee if certain performance targets have been met. Mr.
Kakoyiannis will be entitled to participate in all benefits generally made
available to senior executives of the Company. The Company will also cause a
term life insurance to be issued to Mr. Kakoyiannis for $2.0 million. Under his
employment agreement, Mr. Kakoyiannis will be entitled to receive 93,755 shares
of Class A Common Stock for every 20% increase in the average closing price of
the Class A Common Stock following the Offering (up to a maximum of 281,265
shares) provided that such price remains in effect for six consecutive months.
If Mr. Kakoyiannis earns these grants of shares of Class A Common Stock, the
Company will record future non-cash, compensation expense equal to the fair
value of such stock on the date of grant. If the fair value were based on exact
20% increments over the initial offering price of $7.00 per share, future
compensation
50
<PAGE>
expense would be approximately $2.9 million. Under Mr. Kakoyiannis' employment
agreement, the Company is obligated to register the 281,265 shares of Class A
Common Stock that may be issued to Mr. Kakoyiannis with the Registration
Statement on Form S-8 that the Company intends to file with the Commission to
cover the shares of Class A Common Stock underlying options granted and to be
granted under the 1997 Incentive Stock Plan. If the Company terminates Mr.
Kakoyiannis' employment without cause, it will be obligated to pay him severance
payments in an amount equal to eighteen times his base monthly salary. In
addition, Mr. Kakoyiannis' employment-related benefits will continue for
eighteen months after his termination of employment. If Mr. Kakoyiannis'
employment is terminated for cause or disability, the Company will not be
obligated to make any severance payments or continue any benefits. Mr.
Kakoyiannis will be entitled to terminate his employment and to receive
severance payments upon the occurrence of a "change of control" of the Company
(as defined in Mr. Kakoyiannis' employment agreement). Following the termination
of his employment with the Company for any reason, Mr. Kakoyiannis will not,
during eighteen months thereafter, own, acquire or obtain any license for an AM
or FM radio station or render any services or advice to, or be engaged in any AM
or FM radio station within 75 miles of the transmitter of any radio station
owned or operated by the Company.
EMPLOYMENT AGREEMENT WITH PAUL R. THOMSON
In connection with the consummation of the Offering, the Company will amend
the employment agreement of Mr. Thomson. As amended, Mr. Thomson's employment
agreement will terminate on December 31, 1998. Mr. Thomson's employment
agreement will provide for an annual base salary of $175,000. Mr. Thomson's
salary will be increased to $187,500 in January 1998. Mr. Thomson will be
entitled to participate in all benefits generally made available to senior
executives of the Company and to receive annual bonus compensation as determined
by the Compensation Committee if certain performance targets have been met. Such
bonus compensation shall not exceed $30,000 for 1997 and $35,000 for 1998. If
the Company terminates Mr. Thomson's employment without cause or upon the
occurrence of a "change of control" (as defined in Mr. Thomson's employment
agreement), the Company will be obligated to make severance payments in an
amount equal to (i) twelve times Mr. Thomson's monthly base salary if such
termination or change of control occurs before January 1, 1998 or (ii) the
lesser of three monthly base salary or the base salary for the remaining months
of Mr. Thomson's employment under his employment agreement if such termination
or change of control occurs after January 1, 1998. Following the termination of
his employment with the Company for any reason, Mr. Thomson shall not serve in
any accounting or financial capacity for, or otherwise be involved in the
accounting and financial functions of any radio station with a rock-based format
within 50 miles of the transmitter of any of the Company's radio stations for a
period of six months following the termination of Mr. Thomson's employment
agreement.
EMPLOYMENT AGREEMENT WITH STEVEN G. BLATTER
In connection with the consummation of the Offering, the Company will amend
the employment agreement of Mr. Blatter. As amended, Mr. Blatter's employment
agreement will terminate on December 31, 1998. Mr. Blatter's employment
agreement will provide for an annual base salary of $165,000. Mr. Blatter's
salary will be increased to $181,500 in January 1998. Mr. Blatter will be
entitled to participate in all benefits generally made available to senior
executives of the Company and to receive semi-annual bonus compensation as
determined by the Compensation Committee if certain performance targets have
been met. Such semi-annual bonus compensation shall not exceed $13,750 for 1997
and $15,000 for 1998. If the Company terminates Mr. Blatter's employment
agreement without cause, the Company will be obligated to make severance
payments in an amount equal to (i) the remainder of Mr. Blatter's base salary
through December 31, 1998 if such termination occurs before January 1, 1998,
(ii) six times Mr. Blatter's base monthly salary if such termination occurs
after January 1, 1998 but before July 1, 1998, or (iii) the aggregate amount of
Mr. Blatter's monthly salary for the remaining term of his employment if the
termination occurs after July 1, 1998. If Mr. Blatter's employment agreement is
terminated following a "change of control" (as defined in Mr. Blatter's
employment agreement), Mr. Blatter will be entitled to
51
<PAGE>
one and one-half times his base monthly salary. Following the termination of his
employment with the Company for any reason, Mr. Blatter shall not serve as
Program Director, or otherwise be involved in the programming of any radio
station with a rock-based format within 50 miles of the transmitter of any of
the Company's radio stations for 180 days following the termination of Mr.
Blatter's employment agreement.
EMPLOYMENT AGREEMENT WITH ALAN D. KIRSCHNER
In connection with the consummation of the Offering, the Company will amend
the employment agreement of Mr. Kirschner. As amended, Mr. Kirschner's
employment agreement will terminate on December 31, 1998. Mr. Kirschner's
employment agreement will provide for an annual base salary of $110,000. Mr.
Kirschner will be entitled to participate in all benefits generally made
available to senior executives of the Company and to receive annual bonus
compensation as determined by the Compensation Committee if certain performance
targets have been met. Such bonus compensation shall not exceed $15,000. If Mr.
Kirschner's employment agreement is terminated without cause or upon Mr.
Kirschner's disability, the Company will be obligated to make severance payments
in an amount equal to six times Mr. Kirschner's base monthly salary. If Mr.
Kirschner's employment agreement is terminated upon a "change of control" (as
defined in Mr. Kirschner's employment agreement), the Company shall pay Mr.
Kirschner twelve times his monthly salary. Following the termination of his
employment with the Company for any reason, Mr. Kirschner shall not serve in any
engineering or technical capacity for, or otherwise be involved in the
engineering and technical functions of any radio station within 50 miles of the
transmitter of any of the Company's radio stations for 30 days following the
termination of Mr. Kirschner's employment agreement.
1997 STOCK INCENTIVE PLAN
The Big City Radio, Inc. 1997 Incentive Stock Plan (the "1997 Incentive
Stock Plan") was adopted by the stockholders of the Company and by the Board of
Directors on December 1, 1997. The following is a summary of the material
features contained in the 1997 Incentive Stock Plan.
The purpose of the 1997 Incentive Stock Plan is to give the Company a
significant advantage in retaining key employees, officers and directors, and to
provide an incentive to selected key employees, officers and directors of the
Company and its subsidiaries who have substantial responsibility in the
direction of the Company and its subsidiaries, and others whom the Committee (as
defined herein) determines provide substantial and important services to the
Company, to acquire a proprietary interest in the Company, to continue as
employees, officers and directors or in their other capacities, and to increase
their efforts on behalf of the Company.
TYPES OF AWARDS
The types of awards that may be granted pursuant to the 1997 Incentive Stock
Plan include (i) incentive stock options ("ISOs") and (ii) non-qualified stock
options ("NQSOs" and together with ISOs, "Stock Options" and "Awards"). ISOs are
intended to be treated as incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"). NQSOs are, in
general, options which do not have the special income tax advantages associated
with ISOs.
Stock Option grants consist of the maximum number of ISOs that may be
granted to a particular grantee under applicable law with the balance, if any,
of the Stock Options being NQSOs.
ADMINISTRATION OF THE PLAN
The 1997 Incentive Stock Plan is currently administered by the Board of
Directors and will be administered by the Compensation Committee of the Board of
Directors (the "Committee") once formed. The Committee will consist of two or
more members of the Board of Directors each of whom shall be a "non-employee
director" as defined under Rule 16b-3 of the Securities Exchange Act of 1934, as
amended
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(the "Exchange Act"), and an "outside director" as defined under Section 162(m)
of the Code, and the regulations and interpretations thereunder. Members of the
Committee will be eligible to receive certain Awards (other than ISOs) under the
1997 Incentive Stock Plan.
Subject to the terms and conditions of the 1997 Incentive Stock Plan and the
formula awards for Independent Directors (as defined herein), the Committee is
authorized to grant Awards, to determine which employees, officers, directors or
other individuals may be granted Awards, to determine the type and number of
Awards to be granted, to determine the term of such Awards, to determine the
exercise price of any Award, to determine the terms of any agreement pursuant to
which Awards are granted, to interpret and construe the 1997 Incentive Stock
Plan, and to determine any other matters delegated to it under the 1997
Incentive Stock Plan or necessary for the proper administration of the 1997
Incentive Stock Plan.
SHARES OF CLASS A COMMON STOCK SUBJECT TO THE 1997 INCENTIVE STOCK PLAN
Subject to certain adjustments set forth in the 1997 Incentive Stock Plan,
the aggregate number of shares of the Class A Common Stock that may be the
subject of Awards under the 1997 Incentive Stock Plan is 700,000. The maximum
number of shares of Class A Common Stock available with respect to Awards
granted to any one grantee shall not exceed, in the aggregate, 100,000 shares.
Shares of Class A Common Stock granted under the 1997 Incentive Stock Plan may
either be authorized but unissued shares of Class A Common Stock not reserved
for any other purpose or shares of Class A Common Stock held in or acquired for
the treasury of the Company.
Shares of Class A Common Stock subject to an Award which terminates
unexercised may again be subject to an Award under the 1997 Incentive Stock
Plan. In addition, shares of Class A Common Stock surrendered to the Company in
payment of the exercise price or applicable taxes upon exercise of an Award may
also be used thereafter for additional Awards.
ELIGIBILITY
Any key employee, officer and director, including a director who is not an
employee and a director who serves on the Committee, of the Company and its
subsidiaries who has substantial responsibility in the direction of the Company
and its subsidiaries and anyone else whom the Committee determines provides
substantial and important services to the Company is eligible to receive Awards.
On December 1, 1997, the Board of Directors granted to each of Steven G.
Blatter, David J. Howard, Alan D. Kirschner, Sean O'Neill, Bryan Subotnick and
Paul R. Thomson Stock Options to purchase up to 25,000 shares (which represents
an aggregate of 150,000 shares) of Class A Common Stock at an exercise price of
$6.00 per share. All these Stock Options are exercisable immediately. The
Company will record a future non-cash charge of approximately $150,000 based on
the initial public offering price of $7.00 per share of Class A Common Stock in
the Offering. Also on December 1, 1997, the Board of Directors granted to each
of Steven G. Blatter, David J. Howard, Alan D. Kirschner, Sean O'Neill, Bryan
Subotnick, Paul R. Thomson, Silvia Kessel and Arnold Wadler Stock Options to
purchase up to 50,000 shares (which represents an aggregate of 400,000 shares)
of Class A Common Stock at an exercise price per share equal to the initial
public offering price per share in the Offering, effective only immediately
prior to the consummation of the Offering. Once effective, these Stock Options
will become exercisable in five annual installments, as determined by the Board
of Directors.
Independent Directors who first serve on the Board of Directors shall be
entitled to receive Awards under the 1997 Incentive Stock Plan with respect to
2,500 shares of Common Stock, each having an exercise price equal to the fair
market value of a share of Class A Common Stock on the date of grant. For
purposes hereof, "Independent Directors" shall mean any member of the Board of
Directors who during his entire term as a director was not employed by the
Company and its subsidiaries, within the meaning of Section 424(f) of the Code,
and who also satisfies the criteria for "outside director" under Section 162(m)
of the Code. On December 1, 1997, the Board of Directors granted to Leonard
White Stock Options to
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purchase up to 2,500 shares of Class A Common Stock at an exercise price per
share equal to the initial public offering price per share in the Offering,
effective only immediately prior to the consummation of the Offering. Once
effective, these Stock Options will be immediately exercisable.
TERMS AND CONDITIONS OF STOCK OPTIONS
The exercise price of all ISOs granted under the 1997 Incentive Stock Plan
is not less than the fair market value of the Class A Common Stock on the date
of grant. The exercise price of all NQSOs granted under the 1997 Incentive Stock
Option Plan are determined by the Committee, although the initial awards will be
made at fair market value of the Class A Common Stock on the date of grant. The
term of each Stock Option granted under the 1997 Incentive Stock Plan are
determined by the Committee but will in no event be greater than ten years from
the date of grant.
With respect to ISOs granted to a grantee who owns stock possessing more
than 10% of the voting rights of the Company's outstanding capital stock on the
date of grant, the exercise price of the ISO shall be equal to 110% of the fair
market value of the Class A Common Stock subject to the ISO on the date of grant
and the ISO may not be exercisable more than five years after the date of grant.
Stock Options shall vest and become exercisable over a period of years as
determined by the Committee.
Upon the exercise of a Stock Option, the grantee must pay the exercise price
in cash. Notwithstanding the foregoing, at the discretion of the Committee, the
exercise price may be paid with shares of Class A Common Stock already owned by,
and in possession of, the grantee or with a combination of cash or shares of
Class A Common Stock.
The aggregate fair market value of the Class A Common Stock (determined on
the date of grant) for which ISOs granted under the 1997 Incentive Stock Plan
and any other plan of the Company or a subsidiary may be exercisable for the
first time by any grantee during any calendar year cannot exceed $100,000 or
such other amount as may be prescribed under the Code or applicable regulations
and rulings from time to time. To the extent that the aggregate fair market
value exceeds $100,000, such Stock Options will be treated as NQSOs.
ACCELERATION OF VESTING AND EXERCISABILITY
If a grantee's employment with the Company is terminated because of the
grantee's death, or the grantee's retirement on or after attaining age
sixty-five prior to the date of the Stock Option is by its terms exercisable,
the Stock Option shall be immediately exercisable (and the restrictions thereof,
if any, shall lapse) as of the date of the termination of the grantee's
employment, subject to the other terms of the 1997 Incentive Stock Plan.
Upon a Change in Control (as defined below), and at the sole discretion of
the Board of Directors, each holder of a Stock Option shall have the right to
exercise the Stock Option in full without regard to any waiting period,
installment period or other limitation or restriction thereon.
In general, under the 1997 Incentive Stock Plan, a "Change in Control" of
the Company shall be deemed to have occurred as of the first day any one or more
of the following four conditions have been satisfied: (i) any event whereby a
Person (as defined below) (other than (a) the Company or an affiliate, as
defined in the Exchange Act of the Company, or (b) any employee benefit plan or
trust sponsored or maintained by the Company or an affiliate, as defined in the
Exchange Act) (x) acquires 50% or more of the Company's outstanding voting
securities or (y) acquires (in one transaction or in a series of related
transactions) a subsidiary, business unit, segment or division of the Company as
defined by the Committee (provided, however, that in such event a Change in
Control shall be deemed to occur only with respect to employees of such
subsidiary, business unit, segment or division and who cease to be employees of
the Company or any "affiliate" of the Company); (ii) a change in the composition
of the Board of Directors
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such that at any time a majority of the Board of Directors shall not have been
members of the Board of Directors for twenty-four months; provided, however,
that directors who were appointed or nominated for election by at least
two-thirds of the directors who were directors at the beginning of such
twenty-four month period (or deemed to be such directors under this clause (ii))
shall be deemed to be directors at the beginning of such twenty-four month
period for the purposes of this clause (ii); (iii) the stockholders of the
Company approve any plan or proposal for the liquidation or dissolution of the
Company; or (iv) any consolidation or merger of the Company, other than a merger
or consolidation of the Company in which the voting securities of the Company
outstanding immediately prior thereto continue to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 50% of the combined voting power of the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation. "Person" shall have the same meaning as ascribed to such term
in Section 3(a)(9) of the Exchange Act and used in Section 13(d) thereof.
ADJUSTMENT PROVISIONS
The total number and character of shares of Class A Common Stock subject to
Awards and the number and character of shares of Class A Common Stock subject to
outstanding Awards and/or the exercise price of such shares will be
appropriately adjusted by the Committee if the shares of Class A Common Stock
are changed into or exchanged for a different number or kind of shares of stock
or other securities of the Company or of another corporation (whether by reason
of merger, consolidation, recapitalization, reclassification, split, reverse
split, combination of shares, or otherwise). The Committee may also make
appropriate adjustments in the event of a merger, consolidation or other
transaction or event having a similar effect.
AMENDMENT AND TERMINATION OF THE 1997 INCENTIVE STOCK PLAN
Unless terminated earlier by action of the Board of Directors, the 1997
Incentive Stock Plan will terminate on the tenth anniversary of its adoption and
no additional grants under the 1997 Incentive Stock Plan will be made after that
date.
Except as provided below, the Board of Directors may amend or terminate the
1997 Incentive Stock Plan at any time. The 1997 Incentive Stock Plan may not
however be amended without the approval of the holders of a majority of the
outstanding voting stock of the Company (i) to decrease the minimum exercise
price for ISOs; (ii) to extend the term of the 1997 Incentive Stock Plan beyond
ten years, (iii) to extend the maximum terms of the Awards granted beyond ten
years, (iv) to withdraw the administration of the 1997 Incentive Stock Plan from
the Committee, (v) to change the class of eligible employees, officers,
directors and other grantees, (vi) to increase the aggregate number of shares of
Class A Common Stock which may be issued under the Plan, and (vii) to otherwise
require stockholder approval to comply with Rule 16b-3 under the Exchange Act or
any other applicable law, regulation, or listing requirement or to qualify for
an exemption or characterization that is deemed desirable by the Board of
Directors. Furthermore, no amendment or termination of the 1997 Incentive Stock
Plan shall, without the written consent of the grantee, alter the terms of
Awards already granted and such Stock Options shall remain in full force and
effect as if the 1997 Incentive Stock Plan had not been terminated.
MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS
The Committee may, within the limitations of the 1997 Incentive Stock Plan,
modify, extend or renew outstanding Awards granted under the 1997 Incentive
Stock Plan, or accept the surrender of outstanding Awards and authorize the
granting of new Awards in substitution therefor. No modification may, without
the consent of the grantee, alter or impair any rights or obligations under any
Award theretofore granted to the grantee nor shall any modification adversely
affect the status of an ISO under Section 422 of the Code.
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TRANSFERABILITY OF AWARDS AND OTHER PROVISIONS
The rights of a grantee with respect to the Awards granted pursuant to the
1997 Incentive Stock Plan are not transferable other than by will or the laws of
descent and distribution and are exercisable, during the lifetime of the
grantee, only by the grantee or by the guardian or legal representative of the
grantee acting in a fiduciary capacity on behalf of the grantee under state law
or court supervision. An Award is not subject, in whole or in part, to
attachment, execution or levy of any kind.
RIGHTS UPON TERMINATION OF EMPLOYMENT
If the grantee dies while an employee or when no longer an employee but
while he or she still has the right to exercise an Award, the grantee's estate
shall have the right for a period of one year following the date of death to
exercise the Award to the extent such Award is exercisable and to the extent
such Award has not yet expired.
Upon a grantee's retirement from the Company or a subsidiary on or after
attaining age sixty-five the grantee shall have the right for a period of three
months following the date of retirement to exercise an Award to the extent such
Award is exercisable and to the extent such Award has not yet expired.
Upon a grantee's termination of employment from the Company or a subsidiary
on account of disability, the grantee or the legal representative of the
grantee, shall have the right for a period of one year following the date of
such termination to exercise an Award to the extent such award is exercisable
and to the extent such Award has not yet expired.
In the event the grantee's employment with the Company or a subsidiary is
terminated for any reason other than disability, death or retirement on or after
attaining age sixty-five, the grantee may exercise an Award within three months
after his or her termination of employment.
RIGHTS AS STOCKHOLDER
No grantee of any Stock Option has any rights as a stockholder with respect
to any shares of Class A Common Stock subject to his or her Stock Option prior
to the date on which he or she is recorded as the holder of such shares of Class
A Common Stock on the records of the Company.
RIGHT TO CONTINUED EMPLOYMENT
The 1997 Incentive Stock Plan is not a contract of employment, and the terms
of employment of any grantee shall not be affected in any way by the 1997
Incentive Stock Plan or related instruments except as specifically provided
therein. The establishment of the 1997 Incentive Stock Plan shall not be
construed as conferring any legal rights upon any grantee for a continuation of
employment, nor shall it interfere with the right of the Company or any
subsidiary to discharge any grantee and to treat him or her without regard to
the effect which such treatment might have upon him or her as a grantee.
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of December 18, 1997, certain information
regarding the beneficial ownership of the Company's voting stock by (i) each of
the Company's directors (including nominees), (ii) each person believed by the
Company to own beneficially more than 5% of its outstanding voting stock, (iii)
each of the Company's Named Executive Officers and (iv) all executive officers
and directors of the Company as a group. Except as otherwise indicated, each
stockholder listed below has sole voting and investment power with respect to
shares beneficially owned by such person.
<TABLE>
<CAPTION>
AS ADJUSTED
PRO FORMA FOR FOR THE OFFERING(1)(2)
THE ---------------------------------
RECLASSIFICATION PERCENT
------------------ OF
NUMBER PERCENT NUMBER PERCENT TOTAL
TITLE OF OF OF OF OF VOTING
NAME CLASS SHARES CLASS SHARES CLASS POWER(7)
- ----------------------------------------------------------- ------------ --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Stuart and Anita Subotnick................................. Class B 8,250,458 100.0% 8,250,458 100.0% 94.2%
c/o Metromedia Company Common Stock
215 East 67th Street
New York, New York 10021 Class A 494,286 63.0% *
Common Stock
Michael Kakoyiannis........................................ 1,125,062 100.0% 1,125,062 20.0% 1.3%
c/o Big City Radio, Inc.
11 Skyline Drive
Hawthorne, New York 10532
Silvia Kessel.............................................. -- * --(3) * *
Arnold L. Wadler........................................... -- * --(3) * *
Leonard White.............................................. -- * 2,500(4) * *
Steven G. Blatter.......................................... -- * 25,000(5) * *
Paul R. Thomson............................................ -- * 25,000(5) * *
All Directors and Executive Officers as a Group (8 9,375,520 100.0% 9,972,306(6) 71.3% *
persons)...............................................
</TABLE>
- ------------------------
* less than 1.0%
(1) The shares of Class B Common Stock are convertible into shares of Class A
Common Stock at the rate of one share of Class A Common Stock for each share
of Class B Common Stock and the holders of shares of Class B Common Stock
are entitled to 10 votes per share.
(2) Includes shares of Class A Common Stock that may be purchased in the Standby
Commitment.
(3) Does not include 50,000 shares issuable upon exercise of options that will
become exercisable in five annual installments, as determined by the Board
of Directors.
(4) Includes 2,500 shares issuable upon exercise of options that are exercisable
within 60 days of December 18, 1997.
(5) Includes 25,000 shares issuable upon exercise of options that are currently
exercisable and does not include 50,000 shares issuable upon exercise of
options that will become exercisable in five annual installments, as
determined by the Board of Directors.
(6) Includes 102,500 shares issuable upon exercise of options that are currently
exercisable or exercisable within 60 days of December 18, 1997 and does not
include 300,000 shares issuable upon exercise of options that will become
exercisable in five annual installments, as determined by the Board of
Directors.
(7) Assuming that all the options granted under the 1997 Incentive Stock Plan
have not been exercised.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
HISTORICAL TRANSACTIONS
On May 29, 1996, the Company was merged with Q Broadcasting, Inc., a
Delaware corporation owned by Mr. and Mrs. Subotnick, with the Company as the
surviving corporation. As a result of the merger, Mr. and Mrs. Subotnick each
received 216 shares of Old Common Stock.
On May 30, 1996, the Company entered into the Existing Credit Facility with
Chase and several other lenders pursuant to which Chase and such other lenders
agreed to make revolving credit loans to the Company from time to time until May
31, 2001 or earlier, as provided under the Existing Credit Facility. The payment
and performance by the Company under the Existing Credit Facility is guaranteed
by Stuart Subotnick under a Guarantee Agreement, dated as of May 30, 1996.
Simultaneously with the consummation of the Offering and the application or the
use of proceeds therefrom, Mr. Subotnick's guarantee will be reduced from a
guarantee of the entire Existing Credit Facility to a guarantee of $6.0 million
of the Credit Facility.
In addition, pursuant to a Pledge Agreement, dated as of May 30, 1996 (the
"Old Pledge Agreement"), the Principal Stockholders each granted Chase a first
priority security interest in their shares of Old Common Stock and Mr.
Kakoyiannis granted Chase a second priority security interest in his shares of
Old Common Stock. In connection with the consummation of the Offering, the Old
Pledge Agreement will terminate.
On October 31, 1997, Mr. Subotnick gave a support letter to the Company
guaranteeing his financial support through the earlier of a successful minimum
initial public offering of $36.0 million of equity securities to the public or
October 1, 1998.
The Principal Stockholders have made various loans to the Company in order
to finance the Company's radio station acquisitions and working capital
requirements. The loans from the Principal Stockholders bear interest at
variable rates not exceeding 8%, payable monthly, and aggregated approximately
$8.7 million of principal amount on May 30, 1996. In May 1996, in connection
with the merger of Q Broadcasting, Inc. with and into the Company, the Principal
Stockholders contributed $5.1 million principal amount of stockholders' loans to
Q Broadcasting, Inc. to the capital of Q Broadcasting, Inc. The Principal
Stockholders' outstanding loans to Q Broadcasting, Inc. and to the Company of
$11.7 million of aggregate principal amount were subordinated to the Existing
Credit Facility by a subordinated promissory note dated May 24, 1996. On
September 30, 1997, the loans from the Principal Stockholders aggregated
approximately $13.2 million of principal amount. Immediately prior to the
consummation of the Offering, the Principal Stockholders will contribute the
entire amount of their outstanding stockholders' loans to the capital of the
Company.
As of July 1, 1997, Mr. and Mrs. Subotnick transferred an aggregate of 68
shares of Old Common Stock to Mr. Kakoyiannis as an employment incentive.
Mr. Subotnick and Mr. Kakoyiannis entered into a Loan Agreement, dated as of
August 4, 1995, as amended, pursuant to which Mr. Subotnick made a loan to Mr.
Kakoyiannis as evidenced by a promissory note, dated August 4, 1995, in the
original principal amount of $500,000. This loan is secured by a first priority
security interest in favor of Mr. Subotnick in Mr. Kakoyiannis' shares of Old
Common Stock.
On December 1, 1997, the Board of Directors granted to each of Steven G.
Blatter, David J. Howard, Alan D. Kirschner, Sean O'Neill, Bryan Subotnick and
Paul R. Thomson Stock Options to purchase up to 25,000 shares (which represents
an aggregate of 150,000 shares) of Class A Common Stock at an exercise price of
$6.00 per share. Also on December 1, 1997, the Board of Directors granted to
each of Steven G. Blatter, David J. Howard, Alan D. Kirschner, Sean O'Neill,
Bryan Subotnick, Paul R. Thomson, Silvia Kessel and Arnold Wadler stock options
to purchase up to 50,000 shares (which represents an aggregate of 400,000
shares) of Class A Common Stock and granted to Leonard White Stock Options to
purchase up to
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2,500 shares of Class A Common Stock, at an exercise price per share equal to
the initial public offering price per share in the Offering, effective only
immediately prior to the consummation of the Offering.
TRANSACTIONS ENTERED INTO IN CONNECTION WITH THE OFFERING
RECLASSIFICATION
Immediately prior to the consummation of the Offering, the Company intends
to effect the Reclassification. Pursuant to the Reclassification, each share of
Old Common Stock outstanding or to be issued upon exercise of the stock options
granted under the 1997 Incentive Stock Plan will be reclassified into 7,610
shares of Class A Common Stock. Also in connection with the Offering, Mr. and
Mrs. Subotnick will exchange each share of Class A Common Stock held by them for
one share of Class B Common Stock. See "Description of Capital Stock" for a
description of the relative rights of holders of Class A Common Stock and Class
B Common Stock.
CONVERSION FROM S-CORPORATION INTO A C-CORPORATION
In connection with the consummation of the Offering, the Company revoked its
S-Corporation status and converted to a C-Corporation, effective as of September
30, 1997.
CHANGE IN THE COMPANY'S FISCAL YEAR
In connection with the consummation of the Offering, the Company will change
its fiscal year-end from September 30 to December 31.
TERMINATION OF SHAREHOLDERS' AGREEMENT
In connection with the Offering, the Company, Mr. Kakoyiannis and the
Principal Stockholders terminated an existing Shareholders' Agreement, dated as
of October 17, 1994, by and among the Company, the Principal Stockholders and
Mr. Kakoyiannis.
EQUITY CONTRIBUTION
Immediately prior to the consummation of the Offering, the Principal
Stockholders will either contribute the entire amount of certain outstanding
stockholders' loans made by them to the Company to the capital of the Company or
contribute cash in an amount sufficient to repay a portion of the outstanding
stockholders' loans made to the Company and will contribute the remaining
balance of such loans to the capital of the Company (all such outstanding
stockholders' loans aggregated $13.2 million as of September 30, 1997). See
"--Historical Transactions."
On December 18, 1997, Mr. Subotnick entered into the Standby Commitment with
the Company pursuant to which Mr. Subotnick agreed that if the net proceeds from
the Offering, including proceeds from the exercise, if any, of the Underwriters'
over-allotment option, do not aggregate at least $29.0 million, Mr. Subotnick
will purchase such number of shares of Class A Common Stock at $7.00 per share
necessary to increase the aggregate net proceeds of the Standby Commitment and
the Offering to $29.0 million (494,286 shares of Class A Common Stock if the
Underwriters' over-allotment option is not exercised). The net proceeds of the
Standby Commitment will be used to repay amounts outstanding under the Existing
Credit Facility.
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DESCRIPTION OF CREDIT FACILITY
The Company has received a commitment letter from Chase to enter into the
Credit Facility. The Credit Facility will replace the Company's existing Credit
Agreement, dated as of May 30, 1996, as amended, among the Company, several
financial institutions and Chase, as agent (the "Existing Credit Facility").
Under the terms of the Credit Facility, the Company will have a $35.0
million reducing revolving facility, of which amount Mr. Subotnick will
guarantee the payment of up to $6.0 million. The Credit Facility will mature on
the fifth anniversary of the closing of the Offering. Outstanding amounts under
the Credit Facility will bear interest at a rate based, at the option of the
Company, on the participating bank's prime rate, or the London Interbank
Borrowing Rate plus an applicable margin that will vary (from .5% to 2.00% for
prime rate loans and 1.50% to 3.00% for LIBOR loans). Chase's commitment under
the Credit Facility will be reduced by 20% on each of the second anniversary of
the closing date of the Offering and on the third and fourth anniversaries of
the closing date and the entire remaining amount will terminate on the fifth
anniversary of the closing date. In addition, on each April 30, commencing April
30, 1999, the total commitment amount will be reduced by 50% of the Company's
excess cash flow (as defined in the Credit Facility) during the most recently
completed fiscal year. In addition, Chase's commitment shall also be reduced
upon receipt of certain net cash proceeds in excess of specified amounts from
the sale of assets of the Company which are not applied to purchase additional
assets, which reductions will be applied to the remaining scheduled reductions
mentioned above, ratably, in accordance with the amounts of such scheduled
reductions. The Company will pay an unused commitment fee of .50% on undrawn
amounts under the Credit Facility.
The Credit Facility will contain certain financial and operational covenants
and other restrictions with which the Company must comply, including, among
others, limitations on capital expenditures, the incurrence of additional
indebtedness, restrictions on the use of borrowings, limitations on paying cash
dividends and redeeming or repurchasing capital stock of the Company, and
requirements to maintain certain financial ratios, including, but not limited
to, minimum EBITDA for 1998 and each year thereafter, maximum total leverage,
minimum interest coverage and minimum fixed charge coverage.
The Credit Facility will contain customary conditions precedent, including
consummation of this Offering and events of default, including material
misrepresentations, payment defaults and default in the performance of other
covenants, certain bankruptcy defaults, events having a material and adverse
effect on the Company and revocation of the any of the Company's broadcast
licenses. The Credit Facility will also provide that an event of default will
occur upon the occurrence of a "change of control" as defined in the Credit
Facility. For purposes of the Credit Facility, a change of control will occur
when (i) any person or group other than the Principal Stockholders and their
affiliates obtains the power to elect a majority of the Board of Directors, (ii)
the Company fails to own 100% of the capital stock of its subsidiaries owning
any of the FCC broadcast licenses, or when (iii) the Board of Directors does not
consist of a majority of continuing directors.
In addition to the guarantee by Mr. Subotnick of up to $6.0 million of the
Credit Facility, the Credit Facility will be secured by a first priority
security interest in favor of Chase in all tangible and intangible property and
assets of the Company. See "Risk Factors--Substantial Leverage; Pledge of
Assets; Covenants." After giving effect to the Offering and the Standby
Commitment, the application of the net proceeds therefrom and the guarantee by
Mr. Subotnick of $6.0 million of the Credit Facility, the Company will have
available approximately $7.3 million of borrowing capacity under the Credit
Facility, which can be used for general corporate purposes, including
acquisitions. There can be no assurance that Mr. Subotnick will agree to
guarantee any additional amounts of the Company's obligations.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company will upon consummation of the
Reclassification consist of 120,000,000 shares of capital stock, of which
80,000,000 shares will have been designated as Class A Common Stock, 20,000,000
shares will have been designated as Class B Common Stock, and 20,000,000 shares
will have been designated as Preferred Stock, par value $.01 per share (the
"Preferred Stock"). Effective upon completion of the Offering and the Standby
Commitment, 5,619,348 shares of Class A Common Stock will be issued and
outstanding, 8,250,458 shares of Class B Common Stock will be issued and
outstanding and no shares of Preferred Stock will be issued and outstanding. In
addition, 8,250,458 shares of Class A Common Stock will be reserved for issuance
upon conversion of the Class B Common Stock, 700,000 shares of Class A Common
Stock will be reserved for issuance under options that may be issued under the
1997 Incentive Stock Plan and 281,265 shares of Class A Common Stock will be
reserved for issuance under Mr. Kakoyiannis' employment agreement. Immediately
prior to the consummation of the Offering, there will be one holder of record of
Class A Common Stock and two holders of record of Class B Common Stock.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Company's Amended and Restated
Certificate of Incorporation (the "Amended and Restated Certificate of
Incorporation") and Amended and Restated Bylaws (the "Bylaws"), copies of which
have been filed as exhibits to the Registration Statement of which this
Prospectus is a part (the "Registration Statement").
COMMON STOCK
The shares of Class A Common Stock and Class B Common Stock are identical in
all respects, except for voting rights and certain conversion rights and
transfer restrictions with respect to the shares of the Class B Common Stock.
The number of authorized shares of any class or classes of capital stock of the
Company may be increased or decreased (but not below the number of shares
thereof then outstanding) by the affirmative vote of the holders of a majority
of the voting power of the Common Stock of the Company entitled to vote
generally in the election of directors irrespective of the provisions of Section
242(b)(2) of the DGCL or any corresponding provisions hereinafter enacted.
VOTING RIGHTS
The holders of Class A Common Stock are entitled to one vote per share.
Holders of Class B Common Stock are entitled to ten votes per share. Holders of
all classes of Common Stock entitled to vote will vote together as a single
class on all matters presented to the stockholders for their vote or approval
except for the election and the removal of directors as described below and as
otherwise required by applicable law. In addition, with respect to the election
of directors, the Company's Amended and Restated Certificate of Incorporation
provides that holders of Class B Common Stock will vote as a separate class to
elect up to 75% of the members of the Company's Board of Directors. Stockholders
have no cumulative voting rights.
Directors may be removed, with or without cause, only by the holders of the
class of Common Stock or series of Preferred Stock that, as of the date such
removal is effected, would be entitled to elect such directors at the next
annual meeting of stockholders. Vacancies in a directorship may be filled only
by (a) the remaining directors elected by holders of each class of Common Stock
or series of Preferred Stock that (x) elected such director and (y) as of the
date such vacancy is filled, would be entitled to elect such director at the
next annual meeting of the stockholders or (b) if there are no such remaining
directors, then by the vote of the holders of the class or classes of Common
Stock or series of Preferred Stock, that, as of the date such vacancy is filled,
would be entitled to elect such director at the next annual meeting of
stockholders, voting as a separate class at a meeting, special or otherwise, of
the holders of Common Stock of such class or series of Preferred Stock.
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DIVIDENDS
Holders of Class A Common Stock and the Class B Common Stock are entitled to
receive dividends at the same rate if, as and when such dividends are declared
by the Board of Directors out of assets legally available therefor after payment
of dividends required to be paid on shares of Preferred Stock, if any. The
Company may not make any dividend or distribution to any holder of any class of
Common Stock unless simultaneously with such dividend or distribution the
Company makes the same dividend or distribution with respect to each outstanding
share of Common Stock regardless of class. In the case of a dividend or other
distribution payable in shares of a class of Common Stock, including
distributions pursuant to stock splits or divisions of Common Stock, only shares
of Class A Common Stock may be distributed with respect to Class A Common Stock
and only shares of Class B Common Stock may be distributed with respect to Class
B Common Stock. Whenever a dividend or distribution, including distributions
pursuant to stock splits or divisions of the Common Stock, is payable in shares
of a class of Common Stock, the number of shares of each class of Common Stock
payable per share of such class of Common Stock shall be equal in number. In the
case of dividends or other distributions consisting of other voting securities
of the Company or of voting securities of any corporation which is a
wholly-owned subsidiary of the Company, the Company shall declare and pay such
dividends in three separate classes of such voting securities, identical in all
respects except that (i) the voting rights of each such security issued to the
holders of Class A Common Stock shall be one-tenth of the voting rights of each
such security issued to holders of Class B Common Stock, (ii) such security
issued to holders of Class B Common Stock shall convert into the security issued
to the holders of Class A Common Stock upon the same terms and conditions
applicable to the conversion of Class B Common Stock into Class A Common Stock
and shall have the same restrictions on transfer and ownership applicable to the
transfer and ownership of the Class B Common Stock, and (iii) with respect only
to dividends or other distributions of voting securities of any corporation
which is a wholly owned subsidiary of the Company, the respective voting rights
of each such security issued to holders of the Class A Common Stock and Class B
Common Stock with respect to the election of directors shall otherwise be as
comparable as is practicable to those of the Class A Common Stock and Class B
Common Stock. In the case of dividends or other distributions consisting of
securities convertible into, or exchangeable for, voting securities of the
Company or voting securities of any corporation which is a wholly owned
subsidiary of the Company, the Company shall provide that such convertible or
exchangeable securities and the underlying securities be identical in all
respects (including, without limitation, the conversion or exchange rate) except
that the underlying securities may have the same differences as they would have
if the Company issued voting securities of the Company or of a wholly owned
subsidiary rather than issuing securities convertible into, or exchangeable for,
such securities. The Company does not anticipate paying cash dividends in the
foreseeable future. See "Dividend Policy."
RESTRICTIONS ON ADDITIONAL ISSUANCES AND TRANSFER
The Company may not issue or sell any shares of Class B Common Stock or any
securities (including, without limitation, any rights, options, warrants or
other securities) convertible into, or exchangeable or exercisable for, shares
of Class B Common Stock to any person or entity other than to the Principal
Stockholders, their affiliates or relatives (each, a "Permitted Holder").
Additionally, shares of Class B Common Stock may not be transferred, whether by
sale, assignment, gift, bequest, appointment or otherwise, to a person other
than to a Permitted Holder. Notwithstanding the foregoing (i) any Permitted
Holder may pledge his, her or its shares of Class B Common Stock to a financial
institution pursuant to a bona fide pledge of such shares as collateral security
for indebtedness due to the pledgee provided that such shares remain subject to
the transfer restrictions and that, in the event of foreclosure or other similar
action by the pledgee, such pledged shares of Class B Common Stock may only be
transferred to a Permitted Holder or converted into shares of Class A Common
Stock, as the pledgee may elect and (ii) the foregoing transfer restrictions
shall not apply in the case of a merger, consolidation or business combination
of the Company with or into another corporation in which all of the outstanding
shares of Common Stock and Preferred Stock of the Company regardless of class
are purchased by the acquiror.
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CONVERSION
Shares of Class A Common Stock have no conversion rights. Shares of Class B
Common Stock are convertible into shares of Class A Common Stock, in whole or in
part, at any time and from time to time at the option of the holder, on the
basis of one share of Class A Common Stock for each share of Class B Common
Stock converted. Additionally, at such time as any share of Class B Common Stock
ceases to be held by any of the Principal Stockholders, their affiliates or
relatives, such share of Class B Common Stock shall convert into a share of
Class A Common Stock. The Company covenants that (i) it will at all times
reserve and keep available out of its authorized but unissued shares of Class A
Common Stock, such number of shares of Class A Common Stock issuable upon the
conversion of all outstanding shares of Class B Common Stock, (ii) it will cause
any shares of Class A Common Stock issuable upon conversion of a share of Class
B Common Stock that require registration with or approval of any governmental
authority under federal or state law before such shares may be issued upon
conversion to be so registered or approved and (iii) it will use its best
efforts to list the shares of Class A Common Stock required to be delivered upon
conversion prior to such delivery upon such national securities exchange upon
which the outstanding Class A Common Stock is listed at the time of such
delivery.
RECLASSIFICATION AND MERGER
In the event of a reclassification or other similar transaction as a result
of which the shares of Class A Common Stock are converted into another security,
then a holder of Class B Common Stock will be entitled to receive upon
conversion the amount of such other security that the holder would have received
if the conversion occurred immediately prior to the record date of such
reclassification or other similar transaction. No adjustments in respect of
dividends will be made upon the conversion of any share of Class B Common Stock;
except if a share is converted subsequent to the record date for the payment of
a dividend or other distribution on shares of Class B Common Stock but prior to
such payment, then the registered holder of such share at the close of business
on such record date will be entitled to receive the dividend or other
distribution payable on such date regardless of the conversion thereof or the
Company's default in payment of the dividend due on such date.
In the event the Company enters into any consolidation, merger, combination
or other transaction in which shares of Common Stock are exchanged for or
changed into other stock or securities, cash and/or any other property, then,
and in such event, the shares of each class of Common Stock will be exchanged
for or changed into either (i) the same amount of stock, securities, cash and/or
any other property, as the case may be, into which or for which each share of
any other class of Common Stock is exchanged for or changed into; provided that
if shares of Common Stock are exchanged for or into shares of capital stock,
such shares so exchanged for or changed into may differ to the extent and only
to the extent that the Class A Common Stock and the Class B Common Stock differ
as provided in the Company's Amended and Restated Certificate of Incorporation
or (ii) if holders of each class of Common Stock are to receive different
distributions of stock, securities, cash and/or any other property, an amount of
stock, securities, cash and/or property per share having a value, as determined
by an independent investment banking firm of national reputation selected by the
Board of Directors, equal to the value per share into which or for which each
share of any other class of Common Stock is exchanged or changed.
LIQUIDATION
In the event of a liquidation of the Company, after payment of the debts and
other liabilities of the Company and after making provision for the holders of
Preferred Stock, if any, the remaining assets of the Company will be
distributable ratably among the holders of the Class A Common Stock and Class B
Common Stock treated as a single class.
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OTHER PROVISIONS
Except as described below, the holders of the Class A Common Stock and Class
B Common Stock are not entitled to preemptive rights. None of the Class A Common
Stock or Class B Common Stock may be subdivided or combined in any manner unless
the other classes are subdivided or combined in the same proportion. The Company
may not make any offering of options, rights or warrants to subscribe for shares
of Class B Common Stock. If the Company makes an offering of options, rights or
warrants to subscribe for shares of any other class or classes of capital stock
(other than Class B Common Stock) to all holders of a class of Common Stock,
then the Company is required to simultaneously make an identical offering to all
holders of the other classes of Common Stock other than to any class the holders
of which, voting as a separate class, agree that such offering need not be made
to such class. All such options, rights or warrants offerings shall offer the
respective holders of Class A Common Stock and Class B Common Stock the right to
subscribe at the same rate per share. All outstanding shares of Common Stock
are, and all shares of Common Stock offered hereby when issued will be, upon
payment therefor, validly issued, fully paid and nonassessable.
The DGCL does not require stockholder approval for any issuance of
authorized shares of Common Stock. Such authorized and unissued shares may be
used for a variety of corporate purposes, including future public offerings to
raise additional capital or to facilitate corporate acquisitions. One of the
effects of the existence of unissued and unreserved shares of Common Stock may
be to enable the Board of Directors to issue shares to persons friendly to
current management, which issuance could render more difficult or discourage an
attempt to obtain control of the Company by means of a merger, tender offer,
proxy consent or otherwise, and thereby protect the continuity of the Company's
current management and possibly deprive the stockholders of opportunities to
sell their shares of Common Stock at prices higher than prevailing market
prices.
At present there is no established trading market for the Class A Common
Stock.
The shares of the Class A Common Stock offered hereby have been approved for
listing on the AMEX under the symbol "YFM."
PREFERRED STOCK
The Board of Directors will have the authority, without any further action
by the stockholders of the Company, to issue from time to time shares of
Preferred Stock in one or more series and to fix the designations, preferences,
rights, qualifications, limitations and restrictions thereof, including voting
rights, dividend rights, dividend rates, conversion rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series. The issuance of Preferred Stock with voting rights could have an
adverse effect on the voting power of holders of Common Stock by increasing the
number of outstanding shares having voting rights. In addition, if the Board of
Directors authorizes Preferred Stock with conversion rights, the number of
shares of Common Stock outstanding could potentially be increased up to the
authorized amount. The issuance of Preferred Stock could decrease the amount of
earnings and assets available for distribution to holders of Common Stock. Any
such issuance could also have the effect of delaying, deterring or preventing a
change in control of the Company and may adversely affect the rights of holders
of Common Stock. The Board of Directors does not presently intend to issue any
additional shares of Preferred Stock.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
As a Delaware corporation, the Company is subject to the DGCL, including
Section 203. Section 203 of the DGCL prohibits certain transactions between a
Delaware corporation and an "interested stockholder," which is defined as a
person who, together with any affiliates or associates of such person,
beneficially owns, directly or indirectly, 15% or more of the outstanding voting
shares of a Delaware corporation. This provision prohibits certain business
combinations (defined broadly to include mergers, consolidations, sales or other
dispositions of assets having an aggregate value in excess of 10% of the
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consolidated assets of the corporation, and certain transactions that would
increase the interested stockholder's proportionate share ownership in the
corporation) between an interested stockholder and a corporation for a period of
three years after the date the interested stockholder becomes an interested
stockholder, unless (i) prior to the date the interested stockholder becomes an
interested stockholder, the business combination or the transaction by which the
stockholder becomes an interested stockholder is approved by the corporation's
board of directors, (ii) upon consummation of the transaction which resulted in
the stockholder becoming an interested stockholder, such stockholder held at
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (other than stock held by directors who are also officers
or by certain employee stock plans) or (iii) the business combination is
approved by a majority of the board of directors, and at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
66 2/3% of the outstanding voting stock that is not owned by the interested
stockholder. Mr. and Mrs. Subotnick are interested stockholders under the DGCL.
However since their acquisition of the Company's securities was approved in
advance by the Company's Board of Directors, they would not be prohibited from
engaging in a business combination with the Company.
In the event that the Company learns of a new attributable stockholder and
if such stockholder holds interests that exceed the FCC limits on media
ownership or if the Company learns that Aliens own, control or vote stock in the
Company in excess of the Communications Act limits, under the Amended and
Restated Certificate of Incorporation, the Board of Directors of the Company has
the corporate power to redeem stock of the Company's stockholders to the extent
necessary to be in compliance with FCC and Communications Act requirements. See
"Business--Federal Regulation of Radio Broadcasting."
The Amended and Restated Certificate of Incorporation and Bylaws include
certain provisions which are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and which may have
the effect of delaying, deterring or preventing a future takeover or change in
control of the Company unless such takeover or change in control is approved by
the Board of Directors. Such provisions may also render the removal of directors
and management more difficult.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
The Bylaws provide that stockholders seeking to bring business before an
annual meeting of stockholders, or to nominate candidates for election as
directors at an annual or special meeting of stockholders, must provide timely
notice thereof in writing. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Company not less than 70 days nor more than 90 days prior to the meeting;
provided, however, that in the event that the date of the annual meeting is
advanced by more than 20 days or delayed by more than 70 days from such
anniversary date, notice by the stockholder to be timely must be received no
earlier than the close of business on the ninetieth day prior to such annual
meeting and not later than the close of business on the later of the seventieth
day prior to such annual meeting or the tenth day following the day on which
public announcement of the date of such meeting is first made. The Bylaws also
specify certain requirements for a stockholder's notice to be in proper written
form. These provisions may preclude some stockholders from bringing matters
before the stockholders at an annual or special meeting or from making
nominations for directors at an annual or special meeting.
The Company's Amended and Restated Certificate of Incorporation provides
that to the fullest extent permitted by the DGCL, a director of the Company
shall be liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director. Under current Delaware law, liability of
a director may not be limited (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) in respect of certain unlawful dividend payments or stock redemptions or
repurchases and (iv) for any transaction from which the director derives an
improper personal benefit. The effect of the provisions of the Amended and
Restated Certificate of Incorporation and the Bylaws is to eliminate the rights
of the Company and its stockholders (through stockholders' derivative suits on
behalf
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of the Company) to recover monetary damages against a director for breach of the
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior) except in the situations described in
clauses (i) through (iv) above. This provision does not limit or eliminate the
rights of the Company or any stockholder to seek nonmonetary relief such as an
injunction or rescission in the event of a breach of a director's duty of care.
In addition, the Amended and Restated Certificate of Incorporation and the
Bylaws provide that the Company shall indemnify its directors, officers,
employees and agents to the extent not prohibited by Delaware law.
In addition, following the Offering, the Company intends to enter into
agreements (the "Indemnification Agreements") with each of the directors of the
Company pursuant to which the Company will agree to indemnify each such director
against claims, liabilities, damages, expenses, losses, costs, penalties or
amounts paid in settlement (collectively, "Losses") incurred by such director
and arising out of his capacity as a director, executive officer, employee
and/or agent of the Company to the maximum extent permitted by applicable law.
In addition, such director or officer shall be entitled to an advance of
expenses to the maximum extent authorized or permitted by law to meet the
obligations indemnified against. The Indemnification Agreements will also
obligate the Company to purchase and maintain insurance for the benefit and on
behalf of its directors insuring against all liabilities that may be incurred by
such director in or arising out of his capacity as a director, officer, employee
and/or agent of the Company.
To the extent that the Board of Directors or the stockholders of the Company
may in the future wish to limit or repeal the ability of the Company to
indemnify directors, such repeal or limitation may not be effective as to
directors who are currently parties to the Indemnification Agreements, because
their rights to full protection will be contractually assured by the
Indemnification Agreements. It is anticipated that similar contracts may be
entered into, from time to time, with future directors and with executive
officers of the Company.
REGISTRATION RIGHTS
Under Mr. Kakoyiannis' employment agreement, the Company is obligated to
register the 281,265 shares of Class A Common Stock that may be issued to Mr.
Kakoyiannis with the registration statement on Form S-8 that the Company intends
to file with the Commission to cover the shares of Class A Common Stock
underlying outstanding options and options granted under the 1997 Incentive
Stock Plan.
In connection with the consummation of the Offering, the Company will enter
into registration rights agreements with Mr. Kakoyiannis and the Principal
Stockholders pursuant to which the Company will agree (subject to certain
limitations and under certain circumstances) to register for sale the shares of
Class A Common Stock held by Mr. Kakoyiannis on the date of this Prospectus and
the shares of Class A Common Stock that may be issued to the Principal
Stockholders under the Standby Commitment and upon conversion of the shares of
Class B Common Stock issued to them in the Reclassification.
Pursuant to these registration rights agreements, Mr. Kakoyiannis or the
Principal Stockholders may at any time after the Company qualifies to utilize a
Registration Statement on Form S-3 to register its shares of Class A Common
Stock, demand that the Company register their shares of Class A Common Stock
(assuming the Principal Stockholders have converted their shares of Class B
Common Stock into shares of Class A Common Stock) and, upon such demand, the
Company is required to use its best efforts to effect such registration. The
Company is not required to effect (i) more than three registrations in the
aggregate for Mr. Kakoyiannis and six registrations in the aggregate for the
Principal Stockholders, (ii) more than two such registrations within any six
month period for each of Mr. Kakoyiannis and the Principal Stockholders, (iii)
any such registration within six months after the effectiveness of a
registration statement by the Company offering its shares of Class A Common
Stock (other than a registration statement on Form S-8 with respect to an
employee benefit plan), or (iv) any such registration valued at less than $10.0
million based upon the then current market price or fair market value as
estimated by the Company's Board of Directors.
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Each time the Company proposes to file a registration statement to register
its securities (except for registration on Form S-4 or on Form S-8), the Company
will use its best efforts to effect the registration of shares requested by Mr.
Kakoyiannis or the Principal Stockholders provided that the amount of such
securities requested to be registered may be limited by the underwriters in an
underwritten offering based on such underwriters' determination that inclusion
of the total amount of shares of Class A Common Stock requested to be registered
would materially and adversely affect the success of the offering.
Promptly after completion of the Offering, the Company intends to file with
the Commission a registration statement on Form S-8, covering the shares of
Class A Common Stock underlying options granted or to be granted under the 1997
Incentive Stock Plan and the shares that may be issued to Mr. Kakoyiannis
pursuant to his employment agreement with the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A Common Stock will be Chase
Mellon Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the shares of Class A
Common Stock. Sales of a substantial amount of Class A Common Stock in the
public market, or the perception that such sales may occur, could adversely
affect the market price of the Class A Common Stock prevailing from time to time
in the public market and could impair the Company's ability to raise additional
capital through the sale of its equity securities in the future.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted securities from the
Company or any "affiliate" of the Company, as that term is defined under the
Securities Act, the holder is entitled to sell within any three-month period a
number of shares of Class A Common Stock that does not exceed the greater of 1%
of the then-outstanding shares of the Class A Common Stock or the average weekly
trading volume of shares of Class A Common Stock on all exchanges and reported
through the automated quotation system of a registered security association
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission (the "Commission"). Sales
under Rule 144 are also subject to certain restrictions on the manner of sales,
notices, requirements and the availability of current public information about
the Company. If two years have elapsed since the date of acquisition of
restricted shares from the Company or from any "affiliate" of the Company, and
the holder thereof is deemed not to have been an affiliate of the Company at any
time during the 90 days preceding a sale, such person would be entitled to sell
such Class A Common Stock in the public market under Rule 144(k) without regard
to the volume limitations, manner of sale provisions, public information
requirements or notice requirements.
Upon completion of the Offering and the Standby Commitment, the Company will
have approximately 5,619,348 shares of Class A Common Stock outstanding
(5,725,062 if the Underwriters' overallotment option is exercised in full),
including 4,000,000 shares of Class A Common Stock sold in the Offering
(4,600,000 if the Underwriters' overallotment option is exercised in full) and
1,619,348 "restricted" shares of Class A Common Stock.
The shares of Class A Common Stock offered in the Offering will be freely
tradeable without restriction or further registration under the Securities Act
by persons other than "affiliates" of the Company within the meaning of Rule
144. The holders of restricted shares generally will be entitled to sell these
shares in the public securities market without registration under the Securities
Act to the extent permitted by Rule 144 or any exemption under the Securities
Act. The Company has granted certain registration rights to Mr. Kakoyiannis for
all shares of Class A Common Stock held by him on the date of this Prospectus or
to be issued pursuant to his employment agreement with the Company and to the
Principal Stockholders with respect to all the shares of Class A Common Stock
that may be issued to them under the Standby Commitment and upon conversion of
the shares of Class B Common Stock issued to
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them in the Reclassification, only following the one year anniversary of the
effectiveness of this Offering. Registration of such shares under the Securities
Act would result in such shares becoming available for sale by non-affiliates in
the public securities market without limitation, and by affiliates, subject to
the limitations of Rule 144, immediately upon the effectiveness of such
registration.
The Company and each of its executive officers, directors and certain
stockholders have entered into lock-up agreements with the Underwriters,
providing that, subject to certain exceptions, they will not, for a period of
180 days from the date of this Prospectus, offer, sell, contract to sell or
otherwise dispose of, directly or indirectly, any shares of Class A Common Stock
or any securities convertible into, or exercisable or exchangeable for, shares
of Class A Common Stock, file any registration statement with respect to any
shares of Class A Common Stock or any securities convertible into or exercisable
or exchangeable for shares of Class A Common Stock, or make any demand for, or
exercise any right with respect to the registration of any shares of Class A
Common Stock or any securities convertible into or exercisable or exchangeable
for shares of Class A Common Stock, without prior written consent of DLJ,
subject to certain exceptions. See "Underwriting."
Promptly after completion of the Offering, the Company intends to file with
the Commission a Registration Statement on Form S-8, covering the shares of
Class A Common Stock underlying options granted or to be granted under the 1997
Incentive Stock Plan and the shares that may be issued to Mr. Kakoyiannis
pursuant to his employment agreement with the Company. Such registration
statement will become effective immediately upon filing with the Commission. As
a result, the shares of Class A Common Stock so registered and acquired pursuant
to the 1997 Incentive Stock Plan or issued to Mr. Kakoyiannis under his
employment agreement will be available for sale by non-affiliates in the public
market without limitation and by affiliates, subject to the volume limitations
of Rule 144.
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UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement,
dated December 18, 1997 (the "Underwriting Agreement"), between the Company and
a syndicate of underwriters named below (the "Underwriters"), for whom DLJ and
Furman Selz LLC are acting as representatives (the "Representatives"), the
Underwriters have severally and not jointly agreed to purchase from the Company
and the Company, has agreed to sell to them, the number of shares of Class A
Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
CLASS A
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation........................................ 1,956,500
Furman Selz LLC............................................................................ 1,053,500
Bear, Stearns & Co. Inc.................................................................... 60,000
BT Alex Brown Incorporated................................................................. 60,000
Deutsche Morgan Grenfell Inc............................................................... 60,000
A.G. Edwards & Sons, Inc................................................................... 60,000
Lehman Brothers Inc........................................................................ 60,000
NationsBanc Montgomery Securities, Inc..................................................... 60,000
PaineWebber Incorporated................................................................... 60,000
Prudential Securities Incorporated......................................................... 60,000
Schroder & Co. Inc......................................................................... 60,000
Salomon Smith Barney....................................................................... 60,000
Arnhold and S. Bleichroeder, Inc........................................................... 30,000
Barington Capital Group, L.P............................................................... 30,000
First of Michigan Corporation.............................................................. 30,000
Gruntal & Co., L.L.C....................................................................... 30,000
Johnston, Lemon & Co. Incorporated......................................................... 30,000
McDonald & Company Securities, Inc......................................................... 30,000
The Ohio Company........................................................................... 30,000
Parker/Hunter Incorporated................................................................. 30,000
Pennsylvania Merchant Group Ltd............................................................ 30,000
Ragen Mackenzie Incorporated............................................................... 30,000
Sands Brothers & Co., Ltd.................................................................. 30,000
Sutro & Co. Incorporated................................................................... 30,000
Tucker Anthony Incorporated................................................................ 30,000
----------
Total................................................................................ 4,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Class A Common
Stock offered hereby are subject to approval of certain legal matters by counsel
and to certain other conditions. If any of the shares of Class A Common Stock
are purchased by the Underwriters pursuant to the Underwriting Agreement, all
such shares (other than shares of Class A Common Stock covered by the
over-allotment option described below) must be so purchased.
The Company has granted to the Underwriters an option, exercisable at any
time on or before 30 days after the date of this Prospectus, to purchase up to
an aggregate of 600,000 additional shares of Class A Common Stock at the initial
public offering price less the underwriting discounts and commissions, solely to
cover over-allotments. To the extent that the Underwriters exercise such option,
each of the Underwriters will be committed, subject to certain conditions, to
purchase a number of option shares of Class A Common Stock proportionate to such
Underwriter's initial commitment as indicated in the table above.
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The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
The Company and its executive officers and directors, subject to certain
limited exceptions, have agreed not to offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of Class A Common Stock or any
securities convertible into or exercisable or exchangeable for shares of Class A
Common Stock or, enter into any swap or other arrangement that transfers all or
a portion of the economic consequences associated with the ownership of any
shares of Class A Common Stock (regardless of whether any of the foregoing
transactions is to be settled by the delivery of Class A Common Stock, or such
other securities, in cash or otherwise) for a period of 180 days after the date
of this Prospectus without the prior written consent of DLJ. In addition, during
such period, without such prior written consent, and subject to certain limited
exceptions, the Company has also agreed not to file a registration statement
with respect to, and its executive officers and directors have agreed not to
make any demand for, or exercise any right with respect to, the registration of
any shares of Class A Common Stock or any securities convertible into or
exercisable or exchangeable for shares of Class A Common Stock.
At the request of the Company, the Underwriters have reserved up to 200,000
of the shares of Class A Common Stock offered hereby for sale at the public
offering price to certain directors, officers and employees of the Company. The
number of shares of Class A Common Stock available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares.
Any reserved shares not so purchased will be offered by the Underwriters to the
general public on the same basis as the other shares offered hereby. All
purchasers of such reserved shares will be required to enter into agreements
identical to those described in the immediately preceding paragraph restricting
the transferability of such shares for a period of 180 days after the date of
this Prospectus.
Prior to the Offering, there has been no established trading market for the
Class A Common Stock. The initial public offering price for the shares of Class
A Common Stock offered was determined by negotiation between the Company and the
Representatives. The factors considered in determining the initial public
offering price include the history of and the prospects for the industry in
which the Company competes, the past and present operations of the Company, the
historical results of operations of the Company, the prospects for future
earnings of the Company, the recent market prices of securities of generally
comparable companies and the general conditions of the securities markets at the
time of the Offering.
The Representatives have advised the Company that the Underwriters propose
to offer shares of Class A Common Stock to the public initially at the public
offering price set forth on the cover page of this Prospectus and, through the
Representatives, to certain dealers at such price less a concession not in
excess of $0.29 per share; that the Underwriters and such dealers may allow a
discount not in excess of $0.10 per share on sales to certain other dealers; and
that, after the commencement of the initial public offering, the public offering
price and concession and discount to dealers may be changed by the
Representatives on behalf of the Underwriters. The Representatives have informed
the Company that they do not expect to confirm sales to accounts over which the
Underwriters exercise discretionary authority.
The shares of Class A Common Stock offered hereby have been approved for
inclusion on the AMEX, under the symbol "YFM."
In connection with Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Class A Common
Stock. Specifically, the Underwriters may over-allot the Offering, creating a
syndicate short position. The Underwriters may bid for and purchase shares of
Class A Common Stock in the open market to cover syndicate short positions or to
stabilize the price of the Class A Common Stock. In addition, the Underwriters
may reclaim selling concessions from other Underwriters
70
<PAGE>
in the Offering, if they repurchase previously distributed shares of Class A
Common Stock in syndicate covering transactions, in stabilization transactions
or otherwise. These activities may stabilize or maintain the market price of the
Class A Common Stock above independent market levels. The Underwriters are not
required to engage in these activities, and may end these activities at any time
and will, in any event, be discontinued 30 days after settlement of the
Offering.
Other than in the United States, no action has been taken in any
jurisdiction by the Company or the Underwriters that would permit a public
offering of shares of Class A Common Stock in any jurisdiction where action for
that purpose is required. The shares of Class A Common Stock offered hereby may
not be offered or sold, directly or indirectly, and neither this Prospectus nor
any other offering material or advertisements in connection with the offer and
sale of the shares of Class A Common Stock may be distributed or published in or
from any jurisdiction, except under circumstances that will result in compliance
with applicable rules and regulations of any such jurisdiction. Persons into
whose possession this Prospectus comes are hereby advised to inform themselves
about and to observe any restrictions relating to the offering of shares of
Class A Common Stock and the distribution of this Prospectus. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
shares of Class A Common Stock in any jurisdiction or in any circumstances in
which such an offer or solicitation is unlawful.
Certain of the Underwriters and their affiliates have provided from time to
time, and expect to provide in the future, commercial or investment banking
services to the Company and its affiliates, for which such Underwriters and
their affiliates have received and expect to receive customary fees and
commissions.
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered hereby and
certain other legal matters in connection with the Class A Common Stock offered
hereby will be passed upon for the Company by Paul, Weiss, Rifkind, Wharton &
Garrison, New York, New York. Certain legal matters in connection with the
Offering will be passed upon for the Underwriters by Skadden, Arps, Slate,
Meagher & Flom LLP, Los Angeles, California.
EXPERTS
The financial statements of the Company and related schedule for the Company
as of December 31, 1996 and for the year then ended, the financial statements of
WZVU-FM as of December 31, 1996 and 1995 and for the years then ended and the
financial statements of WVVX as of December 31, 1996 and for the year then ended
have been included herein and in the Registration Statement in reliance upon the
reports of KPMG Peat Marwick LLP, independent certified public accountants
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of the Company and related schedules as of December
31, 1995 and for the year then ended and for the year-ended September 30, 1994
and for the three months ended December 31, 1994 appearing herein have been
audited by Holtz Rubenstein & Co., LLP, independent auditors as stated in their
report appearing elsewhere in the Registration Statement, and upon the authority
of said firm as experts in accounting and auditing.
CHANGE IN INDEPENDENT AUDITOR
Effective September 1996, following the merger of the Company with Q, the
Company appointed KPMG Peat Marwick LLP as successor independent auditor to
replace Holtz Rubenstein & Co., LLP. The decision to change the Company's
independent auditor was approved by the Board of Directors of the Company. The
former auditor's reports for fiscal year ended September 30, 1994, the three
months ended December 31, 1994 and the fiscal year ended December 31, 1995 are
included in this Prospectus.
71
<PAGE>
Such reports do not contain an adverse opinion or a disclaimer of opinion or
qualifications or modifications as to uncertainty, audit scope or accounting
principles. There were no disagreements with the former auditor regarding any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure at the time of the change or with respect to the
Company's financial statements for fiscal 1994 and 1995. Prior to retaining KPMG
Peat Marwick LLP, the Company had not consulted with KPMG Peat Marwick LLP
regarding the application of accounting principles to a specified transaction,
either completed or proposed or the type of audit opinion that might be rendered
on the Company's financial statements in any matter that was either the subject
of a disagreement or a reportable event.
MARKET DATA AND CERTAIN DEFINITIONS
Unless otherwise indicated herein, all markets, audience ratings and
audience rankings have been derived for the indicated station or group of
stations from surveys of the indicated demographic group listening Monday
through Sunday, 6 a.m. to 12 midnight, based on the average of the survey
periods for the referenced year, as reported by Arbitron, Radio Market Report,
The Arbitron Company ("Arbitron"). Unless otherwise indicated herein, audience
share data is expressed as the "local" average quarter hour share for each
indicated radio station. A radio station's "local" audience share is derived by
comparing the radio station's average quarter hour share to the total average
quarter hour share for all stations listed as inside the MSA ("home-to-market"
or "above the line") by Arbitron. Average quarter hour share is the percentage
of the estimated number of persons who listened to a given radio station for a
minimum of five minutes within a quarter hour compared to the total number of
persons who listened to radio in the market within such quarter hour. The most
recent Arbitron survey utilized in this Prospectus is Summer 1997. Unless
otherwise indicated herein metro rank, market ranking by radio advertising
revenue and market radio advertising revenue have been obtained from Investing
in Radio, 1997 Market Report-- Third Edition, BIA Publications Inc. Information
regarding radio station sales in each of the Company's markets has been obtained
from Duncan's American Radio, L.L.C., as set forth in the following
publications: (i) Duncan's Radio Market Guide 1996, (ii) American Radio, Fall
1996, (iii) Duncan's Radio Market Guide 1997, (iv) American Radio, Winter 1997
and (v) American Radio, Spring 1997.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus under the caption "Prospectus
Summary," "Risk Factors," "Business" and otherwise utilizing the phrases "will,"
"expects," "intends" and "contemplates" are "forward-looking" statements (as
such term is defined in the Private Securities Litigation Reform Act of 1995),
including statements regarding, among other items, (i) the Company's growth
strategy, (ii) the Company's intention to acquire additional radio stations and
to enter additional markets, (iii) the Company's expectation of improving the
coverage areas of its radio stations and (iv) the Company's ability to
successfully implement its business strategy. These forward-looking statements
are based largely on the Company's expectations and are subject to a number of
risks and uncertainties, certain of which are beyond the Company's control.
Actual results could differ materially from these forward-looking statements as
a result of, among other things, the facts described in "Prospectus Summary,"
"Risk Factors" and "Business" including, among others, (i) changes in the
competitive marketplace, including the introduction of new technologies or
formatting changes by the Company's competitors, (ii) changes in the regulatory
framework, (iii) changes in audience tastes and (iv) changes in the economic
conditions of local markets. Other factors which may materially affect actual
results include, among others, the following: general economic and business
conditions; industry capacity; demographic changes; changes in political, social
and economic conditions; and various other factors beyond the Company's control.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks and uncertainties, there can be no
assurance that the forward-looking information contained in this Prospectus will
in fact transpire.
72
<PAGE>
ADDITIONAL INFORMATION
The Company is not currently subject to the information requirements of the
Exchange Act. As a result of the Offering, the Company will be required to file
reports and other information with the Commission pursuant to the informational
requirements of the Exchange Act. The Company intends to furnish its
stockholders with annual reports containing consolidated financial statements
audited by independent certified public accountants and unaudited quarterly
reports.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the securities offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus, which
is a part of the Registration Statement, omits certain information, exhibits,
schedules and undertakings set forth in the Registration Statement. For further
information pertaining to the Company and the securities offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents or
provisions of any documents referred to herein are not necessarily complete, and
in each instance, reference is made to the copy of the document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
The Registration Statement may be inspected without charge at the office of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the
Registration Statement may be obtained from the Commission at prescribed rates
from the Public Reference Section of the Commission at such address and at the
Commission's regional offices located at 7 World Trade Center, 13th Floor, New
York, New York 10048, and at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. In addition, registration statements and certain other filings
made with the Commission through its Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system are publicly available through the Commission's site
on the Internet's World Wide Web, located at http://www.sec.gov.
73
<PAGE>
BIG CITY RADIO, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BIG CITY RADIO, INC. PAGE
---------
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Auditors.............................. F-2
Report of Holtz Rubenstein & Co., LLP, Independent Auditors........................ F-3
Balance Sheets as of December 31, 1995 and 1996.................................... F-4
Statements of Operations for the year ended September 30, 1994, the three months
ended December 31, 1994 and the years ended December 31, 1995 and 1996........... F-5
Statements of Cash Flows for the year ended September 30, 1994, the three months
ended December 31, 1994 and the years ended December 31, 1995 and 1996........... F-6
Statement of Stockholders' Deficit................................................. F-7
Notes to Financial Statements...................................................... F-8
Balance Sheet as of December 31, 1996 and September 30, 1997 (unaudited)........... F-18
Statements of Operations for the nine month periods ended September 30, 1996 and
1997 (unaudited)................................................................. F-19
Statements of Cash Flows for the nine month periods ended September 30, 1996 and
1997 (unaudited)................................................................. F-20
Statement of Stockholders' deficit (unaudited)..................................... F-21
Notes to Financial Statements (unaudited).......................................... F-22
<CAPTION>
WZVU-FM
<S> <C>
Independent Auditors' Report....................................................... F-26
Balance Sheets as of December 31, 1995 and 1996 (audited) and May 31, 1997
(unaudited)...................................................................... F-27
Statements of Operations and Station Deficit for the years ended December 31, 1995
and 1996 (audited), for the five months ended May 31, 1996 and for the five
months ended May 31, 1997 (unaudited)............................................ F-28
Statements of Cash Flows for the years ended December 31, 1995 and 1996 (audited)
and for the five months ended May 31, 1996 and for the five months ended May 31,
1997 (unaudited)................................................................. F-29
Notes to Financial Statements...................................................... F-30
<CAPTION>
WVVX-FM, INC.
<S> <C>
Independent Auditors' Report....................................................... F-34
Balance Sheets as of December 31, 1996 (audited) and July 31, 1997 (unaudited)..... F-35
Statements of Operations for the period January 1, 1996 to June 13, 1996 (audited),
June 14, 1996 to December 31, 1996 (audited) and for the seven months ended July
31, 1997 (unaudited)............................................................. F-36
Statements of Cash Flows for the period January 1, 1996 to June 13, 1996 (audited),
June 14, 1996 to December 31, 1996 (audited) and for the seven months ended July
31, 1997 (unaudited)............................................................. F-37
Statement of Station Equity (Deficit) for the period January 1, 1996 to June 13,
1996 (audited), June 14, 1996 to December 31, 1996 (audited) and for the seven
months ended July 31, 1997 (unaudited)........................................... F-38
Notes to Financial Statements...................................................... F-39
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Big City Radio, Inc.:
We have audited the accompanying balance sheet of Big City Radio, Inc.
(formerly Odyssey Communications, Inc.) as of December 31, 1996, and the related
statements of operations, stockholders' deficit and cash flows for the year then
ended. 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 audit.
We conducted our audit 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 audit provides 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 Big City Radio, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
New York, New York
September 10, 1997,
except as to note 1 which is
as of October 31, 1997
KPMG Peat Marwick LLP
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Big City Radio, Inc.:
We have audited the accompanying balance sheet of Big City Radio, Inc.
(formerly Odyssey Communications, Inc.) as of December 31, 1995 and the related
statements of operations, stockholders' deficit and cash flows for the years
ended December 31, 1995 and September 30, 1994 and the three months ended
December 31, 1994. 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 Big City Radio, Inc. as of
December 31, 1995, and the results of its operations and its cash flows for the
years ended December 31, 1995 and September 30, 1994 and the three months ended
December 31, 1994, in conformity with generally accepted accounting principles.
Melville, New York
September 19, 1997
Holtz Rubenstein & Co., LLP
Certified Public Accountants
F-3
<PAGE>
BIG CITY RADIO, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
---------------------------- ------------
1995 1996 1996
------------- ------------- (NOTE 11)
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................................... $ 1,066,000 $ 234,000
Cash held in escrow (note 3)....................................... -- 500,000
Accounts receivable, net of allowance of $58,000 and $212,000 in
1995 and 1996, respectively...................................... 1,081,000 1,537,000
Prepaid expenses and other current assets.......................... 72,000 42,000
------------- -------------
Total current assets............................................. 2,219,000 2,313,000
Property and equipment, net (note 4)................................. 1,084,000 1,477,000
Intangibles, net (note 5)............................................ 6,040,000 29,230,000
Deferred financing fees.............................................. -- 473,000
Other assets......................................................... 90,000 36,000
Advance to purchase stations (note 3)................................ -- 5,434,000
------------- -------------
Total assets..................................................... $ 9,433,000 $ 38,963,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................................... $ 372,000 $ 830,000
Accrued expenses................................................... 370,000 454,000
Other current liabilities.......................................... 35,000 735,000
------------- -------------
Total current liabilities........................................ 777,000 2,019,000
Notes payable (note 6)............................................... 1,000,000 --
Long-term debt (note 7).............................................. -- 28,200,000
Notes payable to stockholders (note 8)............................... 13,477,000 12,544,000
------------- -------------
Total liabilities................................................ 15,254,000 42,763,000
Stockholders' deficit (note 11):
Common stock, $0.01 par value. Authorized 1,000 shares and 2,000
shares in 1995 and 1996, respectively; issued and outstanding 800
shares and 1,232 shares in 1995 and 1996, respectively -- -- 94,000
------------
------------
Additional paid-in capital......................................... 1,370,000 6,489,000 5,300,000
------------
------------
Accumulated deficit................................................ (7,191,000) (10,289,000) $ 0
------------- ------------- ------------
------------
Total stockholders' deficit...................................... (5,821,000) (3,800,000)
------------- -------------
Total liabilities and stockholders' deficit...................... $ 9,433,000 $ 38,963,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
BIG CITY RADIO, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR THREE MONTHS YEAR ENDED
ENDED ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, -----------------------------
1994 1994 1995 1996
------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Gross revenue........................................ $ 2,267,000 $ 654,000 $ 5,655,000 $ 8,567,000
Less: commissions and fees........................... 193,000 50,000 430,000 623,000
------------- ------------ ------------- --------------
Net revenue...................................... 2,074,000 604,000 5,225,000 7,944,000
Operating expenses:
Station operating expenses, excluding depreciation
and amortization................................. 2,326,000 687,000 7,185,000 12,253,000
Depreciation and amortization...................... 524,000 113,000 798,000 1,388,000
Corporate, general and administrative expenses..... -- -- 425,000 1,201,000
------------- ------------ ------------- --------------
Total operating expenses....................... 2,850,000 800,000 8,408,000 14,842,000
------------- ------------ ------------- --------------
Operating loss................................. (776,000) (196,000) (3,183,000) (6,898,000)
Other income (expenses):
Gain on sale of stations........................... -- -- -- 6,608,000
Interest expense, net (notes 6, 7 and 8)........... (439,000) (120,000) (842,000) (2,827,000)
Other, net......................................... 52,000 18,000 20,000 19,000
------------- ------------ ------------- --------------
Total other.................................... (387,000) (102,000) (822,000) 3,800,000
------------- ------------ ------------- --------------
Net loss....................................... $(1,163,000) $ (298,000) $ (4,005,000) $ (3,098,000)
------------- ------------ ------------- --------------
------------- ------------ ------------- --------------
Pro forma net loss per share......................... $ (0.33)
--------------
--------------
Pro forma weighted average shares outstanding (Note
11)................................................ 9,396,920
--------------
--------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
BIG CITY RADIO, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED THREE MONTHS YEARS ENDED
SEPTEMBER ENDED DECEMBER 31,
30, DECEMBER 31, -----------------------
1994 1994 1995 1996
------------ ------------- ---------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,163,000) $ (298,000) $(4,005,000) $(3,098,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 524,000 113,000 798,000 1,388,000
Loss on abandonment................................... -- -- 150,000 --
Contributed services.................................. -- -- 20,000 --
Gain on sale of stations.............................. -- -- -- (6,608,000)
Changes in operating assets and liabilities net of
acquisitions:
(Increase) decrease in assets:
Accounts receivable............................. (369,000) 24,000 (429,000) (456,000)
Prepaid expenses and other current assets....... -- (9,000) (18,000) 30,000
Other assets.................................... (25,000) -- (33,000) 54,000
Increase (decrease) in liabilities:
Accounts payable................................ 14,000 (40,000) 302,000 458,000
Accrued expenses................................ 12,000 (17,000) 257,000 84,000
Other liabilities............................... -- -- 16,000 700,000
------------ ------------- ---------- -----------
Net cash used in operating activities......... (1,007,000) (227,000) (2,942,000) (7,448,000)
Cash flows from investing activities:
Purchase of property and equipment...................... (23,000) (1,000) (333,000) (653,000)
Cash paid for assets of radio stations acquired......... -- -- (3,550,000) (38,173,000)
Cash received for radio stations sold................... -- 20,025,000
Net advances to purchase stations....................... -- -- -- (5,434,000)
------------ ------------- ---------- -----------
Net cash used in investing activities........... (23,000) (1,000) (3,883,000) (24,235,000)
Cash flows from financing activities:
Loans from stockholders................................. 1,112,000 175,000 7,522,000 4,186,000
Drawdown on credit facility, net of fees paid of
$535,000 in May 1996.................................. -- -- -- 38,865,000
Repayment of Existing Credit Facility................... -- -- -- (11,200,000)
Repayment of note payable............................... -- -- -- (1,000,000)
Capital contributions................................... -- -- 350,000 --
Other................................................... (46,000) (3,000) (93,000) --
------------ ------------- ---------- -----------
Net cash provided by financing activities..... 1,066,000 172,000 7,779,000 30,851,000
------------ ------------- ---------- -----------
Change in cash and cash equivalents........... 36,000 (56,000) 954,000 (832,000)
Cash and cash equivalents at beginning of period.......... 20,000 56,000 56,000 1,066,000
Adjustment for duplicate three-month period............... 56,000
------------ ------------- ---------- -----------
Cash and cash equivalents at end of period................ $ 56,000 $ -- $1,066,000 $ 234,000
------------ ------------- ---------- -----------
------------ ------------- ---------- -----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
BIG CITY RADIO, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- --------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1993................. -- $ -- $ 1,000,000 $ (2,023,000) $ (1,023,000)
Net loss................................... -- -- -- (1,163,000) (1,163,000)
---------- --------- ------------- -------------- -------------
Balance at September 30, 1994.............. -- -- 1,000,000 (3,186,000) (2,186,000)
Net loss................................... -- -- -- (298,000) (298,000)
---------- --------- ------------- -------------- -------------
Balance at December 31, 1994............... -- -- 1,000,000 (3,484,000) (2,484,000)
Capital contribution....................... 800 -- 370,000 -- 370,000
Net loss................................... -- -- -- (4,005,000) (4,005,000)
Adjustment for change in fiscal year end
(note 2)................................. -- -- -- 298,000 298,000
---------- --------- ------------- -------------- -------------
Balance at December 31, 1995............... 800 -- 1,370,000 (7,191,000) (5,821,000)
Contribution of stockholders' loans to
equity................................... 432 -- 5,119,000 -- 5,119,000
Net loss................................... -- -- -- (3,098,000) (3,098,000)
---------- --------- ------------- -------------- -------------
Balance at December 31, 1996............... 1,232 $ -- $ 6,489,000 $ (10,289,000) $ (3,800,000)
---------- --------- ------------- -------------- -------------
---------- --------- ------------- -------------- -------------
Pro forma effect of Equity Contribution and
Reclassification......................... 9,375,288 94,000 $ 12,450,000 --
Reinstatement of deferred income taxes
relating to conversion to C-Corporation
status................................... -- (3,350,000)
Reclassification of accumulated deficit to
paid-in capital in connection with the
termination of S-Corporation status...... (13,639,000) 13,639,000
---------- --------- ------------- --------------
Pro forma balance at December 31, 1996..... 9,375,520 94,000 $ 5,300,000 $ 0
---------- --------- ------------- --------------
---------- --------- ------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
BIG CITY RADIO, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
Big City Radio, Inc. (formerly Odyssey Communications, Inc.) ("Big City
Radio") was incorporated in Delaware on August 2, 1994 and commenced operations
on January 1, 1995. On May 30, 1996, Big City Radio merged with Q Broadcasting,
Inc. ("Q", and together with Big City Radio, the "Company") with Big City Radio
being the surviving company. Big City Radio and Q were owned 94% and 100% by
Stuart and Anita Subotnick (the "Principal Stockholders"). Accordingly, the
merger has been accounted for as a combination of entities under common control.
As a result, the combination of Big City Radio and Q was effected utilizing
historical costs.
The Company owns and operates radio broadcasting stations. As of December
31, 1996, the Company owned three FM stations in Southern California, KLYY-FM
Arcadia, KVYY-FM Ventura and KSYY-FM Fallbrook (programmed as "Y-107 LA"). In
the New York area, the Company owns two radio properties, WRGX-FM Westchester
County, New York, and WRKL-AM Rockland, New York (the "Original New York
Stations").
During November 1996, the Company contracted to acquire WZVU-FM Monmouth,
New Jersey, and WWHB-FM Hampton Bays, New York. During December 1996, both of
these stations commenced operations under the Company's management pursuant to
local marketing agreements ("LMAs"). WWHB-FM and WZVU-FM, together with WRGX-FM
Westchester, broadcast in the New York and New Jersey area as "Y-107 NY."
The accompanying financial statements have been prepared on a going-concern
basis which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. Since inception
the Company has not generated significant revenue, has incurred substantial
losses and has never generated positive cash flows from operations. The
Company's recent purchases and reformatting of radio stations in its markets are
currently contributing to the Company's losses. The Company believes that losses
will continue while the Company pursues its strategy of acquiring and developing
radio stations. The ability of the Company to continue as a going concern is
dependent upon: (a) the continued support of its stockholders; (b) additional
sources of financing; and (c) the Company's ability to generate positive cash
flows from operations. The Company has obtained a support letter from a
Principal Stockholder guaranteeing his financial support through the earlier of
a successful minimum initial public offering of $36,000,000 of equity securities
to the public or October 1, 1998.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
In connection with the merger discussed in note 1, Big City Radio and Q are
deemed to be combined since inception for financial reporting purposes. Big City
Radio reports on the basis of a December 31 year-end and Q reported on the basis
of a September 30 year-end. As a result, the December 31, 1995 and 1996
financial statements include the operations of Q on the basis of an eight month
period ended May 30, 1996 (the date of sale of the Q Stations) and twelve month
period ended September 30, 1995, respectively. Periods prior to January 1, 1995,
the commencement of Big City Radio operations, reflect the operations of Q on
the basis of a September 30 year-end. The Company has presented Q's operations
for the period October 1, 1994 to December 31, 1994 to transition from a
September 30 to a December 31 year-end.
The financial statements for the twelve months ended December 31, 1995
include three months of Q (October, November and December 1994) that were
included in the three month transition period ended December 31, 1994. The net
revenues and net loss for the three month duplicate period are $604,000 and
$298,000, respectively. The December 31, 1995 accumulated deficit has been
adjusted to eliminate the duplication of the October, November and December 1994
net losses.
F-8
<PAGE>
BIG CITY RADIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(B) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets ranging from
5 to 7 years for transmission equipment, vehicles and furniture and office
equipment to 39 years for buildings.
(C) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards (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 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. Adoption of this Statement did not have a material impact on the Company's
financial position results of operations, or liquidity.
(D) INTANGIBLE ASSETS
Intangible assets include the portion of the purchase price allocable to FCC
broadcast licenses, which are amortized over 40 years. Covenants not to compete
signed as part of station acquisition agreements, are amortized over the period
of the agreements, generally 3 years. Organization costs are amortized over 5
years.
It is the Company's policy to account for intangible assets at the lower of
amortized cost or fair market value. As part of an ongoing review of the
valuation and amortization of intangible assets, management assesses the
carrying value of the Company's intangible assets if facts and circumstances
suggest that they are impaired. If this review indicates that the intangibles
will not be recoverable as determined by a nondiscounted cash flow analysis over
the remaining amortization period, the carrying value of the Company's
intangibles will be reduced to their estimated realizable value. The Company has
determined that intangibles are fairly stated at December 31, 1996.
(E) DEFERRED FINANCING FEES
Deferred finance costs and loan origination fees incurred in connection with
the long-term debt (see note 7) are amortized over five years, the period of the
Existing Credit Facility.
(F) REVENUE RECOGNITION
Broadcasting revenue is recognized when commercials are aired. Net revenues
represent gross revenues less direct fees and commissions paid to independent
advertising agencies.
F-9
<PAGE>
BIG CITY RADIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) INCOME TAXES
The Company has elected to be treated as an S-Corporation for federal and
certain state income tax purposes. As an S-Corporation, the earnings and losses
of the Company are reported by the individual stockholders and the Company is
not responsible for federal or certain state income taxes. Accordingly, no
provision for income taxes is included in the accompanying financial statements.
The Company will terminate its S-Corporation election in connection with the
Offering discussed in note 11.
(H) USE OF ESTIMATES
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
disclosures 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.
(I) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating the fair value
disclosures for financial instruments:
The carrying amounts reported in the balance sheets for cash, current
receivables, accounts payable and accrued expenses approximate fair value.
The carrying value of the long-term and stockholder debt, including the
current portion at December 31, approximates fair value because they are
floating rate instruments.
(J) BARTER TRANSACTIONS
The Company trades commercial air time for goods and services used
principally for promotional, sales and other business activities. An asset and a
liability are recorded at the fair market value of the goods or services
received. Barter revenue is recorded at the fair market value of the goods or
services received. Barter revenue is recorded and the liability is relieved when
the commercials are broadcast, and barter expense is recorded and the assets are
relieved when the goods or services are received or used.
(K) ADVERTISING
The Company charges advertising costs, as incurred, to expense. Advertising
costs amounted to $41,000, $320,000, and $550,000 for the year ended September
30, 1994, and the years ended December 31, 1995 and 1996, respectively. For the
three months ended December 31, 1994 advertising expense amounted to $28,000.
(3) ACQUISITIONS AND DISPOSITIONS
On November 22, 1996, the Company entered into an agreement to acquire the
assets of WWHB-FM Hampton Bays, New York, for a purchase price of $4,000,000. In
addition, on the same date, a letter of credit issued under the Existing Credit
Facility (see note 7) in the amount of $3,200,000 was delivered to the seller,
which was canceled upon consummation of the acquisition. Simultaneously with the
signing of the asset purchase agreement, the Company signed a LMA with the
seller under which it had the right to program and sell advertising time on the
station for a fee. The Company exercised this right effective December 31, 1996
as part of its operation of Y107-NY. The Company acquired WWHB-FM on April 1,
1997.
F-10
<PAGE>
BIG CITY RADIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) ACQUISITIONS AND DISPOSITIONS (CONTINUED)
On November 7, 1996, the Company entered into an agreement to acquire the
assets of WZVU-FM Monmouth, New Jersey, for a purchase price of $12,000,000.
Upon execution of the asset purchase agreement, $5,434,000 was advanced to the
seller, under a loan agreement which bore interest at prime rate plus 2%,
collateralized by substantially all the assets of the seller and the Company
signed a LMA with the seller under which it has the right to program and sell
advertising time on the station for a fee. The Company exercised this right
effective December 5, 1996 when it commenced the operation of Y-107 NY. Revenue,
programming expenses and other reimbursable expenses pursuant to the LMA were
included in the accompanying financial statements from December 5, 1996 as have
LMA fees of approximately $131,000. The Company acquired WZVU-FM on June 5,
1997.
On May 30, 1996, the Company acquired substantially all of the assets of
KLYY-FM, Arcadia, KVYY-FM, Ventura, KSYY-FM, Fallbrook (the "Los Angeles
Stations"), and KWIZ-FM, Santa Ana, in a simultaneous purchase and multi-party,
tax-free exchange through the use of a third party serving as a "qualified
intermediary." The aggregate purchase price of the four stations was
approximately $38,000,000. The acquisitions were recorded using the purchase
method of accounting. In connection with the acquisition of the Los Angeles
Stations and KWIZ-FM, the Company borrowed $31,000,000 under the Existing Credit
Facility (see note 7). On December 20, 1996, the Company completed the sale of
KWIZ-FM, Santa Ana, California, for a sale price of $11,200,000 and
simultaneously paid down the Existing Credit Facility in the same amount. No
gain or loss was recorded in connection with the sale of KWIZ-FM.
Immediately before the simultaneous purchase and multi-party tax-free
exchange, Q was merged into Big City Radio (see note 1). Two Connecticut radio
stations (WSTC-AM and WKHL-FM), which comprised the sole operating assets of Q
(the "Q stations") were transferred to the acquirer of the Q stations for
$9,500,000, of which $500,000 was held in escrow until May 31, 1997.
Substantially all of the cash received from such acquirer plus cash provided by
Big City Radio was transferred by the "qualified intermediary" to the third
party disposing of the Los Angeles Stations in connection with the tax-free
exchange of the Q stations for the Los Angeles Stations and the purchase of the
assets of KWIZ-FM. For financial reporting purposes, the Company accounted for
the transfer of the Q stations as a sale and recorded a gain of $6,608,000. In
connection with the merger of Q and Big City Radio, the stockholders contributed
$5,119,000 of loans payable by the Company to equity and received 432 additional
shares of Common Stock.
The Company managed the operations of the Los Angeles Stations and KWIZ-FM
for a fee from March 26, 1996 up to the effective acquisition date under the
LMA. Revenue, programming expenses and other reimbursable expenses pursuant to
the LMA, including rent and utilities have been included in the accompanying
financial statements from March 26, 1996 as have LMA fees of approximately
$593,000. The acquisitions were recorded using the purchase method of
accounting. Management's estimate of the fair value of the Los Angeles Stations'
assets acquired exclusive of acquisition costs is as follows:
<TABLE>
<S> <C>
Fixed assets................................................... $ 437,000
FCC broadcast licenses......................................... 26,085,000
Covenant not to compete........................................ 68,000
</TABLE>
The fair value of the fixed assets acquired is determined by reference to
replacement value on an individual asset basis. The fair value of covenants not
to compete is determined by reference to the covenant agreement, and the
remaining purchase price is assigned to the FCC licenses.
Effective December 31, 1994, the Company acquired substantially all the
assets of WRGX-FM and WRKL-AM. The aggregate purchase price totaled $4,550,000,
consisting of cash of $3,550,000 and a note
F-11
<PAGE>
BIG CITY RADIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) ACQUISITIONS AND DISPOSITIONS (CONTINUED)
payable to the seller of $1,000,000 (see note 6). The acquisitions were recorded
using the purchase method of accounting. The accompanying financial statements
include the results of operations from January 1, 1995. The allocation of
purchase price to the assets acquired is as follows:
<TABLE>
<S> <C>
Fixed assets.................................................... $ 250,000
Land and building............................................... 250,000
FCC broadcast licenses.......................................... 3,300,000
Leasehold and tower............................................. 150,000
Covenant not to compete......................................... 600,000
</TABLE>
LMA fees paid are reflected in the accompanying statement of operations as
station operating expenses.
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Land.............................................................. $ 50,000 $ 50,000
Building and improvements......................................... 200,000 236,000
Transmitter equipment............................................. 755,000 1,152,000
Furniture and office equipment.................................... 976,000 260,000
Vehicles.......................................................... 9,000 163,000
------------ ------------
1,990,000 1,861,000
Less: accumulated depreciation.................................... 906,000 384,000
------------ ------------
$ 1,084,000 $ 1,477,000
------------ ------------
------------ ------------
</TABLE>
Subsequent to December 31, 1995, the Company relocated its WRGX-FM tower,
resulting in a write-off of its initial acquisition cost allocated to the tower
of $150,000. This amount is included in other expenses, net, in the 1995
statement of operations.
(5) INTANGIBLES
Intangibles at December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
FCC broadcast licenses......................................... $ 6,000,000 $ 29,528,000
Covenants not to compete....................................... 1,050,000 668,000
Organizational costs........................................... 98,000 --
------------- -------------
7,148,000 30,196,000
Less: accumulated amortization................................. 1,108,000 966,000
------------- -------------
$ 6,040,000 $ 29,230,000
------------- -------------
------------- -------------
</TABLE>
F-12
<PAGE>
BIG CITY RADIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) NOTE PAYABLE
The note payable of $1,000,000 incurred in connection with the purchase of
the Original New York Stations (see note 3), was repaid on May 30, 1996 (see
note 7). Interest expense during the year ended December 31, 1996 amounted to
$25,000.
(7) LONG-TERM DEBT
On May 30, 1996, the Company entered into a credit agreement (the "Existing
Credit Facility") with The Chase Manhattan Bank. The Existing Credit Facility
provides revolving credit commitments in the form of loans and/or letters of
credit in an aggregate principal amount of $40 million. The Existing Credit
Facility is subject to various financial and nonfinancial covenants, including
limitations on additional indebtedness, liens, sale of assets, payment of
dividends and guarantee obligations. Most of the financial covenants are not
applicable until June 1998. A portion of the debt has been guaranteed by a
Principal Stockholder. For the first 18 months of the Existing Credit Facility,
the guaranteed portion was any amount above $13.5 million; and as a result of
certain amendments the guaranteed portion is based on a ratio of total debt to
cash flow. As part of subsequent amendments to the Existing Credit Facility (see
below), the guarantee now extends to all amounts outstanding under the Existing
Credit Facility.
Interest varies for the guaranteed and nonguaranteed portion and fluctuates
based on total debt to cash flow ratio (the "Ratio"). Interest for the
guaranteed debt is payable at the London Interbank Offered Rate ("LIBOR") plus
1.5% to 2.0% (based upon the Ratio); prime plus 0.5% to 1.0% (based upon the
Ratio); or a combination thereof as determined by the borrower. In addition,
there is a 1% increase in all rates related to the nonguaranteed portion of the
debt. The interest rates for the guaranteed and nonguaranteed portions as of and
for the year ended December 31, 1996 were 7.6% and 8.6%, respectively. Interest
expense on the Facility for the year ended December 31, 1996 was $1,794,000. In
addition, the Company has agreed to pay a commitment fee quarterly equal to 0.5%
per annum on the average unused available credit.
The total amount of the Existing Credit Facility is scheduled to reduce as
set forth below. Any additional borrowings would be due on May 31, 2001:
<TABLE>
<CAPTION>
AMOUNT OF
DATE REDUCTION
- ------------------------------------------------------------------------------- -------------
<S> <C>
May 31, 1998................................................................... $ 2,985,000
May 31, 1999................................................................... 5,970,000
May 31, 2000................................................................... 10,149,000
May 31, 2001................................................................... 9,096,000
-------------
$ 28,200,000
-------------
-------------
</TABLE>
The Existing Credit Facility is also scheduled to reduce within 90 days
following each year end by an amount equal to 75% of "Excess Cash Flows," as
defined in the credit agreement. The Existing Credit Facility reduces by the
amount of any net sales proceeds from the sale of any assets.
The Existing Credit Facility was subsequently amended on November 22, 1996
to temporarily increase to $42 million through December 20, 1996, after which it
reverted to $40 million following the sale of KWIZ-FM (see note 3). In addition,
the guaranteed amount has been increased to include any portion of the debt
exceeding $2,215,000 for the initial 18-month period. On May 13, 1997, the
Existing Credit Facility was amended to temporarily increase to $46 million
through October 31, 1997. On August 7, 1997, the Existing Credit Facility was
further amended to increase the Existing Credit Facility to $58 million through
December 31, 1997.
F-13
<PAGE>
BIG CITY RADIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) NOTES PAYABLE TO STOCKHOLDERS
At December 31, 1996, the Company had $12,544,000 outstanding in notes
payable to stockholders at interest rates which fluctuated and ranged during the
year from 5.5% to 8% per annum for the year ended December 31, 1996. The notes
are subordinated to the Existing Credit Facility; however, under the
subordination provisions, the interest accruing on these notes is permitted to
be paid periodically, provided that the stockholders advance net proceeds to
cover such interest payments. Interest expense related to notes payable to
stockholders was $436,000, $781,000 and $1,033,000 at December 31, 1994, 1995
and 1996, respectively.
The stockholders have agreed not to call payment on these notes before July
1, 1998.
(9) COMMITMENTS
(A) LEASES
The Company leases studio and office space, transmitter tower sites and
office equipment under operating leases. Future minimum rental commitments for
the remainder of the operating leases are as follows:
<TABLE>
<S> <C>
1997............................................................ $ 351,000
1998............................................................ 269,000
1999............................................................ 205,000
2000............................................................ 183,000
2001............................................................ 171,000
Thereafter...................................................... 242,000
---------
$1,421,000
---------
---------
</TABLE>
Rent expense for the year ended September 30, 1994 and the years ended
December 31, 1995 and 1996 was approximately $186,000, $301,000, and $325,000,
respectively. For the three months ended December 31, 1994, rent expense
amounted to $55,000.
(B) EMPLOYMENT CONTRACTS
The Company has entered into various employment contracts with eleven
individuals comprised of officers and senior management that provide for minimum
salaries and incentives based upon specified levels of performance. The minimum
payments under these contracts are as follows:
<TABLE>
<S> <C>
1997............................................................ $1,459,000
1998............................................................ 1,401,000
1999............................................................ 326,000
2000............................................................ 182,000
2001 and thereafter............................................. --
---------
$3,368,000
---------
---------
</TABLE>
(10) SUPPLEMENTARY INFORMATION--STATEMENT OF CASH FLOWS
The Company acquired vehicles during the year ended December 31, 1996
through issuances of notes payable amounting to $51,386.
Barter transactions resulted in sales of $315,000, $941,000 and $875,000,
and related expenses of $115,000, $951,000 and $962,000, for the years ended
September 30, 1994 and December 31, 1995 and 1996, respectively. For the three
months ended December 31, 1994 barter sales and related expense amounted to
$94,000 and $123,000.
F-14
<PAGE>
BIG CITY RADIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) SUPPLEMENTARY INFORMATION--STATEMENT OF CASH FLOWS (CONTINUED)
Cash paid for interest during the years ended September 30, 1994 and
December 31, 1995, 1996 and the three months ended December 31, 1994 amounted to
$439,000, $781,000, $2,454,000 and $120,000, respectively.
The capitalization of the Company in January 1, 1995 was effected by the
contribution of $350,000 in cash equity funds and the payment on behalf of the
Company of legal and other start-up expenses of $20,000.
During the year ended December 31, 1996, the Principal Stockholders
contributed notes payable of $5,119,000 to the Company's capital.
(11) INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS (UNAUDITED)
(A) EQUITY CONTRIBUTION AND RECLASSIFICATION. Immediately prior to the
consummation of the offering of 4,494,286 shares of Class A Common Stock (the
"Offering"), the Principal Stockholders will either contribute the entire amount
of certain outstanding stockholders' loans made to the Company to the Company's
capital or contribute cash in an amount sufficient to repay a portion of the
outstanding stockholders' loans made to the Company and contribute the remaining
balance of such loans to the capital of the Company (all such outstanding
stockholders' loans aggregated $13.2 million as of September 30, 1997) (the
"Equity Contribution"). Simultaneously with the Equity Contribution, each share
of the Company's Common Stock, par value $.01 per share (the "Old Common
Stock"), will be reclassified into 7,610 shares of Class A Common Stock and the
Principal Stockholders will exchange each share of Class A Common Stock held by
them for one share of Class B Common Stock (the foregoing reclassification and
exchange is hereinafter referred to as the "Reclassification"). In addition, the
Company will convert from an S-Corporation to a C-Corporation.
(B) DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the
Company will upon consummation of the Equity Contribution and the
Reclassification consist of 120,000,000 shares of capital stock, par value $0.01
per share (the "Common Stock"), of which 80,000,000 shares have been designated
as Class A Common Stock and 20,000,000 shares have been designated as Class B
Common Stock. Effective upon completion of the Offering and the Standby
Commitment, 5,619,348 shares of Class A Common Stock will be issued and
outstanding and 8,250,458 shares of Class B Common Stock will be issued and
outstanding. In addition, 8,250,458 shares of Class A Common Stock will be
reserved for issuance upon conversion of the Class B Common Stock. Immediately
prior to the consummation of the Offering, there will be one holder of Class A
Common Stock and two holders of Class B Common Stock.
The shares of Class A Common Stock and Class B Common Stock are identical in
all respects, except for voting rights and certain conversion rights and
transfer restrictions in respect to the shares of the Class B Common Stock.
The holders of Class A Common Stock are entitled to one vote per share.
Holders of Class B Common Stock are entitled to ten votes per share. Holders of
all classes of Common Stock entitled to vote will vote together as a single
class on all matters presented to the stockholders for their vote or approval
except for the election and removal of directors as described below and as
otherwise required by applicable law. In addition, with respect to the election
of directors, the Company's Amended and Restated Certificate of Incorporation
provides that holders of Class B Common Stock will vote as a separate class to
elect up to 75% of the members of the Company's Board of Directors. Stockholders
have no cumulative voting rights.
All pro forma per share amounts reflect the changes noted above.
F-15
<PAGE>
BIG CITY RADIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS (UNAUDITED) (CONTINUED)
(C) AMENDED CREDIT FACILITY. The Company has received a commitment letter
from a major financial institution to enter into the Credit Facility. The Credit
Facility will replace the Company's Existing Credit Facility (See note 6).
Under the terms of the Credit Facility, the Company will have a $35 million
reducing revolving facility, of which amount Mr. Subotnick will guarantee the
payment of $6.0 million. The Credit Facility will mature on the fifth
anniversary of the closing date of the Offering. The Bank's committment under
the Credit Facility will be reduced by 20% on the second anniversary of the
closing date of the Offering and on the third and fourth anniversaries of the
closing date and the entire remaining amount will terminate on the fifth
anniversary of the closing date. Outstanding amounts under the Credit Facility
will bear interest at a rate based, at the option of the Company, on the
participating bank's prime rate, or the London Interbank Borrowing Rate, plus an
incremental rate.
The Credit Facility will contain certain financial and operational covenants
and other restrictions with which the Company must comply, including, among
others, limitations on capital expenditures, the incurrence of additional
indebtedness, restrictions on the use of borrowings, limitations on paying cash
dividends and redeeming or repurchasing capital stock of the Company, and
requirements to maintain certain financial ratios. The Company will also be
prohibited from making acquisitions without the prior consent of the Bank. All
of the Company's obligations under the Credit Facility will be secured by a
first priority security interest in all of the Company's tangible and intangible
property and assets.
The Credit Facility will contain customary events of default, including
material misrepresentations, payment defaults and default in the performance of
other covenants, certain bankruptcy defaults, events having a material and
adverse effect on the Company and revocation of any of the Company's broadcast
licenses. The Credit Facility will also provide that an event of default will
occur upon the occurrence of a "change of control" as defined in the Credit
Facility. For purposes of the Credit Facility, a change of control will occur
when (i) any person or group other than the Principal Stockholders and their
affiliates obtains the power to elect a majority of the Board of Directors, (ii)
the Company fails to own 100% of the capital stock of its subsidiaries owning
any of the FCC broadcast licenses, or (iii) the Board of Directors does not
consist of a majority of continuing directors.
In addition to the guarantee by Mr. Subotnick of $6.0 million of the Credit
Facility, the Credit Facility will be secured by a first priority security
interest in favor of Chase in all tangible and intangible property and assets of
the Company. After giving effect to the Offering and the Standby Commitment, the
application of the net proceeds therefrom and the guarantee by Mr. Subotnick of
$6.0 million of the Credit Facility, the Company will have available
approximately $7.3 million of borrowing capacity under the Credit Facility,
which can be used for general corporate purposes, including acquisitions. There
can be no assurance that Mr. Subotnick will agree to guarantee any additional
amounts of the Company's obligations.
(D) PRO FORMA AMOUNTS The unaudited pro forma amounts included in
accompanying balance sheet as of December 31, 1996 and the statement of
stockholders' deficit for the year ended December 31, 1996 reflect pro forma
adjustments which give effect to the Equity Contribution and Reclassification
immediately prior to the Offering and the conversion of the Company from
S-Corporation status to C-Corporation status.
The following is a description of the unaudited pro forma adjustments.
(1) The effect of the Equity Contribution and Reclassification.
(2) Deferred tax liabilities of $3,350,000 will be reinstated as a result of
the Company's conversion to C-Corporation status.
F-16
<PAGE>
BIG CITY RADIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS (UNAUDITED) (CONTINUED)
(3) The $13,639,000 reduction of accumulated deficit represents the
reclassification of the deficit to paid-in capital in connection with the
termination of the S-Corporation status.
The number of shares of Existing Common Stock outstanding, which has been
used to calculate pro forma as reported net earnings per share, is the sum of
the 9,375,520 shares immediately prior to the Offering (and after the Equity
Contribution and Reclassification) plus 21,400 shares relating to 150,000 stock
options granted on December 1, 1997 with an exercise price of $6.00 per share
computed using the treasury stock approach at an initial public offering price
of $7.00 per share. In accordance with Staff Accounting Bulletin No. 55 issued
by the Securities and Exchange Commission, earnings per share data is not
presented for any period prior to the Company's most recent year end.
(E) EMPLOYMENT INCENTIVE. On July 1, 1997, the Principal Stockholders
transferred 68 shares of Old Common Stock to the Chief Executive Officer as an
employment incentive. The statement of operations for the nine month period
ended September 30, 1997 will reflect a charge of $3,713,000 relating to the
award. The charge represents the approximate fair market value of the stock
transferred and it has been reflected as a capital contribution in the
accompanying financial statements. The fair market value of the stock
transferred (approximately 516,000 shares after the Equity Contribution and
Reclassification) for accounting purposes only was estimated at 80% of the
assumed initial public offering price of $9.00 per share ($7.20 per share).
(F) STOCK OPTION PLAN. On December 1, 1997 the Company adopted the Big City
Radio, Inc. 1997 Incentive Stock Plan (the "1997 Incentive Stock Plan"). The
following is a summary of the material features of the 1997 Incentive Stock
Plan.
The types of awards that may be granted pursuant to the 1997 Incentive Stock
Plan include (i) incentive stock options ("ISOs") and (ii) non-qualified stock
options ("NQSOs" and together with ISOs, "Stock Options" and "Awards").
Stock Option grants will consist of the maximum number of ISOs that may be
granted to a particular grantee under applicable law with the balance of the
Stock Options being NQSOs.
Subject to certain exceptions set forth in the 1997 Incentive Stock Plan,
the aggregate number of shares of the Class A Common Stock that may be the
subject of Awards under the 1997 Incentive Stock Plan is 700,000. The maximum
number of shares of Class A Common Stock available with respect to Awards
granted to any one grantee shall not exceed, in the aggregate, 100,000 shares.
Shares of Class A Common Stock granted under the 1997 Incentive Stock Plan may
either be authorized by unissued shares of Class A Common Stock not reserved for
any other purpose or shares of Class A Common Stock held in or acquired for the
treasury of the Company.
On December 1, 1997, options for purchase an aggregate of 150,000 shares of
Class A Common Stock were granted to certain officers and directors of the
Company, at an exercise price of $6.00 per share, and options for purchase an
aggregate of 402,500 shares of Class A Common Stock were granted to certain
officers and directors of the Company, to be effective only immediately prior to
the consummation of the Offering, at an exercise price per share equal to the
initial public offering price per share in the Offering.
F-17
<PAGE>
BIG CITY RADIO, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
ASSETS 1996 1997 1997
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash........................................................... $ 234,000 $ 316,000
Restricted cash................................................ 500,000 --
Accounts receivable, net of allowance of $212,000 and $312,000
in 1996 and 1997, respectively............................... 1,537,000 2,263,000
Prepaid expenses and other current assets...................... 42,000 471,000
-------------- --------------
Total current assets......................................... 2,313,000 3,050,000
Property and equipment, net (note 3)............................. 1,477,000 2,672,000
Intangibles, net (note 4)........................................ 29,230,000 54,439,000
Deferred financing fees.......................................... 473,000 563,000
Advances to purchase stations (note 2)........................... 5,434,000
Other assets..................................................... 36,000 272,000
-------------- --------------
Total assets................................................. $ 38,963,000 $ 60,996,000
-------------- --------------
-------------- --------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................................. $ 830,000 $ 875,000
Accrued expenses.................................. 454,000 968,000
Other current liabilities......................... 735,000 812,000
----------- -----------
Total current liabilities....................... 2,019,000 2,655,000
Long-term debt (note 5)............................. 28,200,000 56,700,000
Notes payable to stockholders (note 6).............. 12,544,000 13,163,000
----------- -----------
Total liabilities............................... 42,763,000 72,518,000
Stockholders' deficit:
Common stock, $0.01 par value. Authorized 2,000
shares; issued and outstanding 1,232 shares
(9,375,520 issued and outstanding on a pro forma
basis).......................................... -- -- 94,000
-----------
-----------
Additional paid-in capital........................ 6,489,000 10,202,000 (1,803,000)
-----------
-----------
Accumulated deficit............................... (10,289,000) (21,724,000) $ 0
----------- ----------- -----------
-----------
Total stockholders' deficit..................... (3,800,000) (11,522,000)
----------- -----------
Total liabilities and stockholders' deficit..... $38,963,000 $60,996,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE>
BIG CITY RADIO, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1996 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Gross revenue..................................................................... $ 6,296,000 $ 8,485,000
Less: commissions and fees........................................................ 426,000 947,000
-------------- --------------
Net revenue....................................................................... 5,870,000 7,538,000
Operating expenses:
Station operating expenses excluding depreciation and amortization.............. 9,726,000 9,834,000
Depreciation and amortization................................................... 867,000 1,316,000
Corporate, general and administrative expenses.................................. 804,000 1,104,000
Employment incentive (note 8)................................................... -- 3,713,000
-------------- --------------
Total operating expenses...................................................... 11,397,000 15,967,000
-------------- --------------
Operating loss................................................................ (5,527,000) (8,429,000)
Other income (expenses):
Interest expense (notes 5 and 6)................................................ (1,880,000) (3,062,000)
Gain on sale of stations........................................................ 6,608,000 --
Other, net...................................................................... 1,000 56,000
-------------- --------------
Total other................................................................. 4,729,000 (3,006,000)
-------------- --------------
Net income (loss)............................................................. $ (798,000) $ (11,435,000)
-------------- --------------
-------------- --------------
Pro forma net income (loss) per share............................................. $ (1.22)
--------------
--------------
Pro forma weighted average shares outstanding..................................... 9,396,920
--------------
--------------
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
BIG CITY RADIO, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1996 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................... $ (798,000) $ (11,435,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................... 867,000 1,316,000
Gain on sale of stations........................................................ (6,608,000) --
Employment incentive............................................................ -- 3,713,000
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable......................................................... 22,000 (726,000)
Prepaid expenses and other current assets................................... 7,000 (429,000)
Other assets................................................................ 24,000 (236,000)
Increase (decrease) in liabilities:
Accounts payable.............................................................. 636,000 45,000
Accrued expenses.............................................................. 23,000 514,000
Other liabilities............................................................. 34,000 576,000
-------------- --------------
Net cash used in operating activities..................................... (5,793,000) (6,662,000)
Cash flows from investing activities:
Purchase of property and equipment.............................................. (519,000) (398,000)
Cash paid and advanced for assets of radio stations acquired.................... (38,173,000) (21,796,000)
Net cash received for radio station sold........................................ 8,825,000 --
-------------- --------------
Net cash used in investing activities..................................... (29,867,000) (22,194,000)
Cash flows from financing activities:
Loans from stockholders......................................................... 3,963,000 619,000
Drawdown on credit facility, net of fees paid of $535,000 and $181,000 in 1996
and 1997, respectively........................................................ 31,765,000 28,319,000
Repayment of note payable....................................................... (949,000) --
-------------- --------------
Net cash provided by financing activities................................. 34,779,000 28,938,000
-------------- --------------
Change in cash and cash equivalents............................................... (881,000) 82,000
Cash and cash equivalents at beginning of period.................................. 1,066,000 234,000
-------------- --------------
Cash and cash equivalents at end of period........................................ $ 185,000 $ 316,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying unaudited notes to financial statements.
F-20
<PAGE>
BIG CITY RADIO, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL
----------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ --------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996............ 1,232 $ -- $ 6,489,000 $ (10,289,000) $ (3,800,000)
Capital contribution related to
employment incentive.................. -- -- 3,713,000 -- 3,713,000
Net loss................................ -- -- -- (11,435,000) (11,435,000)
------------ --------- -------------- -------------- --------------
Balance at September 30, 1997........... 1,232 $ -- $ 10,202,000 $ (21,724,000) $ (11,522,000)
------------ --------- -------------- -------------- --------------
------------ --------- -------------- -------------- --------------
Pro Forma effect of Equity Contribution
and Reclassification.................. 9,375,288 94,000 $ 13,069,000
Reinstatement of deferred income taxes
relating to C-Corporation status...... (3,350,000)
Reclassification of accumulated deficit
to paid-in capital in connection with
termination of S-Corporation status... (25,074,000) 25,074,000
------------ --------- -------------- -------------- --------------
Pro Forma balance at September 30,
1997.................................. 9,375,520 94,000 $ (1,803,000) $ -- (1,709,000)
------------ --------- -------------- -------------- --------------
------------ --------- -------------- -------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
BIG CITY RADIO, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying interim financial statements include the accounts of Big
City Radio, Inc. (formerly Odyssey Communications, Inc.).
The accompanying financial statements have been prepared on a going-concern
basis which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. Since inception,
the Company has not generated significant revenue, has incurred substantial net
losses and has never generated positive cash flows from operations. The
Company's recent purchases and reformatting of radio stations in its markets is
currently contributing to the Company's losses. The Company believes that losses
will continue while the Company pursues its strategy of acquiring and developing
radio stations. The ability of the Company to continue as a going concern is
dependent upon: (a) the continued support of its stockholders, (b) additional
sources of financing, and (c) the Company's ability to generate positive cash
flows from operations. The Company has obtained a support letter from a
Principal Stockholder guaranteeing his financial support through the earlier of
a successful minimum initial public offering of $36,000,000 of equity securities
to the public or October 1, 1998.
The accompanying interim financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures made
are adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the latest audited financial
statements and related footnotes included elsewhere herein. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of the Company as of
September 30, 1997, the results of its operations and its cash flows for the
nine month periods ended September 30, 1996 and 1997 have been included. The
results of operations for the interim periods are not necessarily indicative of
the results which may be realized for the full year.
(2) ACQUISITIONS
On June 5, 1997, the Company acquired substantially all of the assets of
WZVU-FM Monmouth, New Jersey, for a purchase price of $12,000,000. At that date
the sellers' loan payable to the Company in the amount of $5,434,000 plus
accrued interest of $103,000 was paid in full. The Company managed the
operations of WZVU-FM for a fee from December 5, 1996 up to the effective
acquisition date under a local marketing agreement ("LMA"). Revenue, programming
expenses and other reimbursable expenses pursuant to the LMA have been included
in the accompanying financial statements as have LMA fees of approximately
$415,000 from January 1, 1997 to June 5, 1997. Management's preliminary estimate
of the fair value of WZVU-FM assets acquired, exclusive of acquisition costs,
subject to further review and appraisal is as follows:
<TABLE>
<S> <C>
Fixed assets................................................... $ 833,000
FCC broadcast license.......................................... 11,157,000
Covenant not to compete........................................ 10,000
</TABLE>
F-22
<PAGE>
BIG CITY RADIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) ACQUISITIONS (CONTINUED)
The fair value of the fixed assets acquired is determined by reference to
replacement value on an individual asset basis. The fair value of the covenant
not to compete is determined by reference to the covenant agreement, and the
remaining purchase price is assigned to the FCC license.
On April 1, 1997, the Company acquired substantially all the assets of
WWHB-FM Hampton Bays, New York, for a purchase price of $4,000,000. The Company
managed the operations of WWHB-FM for a fee from December 31, 1996 up to the
effective acquisition date under a LMA. Revenue, programming expenses and other
reimbursable expenses pursuant to the LMA have been included in the accompanying
financial statements as have LMA fees of $165,000 from January 1, 1997 to April
1, 1997. Management's preliminary estimate of the fair value of WWHB-FM assets
acquired, exclusive of acquisition costs, subject to further review and
appraisal is as follows:
<TABLE>
<S> <C>
Fixed assets.................................................... $ 55,000
FCC broadcast license........................................... 3,795,000
Consulting agreement............................................ 150,000
</TABLE>
The fair value of the fixed assets acquired is determined by reference to
replacement value on an individual asset basis. The fair value of the consulting
agreement is determined by reference to the agreement, and the remaining
purchase price is assigned to the FCC license.
LMA fees are reflected in the accompanying financial statements as station
operating expenses.
On August 8, 1997 the Company acquired substantially all of the assets of
WVVX-FM Chicago for a purchase price of $9,500,000 and WJDK-FM Chicago for a
purchase price of $1,100,000. Management's preliminary estimate of the fair
value of the WVVX-FM and WJDK-FM assets acquired, subject to further review and
appraisal is as follows:
<TABLE>
<CAPTION>
WVVX-FM WJDK-FM
--------- -----------
Fixed assets, including land........................... 119,000 154,000
<S> <C> <C>
FCC broadcast license.................................. 9,381,000 946,000
</TABLE>
The fair value of the fixed assets and land acquired is determined by
reference to replacement value on an individual asset basis and comparable
property, respectively. The remaining purchase price is assigned to the FCC
license.
The following unaudited pro forma results of operations illustrate the
effect of the acquisition of WZVU-FM and WVVX-FM and assumes that the
acquisitions occurred at the beginning of each of the periods presented:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1997
--------- ----------
<S> <C> <C>
Net revenues..................................... $ 8,725 $ 8,573
Income (loss) from continuing operations......... (1,176) (13,551)
Pro forma loss per share......................... (0.09) (1.01)
</TABLE>
F-23
<PAGE>
BIG CITY RADIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(3) PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1997 is as follows:
<TABLE>
<S> <C>
Land............................................................ $ 377,000
Building and improvements....................................... 561,000
Transmitter equipment........................................... 1,789,000
Furniture and office equipment.................................. 406,000
Vehicles........................................................ 219,000
---------
3,352,000
Less: accumulated depreciation.................................. 680,000
---------
$2,672,000
---------
---------
</TABLE>
(4) INTANGIBLES
Intangible Assets at September 30, 1997 are as follows:
<TABLE>
<S> <C>
FCC broadcast licenses......................................................... $55,689,000
Covenants not to compete....................................................... 678,000
----------
Total intangible assets...................................................... 56,367,000
Less: accumulated amortization................................................. 1,928,000
----------
$54,439,000
----------
----------
</TABLE>
(5) LONG-TERM DEBT
The Existing Credit Facility was subsequently amended on August 7, 1997 (the
"fourth amendment") to temporarily increase it to $58 million through December
31, 1997 after which it reverts to $40 million. In addition, the guaranteed
amount has been increased to include all amounts outstanding.
(6) NOTES PAYABLE TO STOCKHOLDERS
At September 30, the Company had $13,163,000 outstanding in notes payable to
stockholders at interest rates which fluctuated and ranged from 5.5% to 8% per
annum for the nine months ended September 30, 1997. The notes are subordinated
to the Existing Credit Facility; however, under the subordination provisions,
the interest accruing on these notes is permitted to be paid periodically,
provided that the stockholders advance net proceeds to cover such interest
payments. Interest expense related to notes payable to stockholders was $444,000
and $619,000 for the nine months ended September 30, 1996 and 1997,
respectively.
The Principal Stockholders have agreed not to demand payment on these notes
before October 1, 1998.
(7) SUPPLEMENTARY INFORMATION--STATEMENT OF CASH FLOWS
Barter transactions resulted in sales of $740,000 and $555,000 and related
expenses of $835,000 and $515,000 for the nine months ended September 30, 1996
and 1997, respectively.
F-24
<PAGE>
BIG CITY RADIO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(7) SUPPLEMENTARY INFORMATION--STATEMENT OF CASH FLOWS (CONTINUED)
Cash paid for interest during the nine months ended September 30, 1996 and
1997 amounted to $1,909,000 and $2,778,000, respectively.
During the nine months ended September 30, 1996, the Principal Stockholders
contributed notes payable of $5,119,000 to the Company's capital.
(8) EMPLOYMENT INCENTIVE
On July 1, 1997, the principal stockholders tranferred 68 shares of Old
Common Stock to the Chief Executive Officer as an employment incentive. The
statement of operations for the nine month period ended September 30, 1997
reflects a charge of $3,713,000 relating to the award. The charge represents the
approximate fair market value of the stock transferred and it has been reflected
as a capital contribution in the accompanying financial statements. The fair
market value of the stock transferred for accounting purposes only was estimated
at 80% of the assumed initial public offering price of $9.00 per share.
(9) STOCK OPTION PLAN
On December 1, 1997, the Company adopted the Big City Radio, Inc. 1997
Incentive Stock Plan (the "1997 Incentive Stock Plan"). The following is a
summary of the material features of the 1997 Incentive Stock Plan.
The types of awards that may be granted pursuant to the 1997 Incentive Stock
Plan include (i) incentive stock options ("ISOs") and (ii) non-qualified stock
options ("NQSOs" and together with ISOs, "Stock Options" and "Awards").
Stock Option grants will consist of the maximum number of ISOs that may be
granted to a particular grantee under applicable law with the balance of the
Stock Options being NQSOs.
Subject to certain exceptions set forth in the 1997 Incentive Stock Plan,
the aggregate number of shares of the Class A Common Stock that may be the
subject of Awards under the 1997 Incentive Stock Plan is 700,000. The maximum
number of shares of Class A Common Stock available with respect to Awards
granted to any one grantee shall not exceed, in the aggregate, 100,000 shares.
Shares of Class A Common Stock granted under the 1997 Incentive Stock Plan may
either be authorized by unissued shares of Class A Common Stock not reserved for
any other purpose or shares of Class A Common Stock held in or acquired for the
treasury of the Company.
On December 1, 1997, options to purchase an aggregate of 150,000 shares of
Class A Common Stock were granted to certain officers and directors of the
Company, at an exercise price of $6.00 per share, and options to purchase an
aggregate of 402,500 shares of Class A Common Stock were granted to certain
officers and directors of the Company, to be effective only immediately prior to
the consummation of the Offering, at an exercise price per share equal to the
initial public offering price per share in the Offering.
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members of K&K Broadcasting
We have audited the accompanying balance sheets of WZVU as of December 31,
1996 and 1995, and the related statements of operations and station deficit and
cash flows for the years then ended. 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 WZVU as of December 31, 1996
and 1995 and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
October 21, 1997
F-26
<PAGE>
WZVU
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS 1995 1996
-------------- ------------- MAY 31,
1997
-------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash.............................................................. $ 74,180 $ 36,739 $ 98,846
Accounts receivable:
Trade........................................................... 342,802 249,452 139,883
Big City Radio.................................................. -- 113,613 --
Other current assets.............................................. 118,559 14,914 19,536
-------------- ------------- -------------
Total current assets.......................................... 535,541 414,718 258,265
Property and equipment, net (note 4)................................ 876,909 911,553 874,354
Intangibles, net (note 5)........................................... 131,807 100,482 87,429
-------------- ------------- -------------
Total assets.................................................. 1,544,257 $ 1,426,753 $ 1,220,048
-------------- ------------- -------------
-------------- ------------- -------------
LIABILITIES AND STATION DEFICIT
Current liabilities:
Accounts payable.................................................. $ 36,906 $ 108,410 $ 89,699
Accrued expenses (Note 7)......................................... 497,637 568,680 199,948
Accrued interest expense (Note 6)................................. 8,207,156 -- 179,683
Notes payable to members (note 7)................................. 649,893 820,930 820,930
Notes payable to Big City Radio (note 6).......................... -- 5,433,687 5,433,687
Notes payable to Weiss Bros. and AT&T (Note 6).................... 5,578,444 -- --
Notes payable to banks (note 6)................................... 40,609 34,168 --
Other liabilities................................................. -- -- 12,959
-------------- ------------- -------------
Total current liabilities..................................... 15,010,645 6,965,875 6,736,906
Station deficit..................................................... (13,466,388) (5,539,122) (5,516,858)
-------------- ------------- -------------
Total liabilities and station deficit......................... $ 1,544,257 $ 1,426,753 $ 1,220,048
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
See accompanying notes to combined financial statements.
F-27
<PAGE>
WZVU
STATEMENTS OF OPERATIONS AND STATION DEFICIT
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM JANUARY 1,
YEAR YEAR JANUARY 1, 1997
ENDED ENDED 1996 THROUGH THROUGH
DECEMBER 31, DECEMBER 31, MAY 31, MAY 31,
1995 1996 1996 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Gross revenue................................... $ 2,891,032 $ 3,173,549 $ 1,177,715 $ 413,933
Less: commission and fees....................... 174,089 247,405 96,888 1,054
-------------- -------------- -------------- --------------
Net revenue..................................... 2,716,943 2,926,144 1,080,827 412,879
Operating expenses:
Station operating expenses, excluding
depreciation and amortization............... 995,106 1,044,024 382,582 91,986
Depreciation and amortization................. 182,275 140,642 62,464 51,094
Corporate general and administrative
expenses.................................... 1,427,016 1,650,991 525,930 219,608
Reimbursement of operating expenses under
LMA......................................... -- (27,169) -- (151,756)
-------------- -------------- -------------- --------------
Total operating expenses.................... 2,604,397 2,808,488 970,976 210,932
-------------- -------------- -------------- --------------
Operating income............................ 112,546 117,656 109,851 201,947
Other income (expenses)
Interest...................................... (2,666,378) (2,498,207) (1,022,274) (179,683)
Other, net.................................... (548) 29,325 3,750 --
-------------- -------------- -------------- --------------
Total other................................... (2,666,926) (2,468,882) (1,018,524) (179,683)
-------------- -------------- -------------- --------------
Loss before extraordinary item.............. (2,554,380) (2,351,226) (908,673) 22,264
Extraordinary item--forgiveness of debt (note
6)............................................ -- 10,278,492 -- --
-------------- -------------- -------------- --------------
Net income (loss)............................... $ (2,554,380) $ 7,927,266 $ (908,673) $ 22,264
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Station Deficit at beginning of period.......... $ (10,912,008) $ (13,466,388) $(13,466,388) $ (5,539,122)
-------------- -------------- -------------- --------------
Station Deficit at end of period................ $ (13,466,388) $ (5,539,122) $(14,375,061) $ (5,516,858)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
See accompanying notes to combined financial statements.
F-28
<PAGE>
WZVU
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
YEAR ENDED YEAR ENDED JANUARY 1, JANUARY 1,
DECEMBER 31, DECEMBER 31, 1996 THROUGH 1997 THROUGH
1995 1996 MAY 31, 1996 MAY 31, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)............................. $ (2,554,380) $ 7,927,266 $ (908,673) $ 22,264
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............... 182,275 140,642 62,464 51,094
Forgiveness of debt......................... -- (10,278,492) -- --
Other....................................... 25,500 19,318 -- --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable....................... 87,247 93,350 (16,455) 109,569
Other receivables......................... -- (113,613) -- 113,613
Other current assets...................... 2,972 99,887 33,509 (4,936)
Increase (decrease) in liabilities:
Accounts payable.......................... (25,506) 71,505 19,901 (18,711)
Accrued expenses.......................... 2,287,349 2,142,378 950,863 (173,118)
Notes payable to members.................. 423 168,587 -- --
-------------- -------------- -------------- --------------
Net cash provided by operating
activities.............................. 5,880 270,828 141,609 99,775
Cash flows from investing activities:
Purchase of property and equipment............ (23,388) (157,071) (122,530) (3,500)
Cash flows from financing activities:
Repayment of notes payable to Weiss Bros. and
AT&T........................................ -- (5,578,444) (65,000) --
Proceeds from notes payable to Big City Radio
payable..................................... -- 5,433,687 -- --
Payments to notes payable to banks............ (19,656) (6,441) (2,610) (34,168)
-------------- -------------- -------------- --------------
Net cash used in financing activities..... (19,656) (151,198) (67,610) (34,168)
-------------- -------------- -------------- --------------
Change in cash............................ (37,164) (37,441) (48,531) 62,107
Cash at beginning of period..................... 111,344 74,180 74,180 36,739
-------------- -------------- -------------- --------------
Cash at end of period........................... 74,180 $ 36,739 $ 25,649 $ 98,846
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
See accompanying notes to combined financial statements.
F-29
<PAGE>
WZVU
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
WZVU (the "Company") conducts radio broadcasting operations in New Jersey.
The principal source of revenue is derived from the sale of air time to
advertisers.
The Company is a radio station owned by K&K Broadcasting, L.L.C. ("K&K
Broadcasting"). The accompanying financial statements presents the results of
operations of the Company on a stand alone basis as K&K Broadcasting had no
corporate expenses.
During November 1996, K&K Broadcasting entered into an agreement to sell
substantially all of the assets and operations of the Company to Big City Radio,
Inc. (formerly Odyssey Communications, Inc.) ("Big City Radio") (see note 3).
In the opinion of management the unaudited combined financial statements as
of May 31, 1997 and for the five month periods ended May 31, 1997 and 1996
contained herein include all adjustments necessary for a fair presentation of
such statements. The general principles followed in preparing the financial
statements as of May 31, 1997 and 1996 are similar to those used in preparing
the audited financial statements as of December 31, 1996 and 1995.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets ranging from
31.5 years for buildings, and five to seven years for transmission equipment,
vehicles and furniture and office equipment.
(B) INTANGIBLES
Intangible assets include a broadcast license and goodwill which are
amortized over a 40 year period.
(C) IMPAIRMENT OF LONG-LIVE ASSETS AND LONG LIVED ASSETS TO BE DISPOSED OF
It is the Company's policy to account for long-lived intangible assets at
the lower of amortized cost or fair market value. As part of an ongoing review
of the valuation and amortization of long-lived intangible assets, management
assesses the carrying value of the Company's long-lived assets and intangible
assets if facts and circumstances suggest that they are impaired. If this review
indicates that the long-lived intangibles will not be recoverable as determined
by a nondiscounted cash flow analysis over the remaining amortization period,
the carrying value of the Company's long-lived assets and intangibles will be
reduced to their estimated realizable value.
(D) REVENUE RECOGNITION
Broadcasting revenue is recognized when commercials are aired. Net revenues
represent gross revenues less direct fees and commissions paid to independent
advertising agencies. Barter transactions are recorded at the estimated fair
value of the merchandise or services received. Barter revenue is recognized when
the commercial is aired and barter merchandise or services received are expensed
when used.
F-30
<PAGE>
WZVU
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) INCOME TAXES
For Federal and state income tax purpose, K&K Broadcasting is treated as a
partnership. Accordingly, no provision is made for income taxes, as income or
loss is included in the tax returns of the Members.
(F) USE OF ESTIMATES
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
disclosures 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.
(G) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating the fair value
disclosures for financial instruments:
The carrying amounts reported in the balance sheets for cash, account
receivables, accounts payable and accrued expenses approximate fair value.
Management believes the carrying value of notes payable approximates its
fair value at December 31, 1995 and 1996.
(H) ADVERTISING
The Company charges advertising costs, as incurred, to expense. Advertising
costs amounted to $139,398, $128,781, $5,318, and $43,172 for the year ended
December 31, 1995 and 1996 and the five month periods ended May 31, 1997 and
1996, respectively.
(3) SALE OF WZVU
On November 7, 1996, K&K Broadcasting entered into an agreement to sell
substantially all of the assets of the Company to Big City Radio for
$12,000,000. At that date, Big City Radio advanced $5,434,000 of the purchase
price to the Company in the form of a loan (see note 7). Simultaneously, with
the signing of the agreement, the Company entered into a local marketing
agreement (LMA) with Big City Radio under which Big City Radio has the right to
program and sell advertising time on the station for a fee and reimburse the
Company for the station's operating costs. Monthly LMA fees, exclusive of
reimbursement of station's operating costs, range from $100,000 to a percentage
of earnings before interest, taxes, depreciation and amortization, as defined.
As of December 31, 1996 and May 31, 1997, the Company received LMA fees from Big
City Radio of $87,097 and $378,421, respectively. The station operated under the
LMA agreement from December 6, 1996 through June 5, 1997.
The Members of K&K Broadcasting also entered into a three year
covenant-not-compete.
F-31
<PAGE>
WZVU
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1996 and May 31, 1997 is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MAY 31,
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Land............................................... $ 150,332 $ 150,332 $ 150,332
Building and improvements.......................... 609,247 710,307 710,307
Transmitter equipment.............................. 250,000 250,000 250,000
Furniture and office equipment..................... 724,143 769,301 772,801
Vehicles........................................... -- 3,750 3,750
------------ ------------ -----------
1,733,722 1,883,690 1,887,190
Less: accumulated depreciation..................... 856,813 972,137 1,012,836
------------ ------------ -----------
876,909 $ 911,553 $ 874,354
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
(5) INTANGIBLES
Intangibles at December 31, 1995 and 1996 and May 31, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31, MAY 31,
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
FCC broadcast licenses.............................. $ 300,644 $ 300,644 $ 300,644
Goodwill............................................ 50,441 50,441 50,441
------------ ------------ -----------
351,085 351,085 351,085
Less: accumulated amortization...................... 219,278 250,603 263,656
------------ ------------ -----------
131,807 $ 100,482 $ 87,429
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
(6) NOTES PAYABLE
At December 31, 1995, the Company had notes payable of $2,250,000 due
December 31, 1996 and $3,328,444 due March 31, 1998 to Weiss Bros. and AT&T,
respectively. The Weiss Bros. and AT&T notes payable bears interest at 25% and
prime plus 1.5%, respectively. The notes are collateralized by substantially all
of the Company's assets. Accrued interest at December 31, 1995 on the notes
payable was $8,207,156.
On November 7, 1996, concurrent with K&K Broadcasting entering into the
Asset Purchase Agreement with Big City Radio (as described in note 3), the
Company entered into a loan agreement with Big City Radio for approximately
$5,434,000. The loan bears interest at prime plus 2% and is collateralized by
substantially all of the Company's assets. Interest accrues beginning February
1, 1997. Interest expense as of May 31, 1997 was $179,683 (unaudited). The
proceeds from the loan were used to repay the outstanding notes payable at
December 31, 1995. Upon repayment of the notes payable, the noteholders forgave
the outstanding accrued interest on notes payable totaling $10,278,492. Accrued
interest forgiven has been reflected in the 1996 statement of operations as an
extraordinary item.
On June 5, 1997, the date of sale of the Company to Big City Radio, the note
payable to Big City Radio was repaid.
F-32
<PAGE>
WZVU
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) NOTES PAYABLE (CONTINUED)
During 1995 and 1996 and at May 31, 1997, the Company had a line of credit
with a commercial bank to borrow up to $100,000 at 10% interest. As of December
31, 1995 and 1996, total borrowings under the line of credit were $40,609 and
$34,168, respectively.
(7) NOTES PAYABLE TO MEMBERS
At December 31, 1995 and 1996 and May 31, 1997, the Company had $649,893,
$820,930 and $820,930, respectively, outstanding in notes payable to members of
K&K Broadcasting which are subordinated to the note payable to Big City Radio as
described in note 7. The notes payable to members were comprised of $390,012 and
$465,012, at December 31, 1995 and 1996, respectively, which bears interest at
7.5% and are due on demand. The remaining notes payable balance represents
accrued interest outstanding on this loan. Also, included in accrued expenses is
$338,750 and $428,750 at December 31, 1995 and 1996, respectively, of accrued
wages payable to one Member.
(8) EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Defined Contribution Plan (Plan) in which all
full-time employees are eligible to participate. Under the terms of the Plan,
employees could contribute a percentage of their base pay up to the annual
Internal Revenue Service (IRS) limit. Employee contributions of up to 6% are
matched 50% by the Company.
For the year ended December 31, 1995 and 1996, total expense for the plan
amounted to $10,053 and $18,856, respectively. Effective December 31, 1996, the
Plan was terminated.
(9) SUPPLEMENTARY INFORMATION--STATEMENT OF CASH FLOWS
Barter transactions resulted in sales and related expenses of $531,946,
$452,158, $3,127 and $163,916 for the year ended December 31, 1995 and 1996 and
the five month periods ending May 31, 1997 and May 31, 1996, respectively.
During March 1995, K&K Broadcasting transferred to the Company net
liabilities of $731,000 in a non-cash transaction. These balances have been
included as an addition to station deficit.
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
WVVX:
We have audited the accompanying balance sheet of WVVX (the Company) as of
December 31, 1996 (Successor), and the related statements of operations, station
equity, and cash flows for the period January 1, 1996 to June 13, 1996
(Predecessor) and the period from June 14, 1996 to December 31, 1996
(Successor). 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 audit.
We conducted our audit 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 audit provides 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 WVVX as of December 31, 1996
(Successor), and the results of its operations and its cash flows for the period
January 1, 1996 to June 13, 1996 (Predecessor) and the period from June 14, 1996
to December 31, 1996 (Successor) in conformity with generally accepted
accounting principles.
As discussed in note 2 to the financial statements, on June 14, 1996, PAR
Radio Holdings, Inc., acquired Douglas Broadcasting, Inc. As a result of the
change in control, the financial information for the period after the change in
control is presented on a different cost basis than that for the period before
the change in control and, therefore, is not comparable.
KPMG Peat Marwick LLP
Oakland, CA
September 18, 1997
F-34
<PAGE>
WVVX
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1996 1997
------------- -------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
SUCCESSOR SUCCESSOR
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................................. $ 19,816 $ 31,957
Trade accounts receivable, less allowance for doubtful accounts of $10,122 in
1996 and $10,000 in 1997....................................................... 38,008 51,539
Prepaid expenses and other current assets........................................ 10,964 11,451
------------- -------------
Total current assets......................................................... 68,788 94,947
Property and equipment, net........................................................ 176,372 161,572
Intangible assets, net............................................................. 10,509,805 10,393,649
Allocated debt issuance costs...................................................... 204,627 177,948
------------- -------------
Total assets................................................................. $ 10,959,592 $ 10,828,116
------------- -------------
------------- -------------
LIABILITIES AND STATION EQUITY
Current liabilities:
Trade accounts payable........................................................... $ 18,910 $ 11,161
Accrued expenses................................................................. 47,120 35,209
------------- -------------
Total current liabilities.................................................... 66,030 46,370
Allocated long term debt........................................................... 2,728,700 2,728,700
Deferred income taxes.............................................................. 3,717,555 3,651,007
Station equity..................................................................... 4,447,307 4,402,039
------------- -------------
Total liabilities and station equity......................................... $ 10,959,592 $ 10,828,116
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
WVVX
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, PERIOD FROM SEVEN
1996 JUNE 14, 1996 MONTHS
TO TO ENDED
JUNE 13, DECEMBER 31, JULY 31,
1996 1996 1997
------------ -------------- -----------
(PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
(UNAUDITED)
<S> <C> <C> <C>
Net revenues....................................... $ 499,254 $ 638,012 $ 621,620
Operating expenses:
Station operating expenses....................... 179,241 219,432 255,493
Allocated corporate general and administrative
expenses....................................... 94,199 148,635 169,485
Depreciation and amortization.................... 151,747 154,611 168,777
------------ -------------- -----------
Total operating expenses..................... 425,187 522,678 593,755
------------ -------------- -----------
Operating income............................. 74,067 115,334 27,865
Allocated interest expense including amortization
of debt issuance costs......................... 150,559 192,265 231,063
Other expenses, net.............................. 7,988 8,242 --
------------ -------------- -----------
Loss before income taxes and extraordinary item.... (84,480) (85,173) (203,198)
Income tax benefit................................. 7,761 27,255 66,548
------------ -------------- -----------
Loss before extraordinary item..................... (76,719) (57,918) (136,650)
Extraordinary item--write-off debt issuance
costs.............................................. (92,676) -- --
------------ -------------- -----------
Net loss..................................... $ (169,395) $ (57,918) $(136,650)
------------ -------------- -----------
------------ -------------- -----------
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
WVVX
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 14, 1996
TO
DECEMBER 31,
PERIOD FROM 1996 SEVEN
JANUARY 1, -------------- MONTHS
1996 ENDED
TO SUCCESSOR JULY 31,
JUNE 13, 1997
1996 -----------
------------
(UNAUDITED)
PREDECESSOR SUCCESSOR
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $ (169,395) $ (57,918) $(136,650)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. 151,747 154,611 168,777
Write-off of debt issuance costs............... 92,676 -- --
Deferred income taxes.......................... (7,761) (27,255) (66,548)
Amortization of debt issuance costs............ 68,608 23,647 26,679
Changes in operating assets and liabilities:
Trade accounts receivable, net............... 27,200 (13) (13,531)
Prepaid expenses and other current assets.... (3,305) (6,271) (487)
Trade accounts payable....................... 1,197 (348) (7,749)
Accrued expenses............................. (98,499) 60,600 (11,911)
Deferred revenue............................. 67,983 (67,983) --
------------ -------------- -----------
Net cash provided by (used in) operating
activities............................. 130,451 79,070 (41,420)
Cash flows from investing activities:
Capital expenditures............................. -- (18,647) (37,821)
------------ -------------- -----------
Net cash used in investing activities.............. -- (18,647) (37,821)
Cash flows from financing activities:
Net cash transferred (to) from owners............ (134,881) (46,723) 91,382
------------ -------------- -----------
Net (decrease) increase in cash.................... (4,430) 13,700 12,141
Cash at beginning of period........................ 10,546 6,116 19,816
------------ -------------- -----------
Cash at end of period.............................. $ 6,116 $ 19,816 $ 31,957
------------ -------------- -----------
------------ -------------- -----------
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE>
WVVX
STATEMENT OF STATION EQUITY
<TABLE>
<CAPTION>
(PREDECESSOR)
- --------------------------------------------------------------------------------
<S> <C>
Balance as of January 1, 1996................................................... $ 409,197
Net loss........................................................................ (169,395)
Repayment of push-down debt by parent........................................... 2,179,489
Net cash transferred to owner................................................... (134,881)
---------
Balance as of June 13, 1996..................................................... $2,284,410
---------
---------
<CAPTION>
- -------------------------------------------------------------------------------------------
(SUCCESSOR)
- --------------------------------------------------------------------------------
<S> <C>
Balance subsequent to change in control as of June 14, 1996..................... $4,551,948
Net loss........................................................................ (57,918)
Net cash transferred to owner................................................... (46,723)
---------
Balance as of December 31, 1996................................................. 4,447,307
Net loss (unaudited)............................................................ (136,650)
Net contribution from owner (unaudited)......................................... 91,382
Balance as of July 31, 1997 (unaudited)......................................... $4,402,039
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE>
WVVX
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE SEVEN-MONTH PERIOD ENDED JULY 31, 1997 IS UNAUDITED).
(1) DESCRIPTION OF BUSINESS
OPERATIONS
WVVX (the "Company") conducts radio broadcasting operations in Chicago. The
principal source of revenue is derived from the Company selling block
programming time to users that have unique demands for time (such as foreign
language and religious programming).
The Company is dependent on its parent company for long-term funding and
also in respect of funding to meet cash flow requirements associated with its
operations. Consequently, the net change in amounts due to or from affiliated
radio stations are treated as contributions to or distributions from station
equity.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
For the period January 1, 1996 to June 13, 1996, the Company was owned by
Douglas Broadcasting, Inc. ("DBI") (Predecessor). On June 14, 1996, DBI was
acquired by Par Radio Holdings Inc. ("PRHI") (Successor) and was accounted for
under the purchase method of accounting. Accordingly, the statements of
operations and cash flows for the period January 1, 1996 to June 13, 1996
reflect the operations of the Company as a part of DBI (Predecessor) and the
balance sheet as of December 31, 1996 and the statements of operations and cash
flows for the periods subsequent to June 14, 1996 reflect the Company's
operation and financial position under the ownership of PRHI (Successor).
As a result of the change in control, the financial information for the
periods after the change in control is presented on a different cost basis than
that for the period before the change in control and, therefore, is not
comparable.
The accompanying financial statements include certain corporate general and
administrative expenses incurred on a consolidated basis by DBI for the period
January 1, 1996 to June 13, 1996 and PRHI for the period January 14, 1996 to
December 31, 1996 and the seven months ended July 31, 1997 and have been
allocated to the Company. Such allocations include corporate salaries, health
insurance, professional services and other corporate overhead expenses and are
included in general and administative expenses in the Company's statements of
operations. In management's opinion, the basis of allocation of such costs is
reasonable. However, the expenses allocated to the Company are not necessarily
representative of what the Company would have incurred on a stand alone basis.
Allocated costs are as follows:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM SEVEN
JANUARY 1, JUNE 14, 1996 MONTHS
1996 TO ENDED
TO DECEMBER 31, JULY 31,
JUNE 13, 1996 1996 1997
------------- -------------- -----------
PREDECESSOR SUCCESSOR SUCCESSOR
<S> <C> <C> <C>
Corporate salaries................ $ 59,182 $ 70,684 $ 94,153
Health insurance.................. 2,463 2,910 2,327
Professional services............. 6,946 8,209 20,492
Other corporate overheads......... 25,608 66,832 52,513
------------- -------------- -----------
$ 94,199 $ 148,635 $ 169,485
------------- -------------- -----------
------------- -------------- -----------
</TABLE>
F-39
<PAGE>
WVVX
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SEVEN-MONTH PERIOD ENDED JULY 31, 1997 IS UNAUDITED).
Included in the financial statements is an allocation of interest expense,
including amortization of debt issuance costs for the period January 1, 1996 to
June 13, 1996 and for the period June 14, 1996 to December 31, 1996 and the
seven months ended July 31, 1997 based on the ratio of investment in WVVX to
total investments of the respective owners, in each period. For purposes of
these financial statements, the Company has been allocated a portion of the
total debt and the goodwill in connection with PRHI's acquisition of DBI. In
addition, as part of the acquisition of DBI by PRHI, DBI repaid its total debt
and the Company has been allocated a portion of the write-off of the debt
issuance costs.
Station operating expenses includes an allocation for salaries of WVVX
employees who provide services to a sister station. Approximately $7,000 per
month is allocated to the sister station based on proportional revenues.
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments necessary for a fair presentation of
financial position, results of operations, and cash flows for the periods
presented. These adjustments consist of normal, recurring items. The results of
operations for any interim period are not necessarily indicative of results for
the full year.
(B) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets ranging
between 5 and 25 years.
(C) INTANGIBLE ASSETS
Included in intangible assets are goodwill and FCC licenses. Goodwill, which
represents the excess of cost of purchased companies over the fair value of
their net assets at the date of acquisition, and FCC licenses are amortized over
40 years.
(D) REVENUE RECOGNITION
Broadcasting revenue is recognized when the program or advertisement is
aired.
(E) INCOME TAXES
The Company accounts for income taxes using the asset and liability method,
under which deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(F) USE OF ESTIMATES
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
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
F-40
<PAGE>
WVVX
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SEVEN-MONTH PERIOD ENDED JULY 31, 1997 IS UNAUDITED).
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 1996
and July 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1996 1997
------------ -----------
<S> <C> <C>
(SUCCESSOR)
Transmitter equipment.............................................. $ 2,714 $ 3,111
Studio and technical equipment..................................... 32,012 32,012
Tower and antenna systems.......................................... 106,957 106,957
Office furniture and equipment..................................... 8,896 8,896
Production library................................................. 2,500 2,500
Other.............................................................. 35,545 35,545
------------ -----------
188,624 189,021
Less: accumulated depreciation and amortization.................... (12,252) (27,449)
------------ -----------
$ 176,372 $ 161,572
------------ -----------
------------ -----------
</TABLE>
(4) INTANGIBLE ASSETS
Intangible assets consisted of the following as of December 31, 1996 and
July 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1996 1997
------------ ------------
<S> <C> <C>
(SUCCESSOR)
Goodwill........................................................... $2,477,164 $ 2,477,164
FCC licenses....................................................... 8,175,000 8,175,000
Other.............................................................. -- 37,378
------------ ------------
10,652,164 10,689,542,
Less: accumulated amortization..................................... (142,359) (295,893)
------------ ------------
$10,509,805 $ 10,393,649
------------ ------------
------------ ------------
</TABLE>
(5) ALLOCATED LONG-TERM DEBT
Allocated long-term debt represents the Company's allocated share of a term
loan of $15,000,000 obtained by PRHI, which was used a fund a portion of the
purchase of the common stock of DBI.
Borrowings bear interest at the lender's prime rate plus 2.75% or at the
London Interbank Offering Rate ("LIBOR") plus 4%.
As of December 31, 1996, principal repayments on the term loan were due as
follows: $2,250,000 in 1999, $3,000,000 in 2000, $3,562,500 in 2001, $4,875,000
in 2002 and $1,312,500 in 2003.
At December 31, 1996 and July 31, 1997 the Parent Company was in technical
default of certain covenant compliance requirements, for which a waiver was
received from the lender. On August 15, 1997, an equity contribution by the
Parent Company's controlling owner was used to repay $6,000,000 of the
$15,000,000 outstanding.
(6) AMOUNTS DUE TO/FROM AFFILIATED STATIONS
Amounts due to or from affiliated radio stations have been included in
station equity and would have eliminated on consolidation in the combined
financial statements of Par Radio Holdings, Inc. for the period from June 14,
1996 to December 31, 1996.
F-41
<PAGE>
WVVX
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SEVEN-MONTH PERIOD ENDED JULY 31, 1997 IS UNAUDITED).
(7) LEASE COMMITMENTS
The Company leases various facilities and equipment under noncancelable
operating leases expiring through 2002. Certain operating leases are renewable
at the end of the contract term. Future minimum lease payments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
1997.............................................................. $ 20,540
<S> <C>
1998.............................................................. 49,719
1999.............................................................. 50,611
2000.............................................................. 51,631
2001.............................................................. 52,665
Thereafter........................................................ 13,166
---------
$ 238,332
---------
---------
</TABLE>
Rent expense was approximately $51,173 and $31,950 for the year ended
December 31, 1996 and the seven months ended July 31, 1997, respectively.
(8) INCOME TAXES
Federal and state income taxes have been provided as if the Company filed a
separate tax return. On a stand alone basis the Company owes no current taxes
and any allocated income tax expenses (benefit) by DBI or PRHI have been
reflected in station equity as transfers to or contributions from owner.
The reconciliation of the income tax charge computed at the U.S. Federal
statutory income tax rate to the Company's effective income tax rate is as
follows:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1, 1996 JUNE 14, 1996 SEVEN MONTHS
TO TO ENDED
JUNE 13, 1996 DECEMBER 31, 1996 JULY 31, 1997
----------------- ----------------- ---------------
PREDECESSOR SUCCESSOR SUCCESSOR
<S> <C> <C> <C>
Tax benefit at U.S. Federal statutory rate...... 34.0% 34.0% 34.0%
Expected state tax benefit...................... 2.5 2.5 5.9
Fully valued unutilized net operating losses.... (26.4) (3.6) (7.8)
Other........................................... (0.9) (0.9) (0.5)
----- --- ---
9.2% 32.0% 31.6%
----- --- ---
----- --- ---
</TABLE>
The net deferred income tax assets/liabilities result from tax effects of
temporary differences as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1996 1997
----------------- -------------
<S> <C> <C>
SUCCESSOR SUCCESSOR
Excess of book basis over tax basis of intangible assets........................ $ (3,900,268) $ (3,831,457)
Excess of book basis over tax basis of tangible assets.......................... (63,047) (59,002)
Other........................................................................... 245,760 239,452
----------------- -------------
$ 3,717,555 $ 3,651,007
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</TABLE>
F-42
<PAGE>
WVVX
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SEVEN-MONTH PERIOD ENDED JULY 31, 1997 IS UNAUDITED).
(9) CONTINGENCIES
The Company is subject to routine claims and litigation incidental to its
business. The Company believes that the results of these matters will not have a
material adverse effect on the Company's financial condition.
(10) SUBSEQUENT EVENT
On August 7, 1997, PHI sold the assets and FCC license of the Company to Big
City Radio, Inc. (formerly Odyssey Communications, Inc.) for $9,500,000.
F-43
<PAGE>
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NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 9
Use of Proceeds................................. 15
Dividend Policy................................. 15
Dilution........................................ 16
Capitalization.................................. 17
Pro Forma Financial Statements.................. 18
Selected Financial and Operating Data........... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 26
Business........................................ 33
Management...................................... 47
Principal Stockholders.......................... 57
Certain Relationships and Related
Transactions.................................. 58
Description of Credit Facility.................. 60
Description of Capital Stock.................... 61
Shares Eligible for Future Sale................. 67
Underwriting.................................... 69
Legal Matters................................... 71
Experts......................................... 71
Change in Independent Auditor................... 71
Market Data and Certain Definitions............. 72
Cautionary Note Regarding Forward-Looking
Statements.................................... 72
Additional Information.......................... 73
Index to Financial Statements................... F-1
</TABLE>
------------------------
UNTIL JANUARY 12, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4,000,000 SHARES
[LOGO]
BIG CITY RADIO, INC.
CLASS A COMMON STOCK
-----------------
PROSPECTUS
-----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FURMAN SELZ
DECEMBER 18, 1997
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