<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------
FORM 8-K
CURRENT REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): February 23, 1998
Chancellor Media Corporation Chancellor Media Corporation of Los Angeles
- ---------------------------- -------------------------------------------
(Exact Name of Registrant as (Exact Name of Registrant as
Specified in Charter) Specified in Charter)
000-21570 333-32259
--------- ---------
(Commission File No.) (Commission File No.)
75-2247099 75-2451687
---------- ----------
(IRS Employer (IRS Employer
Identification No.) Identification No.)
Delaware Delaware
-------- --------
(State or Other Jurisdiction (State or Other Jurisdiction
of Incorporation) of Incorporation)
433 East Las Colinas Boulevard
Suite 1130
Irving, Texas 75039
--------------------
(Address of Principal
Executive Offices)
(972) 869-9020
--------------
(Registrant's telephone
number, including area code)
<PAGE> 2
ITEM 5. OTHER EVENTS
On February 23, 1998, Chancellor Media Corporation (together with its
subsidiaries, the "Company") filed a prospectus supplement (the "Prospectus
Supplement") to its prospectus dated January 27, 1998 (File No. 333-44401). As
contemplated by the Prospectus Supplement, the Company is proposing a public
offering of 16,000,000 shares of its Common Stock. Certain information contained
in the Prospectus Supplement is attached to this Current Report on Form 8-K. The
Company deems the attached information to be of importance to its security
holders. As used herein, unless the context otherwise requires, the term
"Company" refers to Chancellor Media Corporation and its subsidiaries. All share
and per share data herein give effect to the Company's two-for-one common stock
split effected in the form of a stock dividend, paid on January 12, 1998 to
stockholders of record at the close of business on December 29, 1997.
2
<PAGE> 3
THE COMPANY
The Company is one of the largest radio broadcasting companies in the
United States. Upon consummation of the Bonneville Option (as defined) and the
SFX Exchange (as defined), but without giving effect to the recently announced
Capitol Broadcasting Acquisition (as defined) or the potential Capstar
Transaction (as defined), the Company will own and operate 99 radio stations (71
FM and 28 AM) in 21 large markets, including each of the nation's 12 largest
radio revenue markets. Based on the most recent industry data available to the
Company, the Company's portfolio includes the first or second ranked station
cluster in terms of revenue share in 15 markets. On a pro forma basis after
giving effect to the Completed Transactions (as defined) and the Bonneville
Option and the SFX Exchange, but without giving effect to the Capitol
Broadcasting Acquisition or the potential Capstar Transaction, the Company would
have had net revenue and broadcast cash flow (as defined) of approximately
$724.4 million and $303.5 million, respectively, for the nine months ended
September 30, 1997, and its pro forma broadcast cash flow margin for such period
would have been 42%.
The Company's strategy is to secure leading clusters of radio stations in
the largest markets in the United States. The Company's current station
portfolio includes 97 stations (69 FM and 28 AM) comprising a total of 11
station clusters of four or five FM stations ("superduopolies") in seven of the
12 largest radio markets -- Los Angeles, New York, Chicago, San Francisco,
Philadelphia, Washington, D.C. and Detroit -- and in four other large
markets -- Denver, Minneapolis/St. Paul, Phoenix and Orlando. Consummation of
the Bonneville Option and the SFX Exchange will result in a net increase of two
FM stations to the Company's portfolio. See "Recent Developments -- Pending
Transactions." Approximately 66% of pro forma net revenue for the nine months
ended September 30, 1997 would have been generated by the superduopoly markets.
In 1996 (the most recent period for which data is available to the
Company), the 12 largest radio markets in the United States generated
approximately $3.1 billion in radio advertising revenue, which represented
approximately 27% of all radio advertising dollars spent in the United States.
As a result of its large market focus, based on the most recent industry data
available to the Company, the Company's portfolio of stations, upon completion
of the Bonneville Option and the SFX Exchange, would reach an estimated 41.7
million listeners on a weekly basis, or approximately 16% of the population of
the United States. Management believes that the size and reach of the portfolio
will allow the Company to compete more effectively for advertising dollars with
other mass advertising media, such as television and newspapers, and will also
offer national advertisers an opportunity to reach a large segment of the U.S.
population on an efficient, cost-effective basis.
As a complement to its radio broadcasting operations, the Company has
recently formed a national radio network, The AMFM Radio Networks, which began
broadcasting advertising over the Company's portfolio of stations in January
1998. Management believes that The AMFM Radio Networks will allow the Company to
further leverage its broad station base, personalities and advertising inventory
by delivering a national base of approximately 41.7 million listeners to network
advertisers.
3
<PAGE> 4
The chart below ranks the nation's largest radio broadcasting groups based
on cumulative audience share, giving effect to transactions in the industry
announced prior to February 17, 1998:
<TABLE>
<CAPTION>
CUMULATIVE
RADIO GROUP AUDIENCE SHARE(1)
----------- -----------------
<S> <C>
CBS Radio................................................... 57,496,600
Chancellor Media............................................ 41,677,800
Jacor Communications........................................ 22,097,100
Capstar Broadcasting Partners............................... 20,157,100
Clear Channel Communications................................ 17,359,300
ABC Radio................................................... 12,726,100
Cox Radio................................................... 9,111,000
Emmis Broadcasting.......................................... 8,955,300
Sinclair Broadcast Group.................................... 6,743,500
Heftel Broadcasting......................................... 6,449,900
</TABLE>
- ---------------
(1) As reported in the industry publication "Who Owns What" as of February 17,
1998. Reflects number of listeners age 12+, Monday to Sunday, 6:00 a.m. to
midnight, that listened to a station operated by the applicable radio
broadcasting company for a period of 5 minutes or more at least one time per
week.
The Company's portfolio is geographically diversified and employs a wide
variety of programming formats, including adult contemporary, contemporary hit
radio, urban, jazz, country, oldies, news/talk, rock and sports. Each of the
Company's stations targets a specific demographic audience within a market, with
the majority of the stations appealing primarily to 18 to 34 or 25 to 54 year
old men and/or women, the demographic groups most sought after by advertisers.
Management believes that, because of the size and diversity of its station
portfolio, the Company is not unduly reliant on the performance of any one
station or market. No single market to be served by the Company represented more
than 12% of the Company's pro forma broadcast cash flow for the nine months
ended September 30, 1997 (giving effect to the Bonneville Option and the SFX
Exchange, but without giving effect to the Capitol Broadcasting Acquisition and
the potential Capstar Transaction).
4
<PAGE> 5
The following table sets forth certain information regarding the Company's
portfolio and markets, assuming completion of the Bonneville Option and the SFX
Exchange (but without giving effect to the Capitol Broadcasting Acquisition or
the potential Capstar Transaction):
<TABLE>
<CAPTION>
RANKING OF STATIONS
MARKET BY 1996 MARKET --------- AUDIENCE
MARKET RADIO REVENUE(1) REVENUE(2) FM AM SHARE(%)(3)
------ ---------------- ----------- --- --- -----------
<S> <C> <C> <C> <C> <C>
Los Angeles................................... 1 $526,000 4 1 13.7
New York...................................... 2 475,000 5 -- 17.6
Chicago....................................... 3 337,600 5 2 26.6
San Francisco................................. 4 229,700 5 2 21.4
Dallas/Ft. Worth.............................. 5 218,000 3 1 14.1
Philadelphia.................................. 6 204,300 5 1 20.6
Houston....................................... 7 199,000 3 2 17.2
Washington, D.C............................... 8 195,600 4 2 19.1
Boston........................................ 9 194,000 2 1 14.6
Atlanta....................................... 10 192,200 1 -- 4.2
Detroit....................................... 11 180,000 5 2 28.5
Miami/Ft. Lauderdale.......................... 12 174,500 1 1 4.9
Denver........................................ 15 115,200 5 1 15.4
Minneapolis/St. Paul.......................... 16 112,400 5 2 31.2
Phoenix....................................... 17 106,300 4 2 22.2
Cincinnati.................................... 20 90,200 2 2 14.3
Pittsburgh.................................... 24 76,600 1 1 5.5
Sacramento.................................... 25 71,400 2 2 20.1
Orlando....................................... 26 70,700 4 -- 24.1
Nassau/Suffolk (Long Island)(4)............... 44 38,000 4 2 17.3
Riverside/San Bernardino...................... 64 26,400 1 1 7.5
-- --
Total............................... 71 28
== ==
</TABLE>
- ---------------
(1) Ranking of the principal radio market served by the Company's station(s)
among all U.S. radio markets ranked by 1996 gross radio broadcasting revenue
as reported by James H. Duncan, Duncan's Radio Market Guide (1997 ed.).
(2) Aggregate 1996 gross market radio revenues, in thousands, in the market as
reported by Duncan's Radio Market Guide (1997 ed.).
(3) Audience share data reflects the Company's listener share among listeners
age 12+, Monday to Sunday, 6:00 a.m. to midnight, within each market based
on information derived from The Arbitron Company, Fall 1997, Local Market
Reports. Copyright, The Arbitron Company.
(4) The acquisition of four stations (three FM and one AM) in Nassau/Suffolk
(Long Island) would not be consummated if the transactions contemplated by
the potential Capstar Transaction are consummated. See "Recent
Developments -- Potential Capstar Transaction" below.
The Company also owns Katz Media Group, Inc. ("KMG" and, together with its
operating subsidiaries, "Katz"), a full-service media representation firm
serving multiple types of electronic media, with a leading market share in the
representation of radio and television stations and cable television systems.
Katz is exclusively retained by radio stations, television stations and cable
television systems in over 200 designated market areas throughout the United
States, including at least one radio or television station in each of the 50
largest designated market areas, to sell national spot advertising air time.
The Company, formerly known as "Evergreen Media Corporation" ("Evergreen"),
was renamed Chancellor Media Corporation in connection with the merger on
September 5, 1997 of Evergreen and Chancellor Broadcasting Company
("Chancellor") and certain of their respective subsidiaries (the "Chancellor
Merger"). The Company's principal executive office is located at 433 East Las
Colinas Boulevard, Suite 1130, Irving, Texas 75039, and its telephone number is
(972) 869-9020.
5
<PAGE> 6
RECENT DEVELOPMENTS
FISCAL YEAR 1997 RESULTS
- - For the fiscal year ended December 31, 1997, the Company reported that
after tax cash flow increased 83.6% to $126.7 million, or $1.32 per share,
compared to $69.0 million for 1996. Consolidated net revenue increased
98.1% to $582.1 million, compared to $293.9 million in 1996, and broadcast
cash flow increased 122.4% to $265.8 million, compared to $119.5 million in
1996. Primarily as a result of increases in depreciation, amortization and
interest expense related to the Company's acquisition of radio stations
from Viacom International, Inc. and the Chancellor Merger, the Company
reported a net loss attributable to common stockholders of $43.9 million,
or $0.46 per share, for 1997, compared with a net loss attributable to
common stockholders of $20.0 million, or $0.33 per share, for 1996. For the
three months ended December 31, 1997, the Company's after tax cash flow
increased 52.1% to $43.3 million compared to $28.5 million, consolidated
net revenue increased 180.4% to $248.8 million compared to $88.7 million,
and broadcast cash flow increased 187.3% to $117.3 million compared to
$40.8 million, in each case, compared to the three months ended December
31, 1996. Primarily as a result of increases in depreciation, amortization
and interest expense related to the Company's acquisition of radio stations
from Viacom International, Inc. and the Chancellor Merger, the Company
reported a net loss attributable to common stockholders of $31.7 million,
or $0.27 per share, for the three months ended December 31, 1997, compared
with net income attributable to common stockholders of $0.9 million, or
$0.01 per share, for the three months ended December 31, 1996.
THE AMFM RADIO NETWORKS
- - In September 1997, the Company announced the formation of a national radio
network, The AMFM Radio Networks, and the appointment of David Kantor to
the position of Senior Vice President with responsibility for all of the
Company's radio network operations. Prior to joining the Company, Mr.
Kantor served as President of ABC Radio Networks, the largest commercial
radio network in the United States. Management believes that the network
will allow the Company to further leverage its broad station base,
personalities and advertising inventory by delivering a national base of
approximately 41.7 million listeners to network advertisers. See "Risk
Factors -- Integration of Operations; Operation of Katz and Radio Network."
COMPLETED TRANSACTIONS
- - Since January 1, 1997, the Company has completed (i) the Chancellor Merger,
which added 52 radio stations (36 FM and 16 AM) to the Company's portfolio
of stations, for a net purchase price of approximately $2.0 billion, (ii)
the acquisition of 23 radio stations for a net purchase price of
approximately $1.5 billion, (iii) the exchange of seven stations for five
stations and $6.0 million in cash, (iv) the sale or other disposition of 10
radio stations for $269.3 million in cash and a promissory note for $18.0
million and (v) the acquisition of Katz, a full service media
representation firm, for a net purchase price of approximately $379.1
million. These transactions, together with the acquisitions and
dispositions completed by the Company during 1996 and acquisitions and
dispositions completed by Chancellor during 1996 and 1997, are referred to
herein as the "Completed Transactions."
PENDING TRANSACTIONS
- - BONNEVILLE OPTION. On August 6, 1997, the Company paid $3.0 million to
Bonneville International Corporation ("Bonneville") for an option to
exchange three of the Company's stations in Los Angeles and Washington,
D.C. (2 FM and 1 AM) plus an additional $57.0 million in cash for three of
Bonneville's FM stations in New York, Los Angeles and Houston (the
"Bonneville Option"). The Bonneville Option was exercised on October 1,
1997 and definitive exchange documentation is presently being negotiated.
Although there can be no assurance, the Company expects that the
transactions contemplated by the Bonneville Option will be completed during
the first quarter of 1998.
- - CAPITOL BROADCASTING ACQUISITION. On February 17, 1998, the Company entered
into an agreement to acquire WWDC-FM/AM in Washington, D.C. from Capitol
Broadcasting Company and its affiliates for a purchase price of $72.0
million in cash (including $4.0 million paid by the Company in escrow) (the
6
<PAGE> 7
"Capitol Broadcasting Acquisition"), plus an amount equal to the value
assigned to certain accounts receivable for the stations. Consummation of
the Capitol Broadcasting Acquisition is conditioned, among other things, on
the consummation of the exchanges of the Company's Washington, D.C.
stations that are subject to the Bonneville Option. Although there can be
no assurance, the Company expects that the Capitol Broadcasting Acquisition
will be consummated in the second quarter of 1998.
- - SFX EXCHANGE. On July 1, 1996, Chancellor entered into an agreement
(assumed by the Company in the Chancellor Merger) to exchange two FM
stations in Jacksonville and $11.0 million in cash in return for four
stations (three FM and one AM) in Nassau/Suffolk (Long Island) (the "SFX
Exchange"). On November 6, 1997, the Antitrust Division of the United
States Department of Justice (the "DOJ") filed suit against the Company
seeking to enjoin under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act") the acquisition of the four Long Island
properties under the SFX Exchange. If the Company is unable to acquire the
four Long Island properties, the SFX Exchange will not be consummated and
the Company will retain ownership of the two Jacksonville FM stations.
Furthermore, assuming that the conditions precedent to the effectiveness of
the Capstar Transaction are satisfied (see "Recent
Developments -- Potential Capstar Transaction" below), it is expected that,
upon consummation of Capstar Broadcasting Corporation's pending acquisition
of SFX, the SFX Exchange would be terminated. There can be no assurance as
to whether or when the SFX Exchange will ultimately be consummated. The
Company does not believe that failure to consummate the SFX Exchange would
have a material adverse effect on the Company's business, results of
operations or financial condition.
Further information regarding the Completed Transactions, the Bonneville
Option and the SFX Exchange, including information regarding the pro forma
effect thereof on the Company's results of operations for the year ended
December 31, 1996 and the nine months ended September 30, 1997, is included in
the Company's Current Report on Form 8-K/A dated February 10, 1998 (the "Form
8-K/A").
POTENTIAL CAPSTAR TRANSACTION
On February 20, 1998, the Company reached an agreement to acquire from
Capstar Broadcasting Corporation (together with its subsidiaries, "Capstar")
certain radio stations in Dallas, Houston, San Diego and Pittsburgh (the
"Capstar/SFX Stations") for an aggregate purchase price of approximately $637.5
million (the "Capstar Transaction"). Hicks, Muse, Tate & Furst, Incorporated
("Hicks Muse"), which is a substantial shareholder of the Company, controls
Capstar, and certain directors of the Company are directors and/or executive
officers of Capstar and/or officers of Hicks Muse. See "Risk Factors -- Federal
Broadcasting Industry Subject to Federal Regulation," "Risk Factors -- Conflict
of Interest" and "Risk Factors -- Control of the Company." The Capstar/SFX
Stations are presently owned by SFX, and are expected to be acquired by Capstar
as part of Capstar's pending acquisition of SFX (the "Capstar/SFX Acquisition").
The Capstar/SFX Stations would be acquired by the Company in a series of
purchases and exchanges over a period of three years, and would be operated by
the Company under time brokerage agreements immediately upon the consummation of
the Capstar/SFX Acquisition. As part of the Capstar Transaction, the SFX
Exchange would, upon consummation of the Capstar/SFX Acquisition, be terminated.
As part of the proposed Capstar Transaction, the Company would, at the
consummation of the Capstar/SFX Acquisition, provide a subordinated loan to
Capstar in the principal amount of $250.0 million (the "Capstar Loan"). The
Capstar Loan would bear interest at the rate of 12% per annum (subject to
increase in certain circumstances), and would be secured by a senior pledge of
common stock of Capstar's direct subsidiaries, a senior pledge of a majority of
common stock of SFX, and a senior guarantee by SFX. A portion of the Capstar
Loan would be prepaid by Capstar in connection with the Company's acquisition
of, and the proceeds of such prepayment would be used by the Company as a
portion of the purchase price for, each Capstar/SFX Station. The Company's
obligation to provide the Capstar Loan is conditioned, among other things, on
Capstar's receipt of at least $650.0 million in equity investments that are
subordinate to the Capstar Loan between January 1, 1998 and the consummation of
the Capstar/SFX Acquisition.
Effectiveness of the Capstar Transaction is subject to the conditions
precedent that the boards of directors of the Company and Capstar approve the
transaction (including approval by a majority of
7
<PAGE> 8
disinterested directors on the Company's board and by an advisory committee to
Capstar's board) and receipt by the Company and Capstar of fairness opinions
from nationally recognized investment banking firms regarding the transaction.
There can be no assurance that such approvals will be granted or that such
fairness opinions will be obtained. Assuming that such approvals are granted and
that such fairness opinions are obtained, and the Capstar Transaction becomes
effective, consummation of the Capstar Transaction would be subject, among other
things, to approval by the Federal Communications Commission (the "FCC") and
expiration or termination of the waiting period required under the HSR Act. See
"Risk Factors -- Necessity of Governmental Reviews and Approvals Prior to
Consummation of the Pending Transactions."
Capstar has informed the Company that Capstar expects that the Capstar/SFX
Acquisition will be consummated in the second quarter of 1998.
COMPANY STRATEGY
The Company's senior management team, led by Scott K. Ginsburg, James de
Castro, Matthew E. Devine and Kenneth O'Keefe, has extensive experience in
acquiring and operating large market radio station groups. The Company's
business strategy is to assemble and operate radio station clusters in order to
maximize broadcast cash flow generated in each market. This strategy relies on
the following seven key elements.
Create Large Market Superduopolies. The Company seeks to be the owner and
operator of the leading superduopoly in the largest markets in the United
States. Management believes that the large revenue base in these markets, in
conjunction with operating synergies achievable through the operation of
multiple stations, will enable it to appeal to a wider universe of national and
local advertisers and to achieve a greater degree of profitability than that of
operators and broadcasters in smaller markets. The Bonneville Option, if
consummated, will complement the Company's existing stations in the Los Angeles,
New York and Houston markets. The Company expects to continue to selectively
pursue acquisition opportunities in the major markets in which it competes as
well as in other markets, with particular emphasis on the nation's largest 25
markets.
Maximize Superduopoly Revenue and Expense Synergies. The Company seeks to
capitalize on the revenue growth and expense savings opportunities of
superduopolies. Superduopolies have only been permissible since the passage of
the Telecommunications Act of 1996 (the "1996 Act"). Management believes that
substantial benefits can be derived from the successful integration of these
station cluster groups. Management also believes that radio station clusters can
attract increased revenues in a market by delivering larger combined audiences
to advertisers and by engaging in joint marketing and promotional activities. In
addition, management expects to continue to realize significant expense savings
through the consolidation of facilities and through the economies of scale
created in areas such as national representation commissions, employee benefits,
insurance premiums and other operating costs.
Establish Strong Listener Loyalty. Management believes that strong
listener familiarity with a given radio station produces listener loyalty.
Management seeks to establish this familiarity through a variety of programming
and marketing techniques, including the development of high-profile on-air
personalities and creative station-sponsored promotional events, all of which
are designed to secure heightened listener awareness. The Company also conducts
extensive market research to help identify programming format opportunities and
attract new listeners, as has been the case with WKTU-FM in New York. After
operating WKTU-FM for nine months under the call letters and country music
format inherited from a prior operator, in February 1996 the Company began to
operate WKTU-FM as a rhythmic contemporary hits station. According to Arbitron,
WKTU-FM was ranked eleventh in its target demographic group as a country
station, and was ranked first in several key demographic groups (including its
target demographic group) in the first full ranking period after the station
changed its format. The station has continued to rank among the top five
stations in its target demographic group in subsequent periods. Management
believes that institutionalizing its radio stations in their markets through
programming, marketing and research ensures steady long-term audience share
ratings.
8
<PAGE> 9
Maintain Strict Cost Controls. Management maintains a company-wide focus
on cost controls in an effort to maximize broadcast cash flow margins.
Management reviews station spending on a monthly basis. In addition, corporate
level employees maintain weekly sales reporting systems designed to enable
management to evaluate station performance on a current basis. The Company's
focus on maximizing superduopoly revenues and maintaining cost controls is
reflected by the fact that, during 1995 and 1996 and the nine months ended
September 30, 1997, the Company achieved historical broadcast cash flow margins
of 40% or more. The Company also carefully monitors capital expenditures.
Develop Experienced, Incentivized Management Team. The Company believes
that management depth is critical to achieving superior operating performance in
a portfolio as large as the Company's. The Company's senior management team of
Scott K. Ginsburg, James de Castro, Matthew Devine and Kenneth O'Keefe
collectively have an aggregate of more than 60 years of radio industry operating
experience. This senior management team is supported by an experienced team of
veteran group operators and station general managers. At the station level, the
Company seeks to incentivize its individual radio station managers and sales
forces to outperform revenue and broadcast cash flow budget expectations by
granting quarterly and annual performance measurement-based bonuses. The Company
believes that the incentives it offers to its employees, as well as its stature
in the radio industry, will enable it to continue to be successful in recruiting
top industry employees.
Maximize After Tax Cash Flow. By emphasizing the revenue and expense
synergies achievable through the assembly and operation of superduopolies and by
carefully monitoring operating costs, the Company seeks to maximize broadcast
cash flow and, ultimately, after tax cash flow (broadcast cash flow less
corporate general and administrative expenses, debt service, tax payments and
dividend requirements). This focus on after tax cash flow should facilitate
reduction of leverage without undue dependence on capital markets and position
the Company to pursue attractive acquisitions.
Related Business Expansion. In addition to the foregoing, the Company seeks
to further leverage its radio expertise by expanding into industries related to
the operation of radio stations. In this regard, the Company formed a national
radio network, The AMFM Radio Networks, in September 1997 and acquired Katz, a
full-service media representation firm in October 1997. The Company is also
exploring the acquisition of additional complementary media businesses,
particularly businesses with significant free cash flow generating potential and
with a large-market focus similar to the Company's.
9
<PAGE> 10
THE OFFERING
Common Stock to be offered
by the Company............. 16,000,000 shares
Common Stock to be
outstanding after the
Offering(1).............. 135,991,742 shares of Common Stock.
Use of Proceeds............ For general corporate purposes, including the
possible repurchase of the outstanding shares of
12% Exchangeable Preferred Stock (the "12%
Preferred Stock") and 12 1/4% Series A Senior
Cumulative Exchangeable Preferred Stock (the
"12 1/4% Preferred Stock") of Chancellor Media
Corporation of Los Angeles ("CMCLA"), the Company's
indirect wholly owned operating subsidiary. Pending
any such use, net proceeds will be used to reduce
borrowings under the Company's senior credit
facility with a syndicate of commercial banks and
other financial institutions (the "Senior Credit
Facility"). Amounts used to reduce borrowings and
not reborrowed in connection with the proposed
repurchase of the 12% Preferred Stock and the
12 1/4% Preferred Stock may be subsequently
reborrowed for general corporate purposes
(including financing of the Bonneville Option, the
SFX Exchange, the Capitol Broadcasting Acquisition,
and the Capstar Transaction, if the conditions
precedent to its effectiveness are satisfied),
subject to compliance with certain conditions. See
"Risk Factors -- Possible Non-Consummation of, or
Increased Cost of, Proposed Repurchase of 12 1/4%
Preferred Stock and 12% Preferred Stock."
Nasdaq National Market
Symbol of Common Stock..... AMFM
- ---------------
(1) Shares outstanding are as of January 31, 1998. Excludes (i) 6,678,866 shares
of Common Stock that may be issued from time to time upon the exercise of
vested employee and director stock options having exercise prices ranging
from $0.01 to $37.31 per share, (ii) 2,043,136 shares of Common Stock that
may be issued from time to time upon exercise of currently unvested employee
and director stock options having exercise prices ranging from $6.17 to
$37.31 per share (iii) 1,017,889 shares of Common Stock issuable upon
exercise of options authorized but not yet granted under the Company's
employee and director stock option plans, (iv) 11,980,000 shares of Common
Stock issuable upon conversion of the Company's $3.00 Convertible
Exchangeable Preferred Stock (the "$3.00 Convertible Preferred Stock") and
(v) 6,079,088 shares of Common Stock issuable upon conversion of the
Company's 7% Convertible Preferred Stock (the "7% Convertible Preferred
Stock").
10
<PAGE> 11
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary pro forma financial information set forth below under Company
Pro Forma presents adjustments for (i) in the case of the Operating Data and
Other Data, the Completed Transactions, the Bonneville Option, the SFX Exchange
and financing transactions undertaken by the Company and Chancellor during 1996
and 1997, as if such transactions had occurred on January 1, 1996 and (ii) in
the case of the Balance Sheet Data, the Completed Transactions consummated after
September 30, 1997, the Bonneville Option, the SFX Exchange and the offering
(the "8 1/8% Notes Offering") in December 1997 of $500.0 million aggregate
principal amount of the Company's 8 1/8% Senior Subordinated Notes due 2007 (the
"8 1/8% Notes"), as if such transactions had occurred on September 30, 1997. For
information regarding the assumptions and adjustments used in preparing the
Company Pro Forma data, see the Form 8-K/A.
The summary pro forma financial information set forth below under Company
Pro Forma As Adjusted for the Offering presents adjustments for (i) in the case
of the Operating Data and Other Data, the Completed Transactions, the Bonneville
Option, the SFX Exchange, financing transactions undertaken by the Company and
Chancellor during 1996 and 1997, and the Offering and the application of the net
proceeds therefrom as described herein, as if such transactions had occurred on
January 1, 1996 and (ii) in the case of the Balance Sheet Data, the Completed
Transactions consummated after September 30, 1997, the Bonneville Option, the
SFX Exchange, the 8 1/8% Notes Offering and the Offering and the application of
the net proceeds therefrom, as if such transactions had occurred on September
30, 1997.
The information set forth under Company Pro Forma As Adjusted for the
Offering assumes that all of the outstanding shares of 12% Preferred Stock and
12 1/4% Preferred Stock will be repurchased and retired pursuant to a tender
offer, certain permitted redemptions, negotiated purchases or open-market
transactions. The pro forma data is based on assumed premiums (which includes
accrued and unpaid dividends) to be paid to holders of 12% Preferred Stock and
12 1/4% Preferred Stock, and other assumptions relating to such repurchases. No
assurance can be given that the actual premiums paid in connection with any such
repurchases made by the Company will not be greater, perhaps by a substantial
amount, than the amounts assumed in the pro forma data. In addition, there can
be no assurance that any shares of 12% Preferred Stock and 12 1/4% Preferred
Stock will be repurchased by the Company. See "Risk Factors -- Possible Non-
Consummation of, or Increased Cost of, Proposed Repurchase of 12 1/4% Preferred
Stock and 12% Preferred Stock."
The summary pro forma financial information does not give effect to the
recently announced Capitol Broadcasting Acquisition or the potential Capstar
Transaction.
The pro forma information set forth below is not necessarily indicative of
the operating results or financial position that would have been achieved had
such transactions actually been consummated on the dates specified nor is it
indicative of the Company's operating results or financial position for any
future periods or dates.
11
<PAGE> 12
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------------------------ ----------------------------------------
COMPANY COMPANY
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
COMPANY COMPANY FOR THE COMPANY COMPANY FOR THE
HISTORICAL PRO FORMA OFFERING HISTORICAL(1) PRO FORMA OFFERING
---------- --------- ----------- ------------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND MARGIN DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net revenues............................ $ 293,850 $898,476 $ 898,476 $ 333,283 $ 724,397 $ 724,397
Operating expenses excluding
depreciation and amortization......... 174,344 533,865 533,865 184,713 420,879 420,879
Operating income (loss)................. 17,960 (19,825) (19,825) 32,538 14,107 14,107
Interest expense, net................... 37,050 204,877 188,630 45,036 153,658 141,473
Dividends and accretion on preferred
stock of subsidiary................... -- 38,400 -- 2,779 30,100 --
Net loss................................ (16,194) (202,004) (153,044) (6,491) (122,705) (84,684)
Preferred stock dividends............... 3,820 25,670 25,670 5,748 19,316 19,316
Net loss attributable to common
stockholders.......................... (20,014) (227,674) (178,714) (12,239) (142,021) (104,000)
Loss per common share................... $ (0.33) $ (1.91) $ (1.32) $ (0.14) $ (1.19) $ (0.77)
Weighted average common shares
outstanding........................... 60,414 118,927 134,927 87,690 119,102 135,102
OTHER DATA:
Broadcast cash flow(2).................. $ 119,506 $364,611 $ 364,611 $ 148,570 $ 303,518 $ 303,518
Broadcast cash flow margin.............. 41% 41% 41% 45% 42% 42%
EBITDA(2)............................... $ 111,709 $340,662 $ 340,662 $ 136,924 $ 277,410 $ 277,410
BALANCE SHEET DATA (END OF PERIOD):
Working capital, excluding current
portion of long-term debt............. $ 67,921 $ 123,805 $ 142,148 $ 142,148
Total assets............................ 1,020,959 4,213,376 5,115,612 5,115,612
Long-term debt (including current
portion)(3)........................... 358,000 1,857,000 2,678,601 2,446,508
Redeemable preferred stock.............. -- 338,566 338,566 --
Stockholders' equity.................... $ 549,411 $1,508,666 $1,508,666 $2,079,325
</TABLE>
- ---------------
(1) Certain reclassifications have been made to the Company's historical
financial statements for the nine months ended September 30, 1997 to conform
to the presentation which will be reflected in the Company's audited
financial statements for the year ended December 31, 1997.
(2) Broadcast cash flow consists of operating income excluding depreciation and
amortization, corporate general and administrative expense and other
non-cash and non-recurring charges. EBITDA consists of operating income
excluding depreciation and amortization and other non-cash and non-recurring
charges. Although broadcast cash flow and EBITDA are not calculated in
accordance with generally accepted accounting principles, the Company
believes that broadcast cash flow and EBITDA are widely used as a measure of
operating performance. Nevertheless, these measures should not be considered
in isolation or as a substitute for operating income, cash flows from
operating activities or any other measure for determining the Company's
operating performance or liquidity that is calculated in accordance with
generally accepted accounting principles. Broadcast cash flow and EBITDA do
not take into account the Company's debt service requirements and other
commitments and, accordingly, broadcast cash flow and EBITDA are not
necessarily indicative of amounts that may be available for reinvestment in
the Company's business or other discretionary uses.
(3) The current portion of the Company's long-term debt at December 31, 1996 and
September 30, 1997 was $26,500 and $0, respectively.
12
<PAGE> 13
RISK FACTORS
Prospective investors should carefully consider the following factors
before investing in any of the securities issued by the Company or its
subsidiary, Chancellor Media Corporation of Los Angeles.
SUBSTANTIAL LEVERAGE; HISTORY OF NET LOSSES
The Company has consolidated indebtedness that is substantial in relation
to its stockholders' equity. The Company is subject to the terms of the Senior
Credit Facility, the indentures (the "Indentures") governing the Company's
9 3/8% Senior Subordinated Notes due 2004 (the "9 3/8% Notes"), 8 3/4% Senior
Subordinated Notes due 2007 (the "8 3/4% Notes"), 10 1/2% Senior Subordinated
Notes due 2007 (the "10 1/2% Notes"), and the 8 1/8% Notes, and the certificates
of designation governing the 12 1/4% Preferred Stock and the 12% Preferred
Stock. The Senior Credit Facility, the Indentures and such certificates of
designation limit, but do not prohibit, the incurrence of additional
indebtedness by the Company. As of September 30, 1997, the Company had
outstanding long-term indebtedness of approximately $1.86 billion and redeemable
preferred stock with an aggregate liquidation preference of $338.6 million, an
accumulated deficit of $125.8 million and stockholders' equity of $1.51 billion.
As of September 30, 1997, on a pro forma basis after giving effect to those
Completed Transactions consummated after such date, the Bonneville Option, the
SFX Exchange, the 8 1/8% Notes Offering and the Offering and the application of
the net proceeds therefrom (assuming that all of the outstanding shares of 12%
Preferred Stock and 12 1/4% Preferred Stock are repurchased by the Company), but
without giving effect to the Capitol Broadcasting Acquisition and the potential
Capstar Transaction, the Company would have had outstanding long term
indebtedness of approximately $2.45 billion, an accumulated deficit of $191.7
million and stockholders' equity of $2.08 billion. See "Summary Historical and
Pro Forma Financial Data".
The degree to which the Company is leveraged could have material
consequences to the Company and the holders of Common Stock, including, but not
limited to the following: (i) its ability to obtain additional financing in the
future for acquisitions, working capital, capital expenditures, and general
corporate or other purposes may be impaired, (ii) a substantial portion of its
cash flow will be required for debt service under the Senior Credit Facility,
the 9 3/8% Notes, the 8 3/4% Notes, the 10 1/2% Notes, and the 8 1/8% Notes,
and, as a result, will not be available for other purposes, (iii) to the extent
the Company is not successful in repurchasing the 12% Preferred Stock and the
12 1/4% Preferred Stock, commencing in February 2001, the Company will have
substantial cash dividend requirements on the 12 1/4% Preferred Stock and,
commencing in January 2002, on the 12% Preferred Stock (the Company may, but is
not required to, pay cash dividends on such securities prior to such date, and
has paid the most recent dividends on such instruments in cash), (iv) the
Company's ability to declare and pay cash dividends on the $3.00 Convertible
Preferred Stock, the 7% Convertible Preferred Stock and the Common Stock will be
limited by the terms of the Senior Credit Facility, the Indentures and the
certificates of designation governing the 12% Preferred Stock and the 12 1/4%
Preferred Stock, (v) the Company's level of indebtedness could make it more
vulnerable to economic downturns, limit its ability to withstand competitive
pressures and reduce its flexibility in responding to changing business and
economic conditions, (vi) certain of the Company's borrowings are and will
continue to be at variable rates of interest, which causes the Company to be
vulnerable to increases in interest rates and (vii) the agreements governing its
long-term debt (and, to a lesser extent, the 12 1/4% Preferred Stock and the 12%
Preferred Stock) contain numerous restrictive operating and financial covenants
with which it must comply. The failure by the Company to comply with such
covenants in such debt instruments could result in an event of default
thereunder, which could permit acceleration of the obligations under such
instruments and in some cases acceleration of obligations under other
instruments that contain cross-default or cross-acceleration provisions.
The ability of the Company to pay cash dividends on the $3.00 Convertible
Preferred Stock, the 7% Convertible Preferred Stock and the Common Stock and to
satisfy its obligations under the Senior Credit Facility, the Indentures and the
certificates of designation governing the 12 1/4% Preferred Stock and the 12%
Preferred Stock will depend upon the Company's future operating performance.
Such operating performance will be affected by prevailing economic conditions
and financial, business and other factors, certain of which are beyond the
Company's control. The Company anticipates that its operating cash flow,
together with borrowings under the Senior Credit Facility, will be sufficient to
meet its operating expenses and to service its
13
<PAGE> 14
debt and preferred stock dividend requirements as they become due. However, if
the Company is unable to service its indebtedness, whether upon acceleration of
such indebtedness or in the ordinary course of business, it will be forced to
pursue one or more alternative strategies such as selling assets, restructuring
or refinancing its indebtedness, or seeking additional equity capital. There can
be no assurance that any of these strategies could be effected on satisfactory
terms, if at all, or that the approval of the Federal Communications Commission
(the "FCC") could be obtained on a timely basis, or at all, for the transfer of
any of the stations' licenses in connection with a proposed sale of assets.
The Company has historically experienced, on a consolidated basis, net
losses, principally as a result of significant interest charges, certain
non-recurring expenses and depreciation and amortization charges relating to the
acquisition of radio broadcasting stations. The Company's net loss attributable
to common stockholders for the years ended December 31, 1994, 1995 and 1996 and
for the nine months ended September 30, 1997 was $8.4 million, $10.7 million,
$20.0 million and $12.2 million, respectively. On a pro forma basis, after
giving effect to the Completed Transactions, the Bonneville Option, the SFX
Exchange, financing transactions undertaken by the Company and Chancellor during
1996 and 1997, and the Offering and the application of the net proceeds
therefrom (assuming that all of the outstanding shares of 12% Preferred Stock
and 12 1/4% Preferred Stock are repurchased by the Company), but without giving
effect to the Capitol Broadcasting Acquisition and the potential Capstar
Transaction, the Company's net loss attributable to common stockholders for the
year ended December 31, 1996 and the nine months ended September 30, 1997 would
have been $178.7 million and $104.0 million, respectively. The acquisition of
radio broadcasting stations and business related thereto has been and will
continue to be an important part of the Company's operating strategy, and the
Company expects that amortization charges and interest expenses relating to past
and possible future acquisitions will continue to have a significant adverse
effect on the Company's reported results.
POSSIBLE NON-CONSUMMATION OF, OR INCREASED COST OF, PROPOSED REPURCHASE OF FOR
12 1/4% PREFERRED STOCK AND 12% PREFERRED STOCK
Except under certain circumstances applicable to a portion of each issue,
neither the 12 1/4% Preferred Stock nor the 12% Preferred Stock is currently
redeemable at the option of the Company. The Company anticipates that it will
attempt to repurchase the non-redeemable portion of the 12 1/4% Preferred Stock
and the 12% Preferred Stock shortly after completion of the Offering. However,
the decision whether to sell shares of 12% Preferred Stock or 12 1/4% Preferred
Stock by the holders thereof will be entirely within the discretion of the
holders based on the price offered by the Company, the terms and conditions of
the offer and other factors deemed relevant by a holder. There can be no
assurance that the Company will be able to repurchase all shares of 12%
Preferred Stock or the 12 1/4% Preferred Stock, as to the amount of securities
of either series that may be repurchased or as to the prices at which any
repurchase will be made. In addition, the Company reserves the right not to seek
to repurchase either or both of the 12% Preferred Stock and 12 1/4% Preferred
Stock based on prevailing market prices for such preferred stock and other
factors which the Company deems relevant.
NECESSITY OF GOVERNMENTAL REVIEWS AND APPROVALS PRIOR TO CONSUMMATION OF THE
PENDING TRANSACTIONS
Approval of the FCC is required for the issuance, renewal or transfer of
radio broadcast station operating licenses. In addition, the consummation of
each of the Bonneville Option, the SFX Exchange and the Capitol Broadcasting
Acquisition is, and any future transactions undertaken by the Company (including
the potential Capstar Transaction, if the conditions precedent to its
effectiveness are satisfied) likely will be, conditioned upon the expiration or
termination of the applicable waiting period under the HSR Act. To date, (i) the
FCC has approved the SFX Exchange and such approval has become a final,
nonappealable order, (ii) the FCC has approved the transfer of two of the six
stations involved in the Bonneville Option, but such approvals have not become
final, nonappealable orders, (iii) the FCC's approval has not yet been sought
regarding the Capitol Broadcasting Acquisition and the potential Capstar
Transaction, (iv) the waiting period required under the HSR Act for the
Bonneville Option has expired or been terminated, (v) the waiting period
required under the HSR Act for SFX Exchange has not expired or been terminated
and (vi) the Company has not yet requested that the waiting period required
under the HSR Act for the Capitol Broadcasting Acquisition and the potential
Capstar Transaction expire or be terminated. See "Risk Factors -- Antitrust
Matters" below.
14
<PAGE> 15
INTEGRATION OF ACQUISITIONS; OPERATION OF KATZ AND RADIO NETWORK
As a result of the Completed Transactions, the Company holds a
significantly larger portfolio of radio stations than the Company has held in
the past. In addition, management is regularly involved in discussions with
third parties regarding potential acquisitions, and the Company may pursue an
active acquisition strategy that could result in additional expansion in the
future. As a result of the Company's acquisition strategy, the Company's
management is required to manage a substantially larger radio station group than
historically has been the case. The Company's future operations and earnings
will be largely dependent on the Company's ability to integrate the stations
recently acquired and proposed to be acquired. The Company must, among other
things, integrate management and employee personnel and combine certain
administrative procedures. There can be no assurance that the Company will
successfully integrate the stations recently acquired and proposed to be
acquired, and the failure to do so could have a material adverse effect on the
Company's results of operations and financial condition. In addition, the need
to focus management's attention on the integration of these stations may limit
the ability of the Company to successfully pursue other opportunities for a
period of time.
The acquisition strategy of the Company involves numerous other risks,
including increasing leverage and debt service requirements, the diversion of
management's attention from other business concerns and the potential loss of
key employees of acquired stations. The availability of additional acquisition
financing cannot be assured, and depending on the terms of the proposed
acquisitions and financings, could be restricted by the terms of the Senior
Credit Facility, the Indentures, the certificates of designation for the 12 1/4%
Preferred Stock and the 12% Preferred Stock, and, to a lesser extent, the
certificates of designation for the Company's 7% Convertible Preferred Stock and
$3.00 Convertible Preferred Stock. There can be no assurance that any future
acquisitions will not have a material adverse effect on the Company's financial
condition and results of operations.
With the Company's acquisition of Katz, the Company has entered into a line
of business not previously undertaken by the Company on a national basis.
Although the media representation business is related to the radio broadcasting
business and the Company's subsidiaries have experience in certain aspects of
the media representation business at the local radio station level, the Company,
through its Katz subsidiaries, must operate the business of Katz and manage a
significantly larger base of management and employee personnel performing
national media representation functions. There can be no assurance that the
Company will be able to successfully operate Katz. In addition, the need to
focus management's attention on the operation of this business may limit the
ability of the Company to successfully pursue other opportunities for a period
of time.
The Company, through The AMFM Radio Networks, is operating a new national
radio network. Although certain of the Company's radio stations have syndicated
programs created locally in the past, the Company has not previously undertaken,
at the national level, a radio network. The Company will compete with a number
of established state and national radio network operators in this regard. There
can be no assurance that the Company will be successful in operating a new
national radio network.
COMPETITIVE NATURE OF RADIO BROADCASTING AND MEDIA REPRESENTATION
The radio broadcasting industry is a highly competitive business. The
success of each of the Company's stations is dependent, to a significant degree,
upon its audience ratings and share of the overall advertising revenue within
its market. The Company's stations compete for listeners and advertising revenue
directly with other radio stations, as well as with other media, within their
respective markets. The Company also competes with other broadcasting operators
for acquisition opportunities, and prices for radio stations in major markets
have increased significantly in recent periods. To the extent that the
consolidation in the radio broadcasting industry continues, certain competitors
may emerge with larger portfolios of major market radio stations, greater
ability to deliver large audiences to advertisers and more access to capital
resources than the Company. The audience ratings and market share for the
Company are and will be subject to change and any adverse change in a particular
market could have a material and adverse effect on the revenue of their stations
located in that market. There can be no assurance that any one of the Company's
stations will be able to maintain or increase its current audience ratings or
advertising revenue market share.
15
<PAGE> 16
The radio broadcasting industry 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, direct broadcast satellite
("DBS") systems and other digital audio broadcasting formats to local and
national audiences. In addition, the FCC has auctioned spectrum for a new
satellite-delivered Digital Audio Radio Service ("DARS"). These actions may
result in the introduction of several new national or regional multi-channel and
multi-format satellite radio services with sound quality equivalent to compact
discs. Another possible competitor to traditional radio is In Band On Channel
("IBOC") digital radio. IBOC could provide multi-channel, multi-format digital
radio services in the same band width currently occupied by traditional AM and
FM radio services. The Company cannot predict at this time the effect, if any,
that any such new technologies may have on the radio broadcasting industry.
The success of the Company's Katz media representation operations depends
on Katz' ability to maintain and acquire representation contracts with radio and
television stations and cable systems, the inventory of time Katz represents and
the experience of Katz' executive management and sales personnel. The media
representation business is highly competitive, both in terms of competition to
gain client stations and to sell air time to advertisers. Katz competes not only
with other independent and network media representatives but also with direct
national advertising. Katz also competes on behalf of its clients for
advertising dollars with other media such as newspapers and magazines, outdoor
advertising, transit advertising, direct response advertising, yellow page
directories and point of sale advertising.
ANTITRUST MATTERS
As a result of the recent consolidation of ownership in the radio broadcast
industry, the DOJ has been giving closer scrutiny to acquisitions in the
industry, including certain transactions involving the Company. The consummation
of each of the Bonneville Option, the SFX Exchange and the Capitol Broadcasting
Acquisition is, and any future transactions undertaken by the Company (including
the potential Capstar Transaction, if the conditions precedent to its
effectiveness are satisfied) likely will be, subject to notification filing
requirements, applicable waiting periods and possible review by the DOJ or the
United States Federal Trade Commission (the "FTC") under the HSR Act. The DOJ
has filed suit against the Company seeking to enjoin the SFX Exchange, and there
can be no assurance as to the outcome of this litigation. DOJ review of certain
transactions has caused, and may continue to cause, delays in anticipated
consummations of certain transactions and, in some cases, may result in attempts
by DOJ to enjoin such transactions or negotiate modifications of the proposed
transactions. Such delays, injunctions and modifications could have an adverse
effect on the Company and may result in the abandonment of some otherwise
attractive transactions.
The DOJ has stated publicly that it has established certain revenue and
audience share concentration benchmarks with respect to radio station
acquisitions, above which a transaction may receive additional antitrust
scrutiny. However, to date, the DOJ has also investigated transactions that do
not meet or exceed these benchmarks and has cleared transactions that do exceed
the benchmarks. Although the Company does not believe that its acquisition
strategy as a whole will be adversely affected in any material respect by
antitrust review (including review under the HSR Act) or by additional
divestitures that the Company may have to make as a result of antitrust review,
there can be no assurance that this will be the case.
RADIO BROADCASTING INDUSTRY SUBJECT TO FEDERAL REGULATION
The radio broadcasting industry is subject to extensive regulation by the
FCC under the Communications Act of 1934, as amended (as amended by the 1996
Act, the "Communications Act"). Approval of the FCC is required for the
issuance, renewal or transfer of radio broadcast station operating licenses. See
"Risk Factors -- Necessity of Governmental Reviews and Approvals Prior to
Consummation of the Pending Transactions" above. In particular, the Company's
business is dependent upon its continuing to hold radio broadcasting licenses
from the FCC that are issued for terms of up to eight years. While in the vast
majority of cases such licenses are renewed by the FCC, there can be no
assurance that any of the stations' licenses will be renewed at their expiration
dates, or that renewals, if granted, will not include conditions or
qualifications that could adversely affect the Company's operations. In
addition, the Communications Act and FCC rules restrict alien ownership and
voting of capital stock of, and participations in the affairs of, the Company.
Moreover,
16
<PAGE> 17
laws, regulations and policies may be changed significantly over time and there
can be no assurance that such changes will not have a material adverse affect on
the business, financial condition and results of operations of the Company.
The 1996 Act, which amended the Communications Act in a number of important
respects, has created significant new opportunities for radio broadcasters, but
also has created uncertainties as to how the FCC and the courts will enforce and
interpret the 1996 Act. Although the 1996 Act eliminated the national ownership
ceiling previously applicable to radio broadcasters and also loosened
restrictions previously applicable to ownership within single markets,
significant restrictions remain on permitted levels of local ownership. In
markets with 45 or more stations, ownership is limited to eight stations, no
more than five of which can be FM or AM; in markets with 30-44 stations,
ownership is limited to seven stations, no more than four of which can be FM or
AM; in markets with 15-29 stations, ownership is limited to six stations, no
more than four of which can be FM or AM; and in markets with 14 or fewer
stations, ownership is limited to no more than 50% of the market's total and no
more than three AM or FM. Compliance with the FCC's multiple ownership rules is
expected to cause the Company and other radio broadcasters to forego acquisition
opportunities that they might otherwise wish to pursue. Compliance with these
rules by third parties may also have a significant impact on the Company as, for
example, in precluding the consummation of swap transactions that would cause
such third parties to violate multiple ownership rules.
Hicks Muse, through its ownership of a majority of outstanding capital
stock of Capstar, has an attributable interest in Capstar. In addition, four of
the Company's directors -- Thomas O. Hicks, Lawrence D. Stuart, Jr., Eric C.
Neuman and Steven Dinetz -- are directors and/or executive officers of Capstar
and therefore have attributable interests in Capstar, and Messrs. Hicks, Stuart
and Neuman are officers of Hicks Muse. Capstar presently owns or proposes to
acquire over 300 radio stations in numerous markets (mainly mid-size and small)
throughout the United States. Hicks Muse and Messrs. Hicks and Neuman also have
attributable interests in STC Broadcasting, Inc. ("STC"), which owns or proposes
to acquire six television stations in six markets. Hicks Muse and Messrs. Hicks
and Neuman also have attributable interests in an entity seeking to acquire
control of LIN Television Corporation ("LIN"), which would upon such acquisition
own eight television stations in eight markets. Under the FCC's rules, these
broadcast interests are attributed to the Company. If any such radio broadcast
interests overlap with the Company's directly-held radio broadcast interests in
the Company's markets, such interests are combined with the Company's interests
in such markets when determining compliance with the multiple ownership rules.
In addition, under the FCC's one-to-a-market rules, a party may not have
attributable interests in radio stations and a television station in the same
market unless a waiver is granted by the FCC. Although none of the television
stations owned or to be acquired through STC and LIN overlap with any of the
stations owned or to be acquired by the Company in any of its markets, there can
be no assurance that, in the future, such overlaps will not occur. As a result
of these attributable interests, the Company's future acquisition strategy may
be adversely affected. There can be no assurance that these additional
attributable interests will not have a material adverse effect on the Company's
future acquisition strategy or on the business, financial condition and results
of operations of the Company.
CONFLICT OF INTEREST
As described above (see "Risk Factors -- Radio Broadcasting Industry
Subject to Federal Regulation"), Hicks Muse and certain of the Company's
directors have interests in Capstar, which owns or proposes to acquire over 300
radio stations in a number of states, in STC, which owns or proposes to acquire
six television stations in six markets, and in an entity seeking to acquire
control of LIN, which would upon such acquisition own eight television stations
in eight markets. Hicks Muse and these directors may in the future acquire
interests in, manage or otherwise control other radio or television stations or
other entertainment and communications media.
Directors of the Company who are also directors and/or executive officers
of Capstar, STC or the entity seeking to acquire control of LIN may have
conflicts of interest with respect to matters potentially or actually involving
or affecting the Company and Capstar, STC or the entity seeking to acquire
control of LIN, such as acquisitions, operations, financings and other corporate
opportunities that may be suitable for both the Company and Capstar, STC or the
entity seeking to acquire control of LIN. To the extent that such
17
<PAGE> 18
opportunities arise, these directors may consult with their legal advisors and
make determinations with respect to such opportunities after consideration of a
number of factors, including whether such opportunities are presented to any
such director in his capacity as a director of the Company, whether such
opportunities are consistent with the Company's strategic objectives and whether
the Company will be able to undertake or benefit from such opportunities. In
addition, determinations may be made by the Company's Board of Directors, when
appropriate, by a vote of some or all of the disinterested directors only.
However, no assurances can be given that such disinterested director approval
will be sought or that any such conflicts will be resolved in favor of the
Company.
CONTROL OF THE COMPANY
After giving effect to the Offering, Thomas O. Hicks and affiliates of
Hicks Muse will hold approximately 12% of the outstanding primary shares of the
Common Stock of the Company, and Scott K. Ginsburg will hold approximately 3% of
the outstanding primary shares of the Common Stock of the Company. Additionally,
three directors of the Company are also principals or executive officers of
Hicks Muse. Accordingly, Mr. Hicks and Hicks Muse will have substantial
influence over the management and policies of the Company and on all matters
submitted to a vote of the holders of Common Stock of the Company, and the
combined voting power of Mr. Hicks, Hicks Muse and Mr. Ginsburg may have the
effect of discouraging certain types of transactions involving an actual or
potential change of control of the Company.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Senior Credit Facility, the Indentures and the certificates of
designations for the Company's preferred stock each contain certain covenants
that restrict, among other things, the Company's ability to incur additional
indebtedness, incur liens, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, impose restrictions on the ability of a subsidiary to pay dividends
or make certain payments to the Company, enter into sale and leaseback
transactions, conduct business other than the ownership and operation of radio
broadcast stations and businesses related thereto, merge or consolidate with any
other person or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of the assets of the Company. The Senior Credit
Facility requires the Company to maintain specified financial ratios and to
satisfy certain financial condition tests. The Company's ability to meet those
financial ratios and financial condition tests can be affected by events beyond
its control, and there can be no assurance that the Company will meet those
tests. A breach of any of these covenants could result in a default under the
Senior Credit Facility, the Indentures and other financial documents. In the
event of an event of default under the Senior Credit Facility or the Indentures,
the lenders thereunder could elect to declare all amounts outstanding
thereunder, together with accrued interest, to be immediately due and payable.
In the case of the Senior Credit Facility, if the Company were unable to repay
those amounts, the lenders thereunder could, subject to compliance with
applicable FCC rules, proceed against the collateral granted to them to secure
that indebtedness. If indebtedness under the Senior Credit Facility were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay in full that indebtedness and the other indebtedness of the
Company.
LIMITATION ON ABILITY TO PAY DIVIDENDS
The Company is a holding company with no significant assets other than the
common stock of Chancellor Mezzanine Holdings Corporation, which is also a
holding company that owns, directly and indirectly, all of the outstanding
common stock of CMCLA. Consequently, the Company is ultimately dependent on
dividends and other funds from CMCLA to meet its obligations, including with
respect to dividends on the $3.00 Convertible Preferred Stock, the 7%
Convertible Preferred Stock and the Common Stock. The Senior Credit Facility,
the Indentures and the certificates of designation governing the 12% Preferred
Stock and the 12 1/4% Preferred Stock limit, but do not prohibit, the payment of
dividends by CMCLA.
In addition to these restrictions, under Delaware law, the Company is
permitted to pay dividends on its capital stock, including the $3.00 Convertible
Preferred Stock, the 7% Convertible Preferred Stock and the Common Stock, only
out of its surplus or, in the event that it has no surplus, out of its net
profits for the year in which a dividend is declared or for the immediately
preceding fiscal year. Surplus is defined as the excess of a company's total
assets over the sum of its total liabilities plus the par value of its
outstanding capital stock. In
18
<PAGE> 19
order to pay dividends in cash, the Company must have surplus or net profits
equal to the full amount of the cash dividend at the time such dividend is
declared. In determining the Company's ability to pay dividends, Delaware law
permits the board of directors of the Company to revalue the Company's assets
and liabilities from time to time to their fair market values in order to create
surplus. The Company cannot predict what the value of its assets or the amount
of its liabilities will be in the future and, accordingly, there can be no
assurance that the Company will be able to pay dividends on the $3.00
Convertible Preferred Stock, the 7% Convertible Preferred Stock or the Common
Stock. The Company intends to retain future earnings for use in its business and
does not anticipate paying any cash dividends on shares of its Common Stock in
the foreseeable future.
DEPENDENCE ON KEY PERSONNEL
The Company's business is dependent upon the performance of certain key
individuals, including Thomas O. Hicks, the Chairman of the Company; Scott K.
Ginsburg, the President and Chief Executive Officer of the Company; James de
Castro, the Chief Operating Officer of the Company; and Matthew E. Devine, the
Chief Financial Officer of the Company. The loss of the services of Mr. Hicks,
Mr. Ginsburg, Mr. de Castro or Mr. Devine could have a material and adverse
effect on the Company.
UNCERTAINTY AS TO MARKET PRICE OF THE COMMON STOCK
Because the market price of the Common Stock is subject to fluctuation, the
market value of the shares of the Common Stock may increase or decrease prior to
and following the consummation of the Offering. There can be no assurance that
at or after the consummation of the Offering the shares of the Common Stock will
trade at the prices at which such shares have traded in the past. The prices at
which the Common Stock trades after the consummation of the Offering may be
influenced by many factors, including the liquidity of the Common Stock,
investor perceptions of the Company and the radio broadcasting industry, the
operating results of the Company and its subsidiaries, the Company's dividend
policy, possible future changes in regulation of the radio broadcasting industry
and general economic and market conditions.
DILUTION
Persons purchasing shares of Common Stock at the offering price will incur
immediate dilution in net tangible book value per share of Common Stock. As of
September 30, 1997, after giving effect to the Completed Transactions, the
Bonneville Option, the SFX Exchange and the 8 1/8% Notes Offering, but without
giving effect to the Capitol Broadcasting Acquisition and the potential Capstar
Transaction, the Company would have had an adjusted consolidated negative net
tangible book value of approximately $3.10 billion, or $26.00 per share of
Common Stock. "Net Tangible Book Value" per share 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 (excluding
for this purpose shares of Common Stock issuable upon exercise of outstanding
employee and director stock options and shares of Common Stock issuable upon
conversion of the Company's convertible preferred stock). After giving effect to
the Completed Transactions, the Bonneville Option, the SFX Exchange, the 8 1/8%
Notes Offering and the sale of 16,000,000 shares of Common Stock offered hereby
at an assumed public offering price of $41.25 per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses, but without giving effect to the Capitol Broadcasting Acquisition and
the potential Capstar Transaction, the Company's adjusted consolidated negative
net tangible book value at September 30, 1997, would have been approximately
$2.53 billion, or $18.70 per share of Common Stock. This represents an immediate
increase in net tangible book value of $7.30 per share to existing stockholders
and an immediate dilution of $59.95 per share to new investors purchasing shares
in this Offering. "Dilution" per share represents the difference between the
price per share to be paid by the new investors and the pro forma consolidated
negative net tangible book value per share at September 30, 1997.
19
<PAGE> 20
FORWARD-LOOKING STATEMENTS
This Current Report on Form 8-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In addition,
when used herein, the words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others: substantial leverage and the history of net
losses; the necessity of governmental approvals for certain pending
transactions; certain risks associated with the integration of acquisitions and
operation of related businesses; competition; government regulation; conflicts
of interest; general economic and business conditions; dependence on key
personnel; terms of the Company's indebtedness; limitations on the Company's
ability to pay dividends; and other factors included herein. These
forward-looking statements speak only as of the date hereof. The Company
expressly disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained herein to reflect any
change in the Company's expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.
20
<PAGE> 21
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits.
7(c) Exhibits
--------
* 2.43 Letter Agreement, dated February 20, 1998, between
Chancellor Media Corporation of Los Angeles and Capstar
Broadcasting Corporation.
- ---------------------------
* Filed herewith.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, each of the registrants has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
Chancellor Media Corporation Chancellor Media Corporation
of Los Angeles
By: /s/ Matthew E. Devine By: /s/ Matthew E. Devine
----------------------- -----------------------------
Matthew E. Devine Matthew E. Devine
Chief Financial Officer Chief Financial Officer
Date: February 27, 1998
22
<PAGE> 23
EXHIBIT INDEX
* 2.43 Letter Agreement, dated February 20, 1998, between
Chancellor Media Corporation of Los Angeles and Capstar
Broadcasting Corporation.
- ---------------------------
* Filed herewith.
<PAGE> 1
EXHIBIT 2.43
[CHANCELLOR MEDIA CORPORATION OF LOS ANGELES LETTERHEAD]
February 20, 1998
R. Steven Hicks,
President and Chief Executive Officer
Capstar Broadcasting Corporation
600 Congress Avenue, Suite 1400
Austin, Texas 78705
re: Chancellor / Capstar Transaction
Dear Steve:
This letter (the "Letter Agreement"), when executed by both parties below,
will set forth the essential terms and conditions of our agreement regarding a
transaction between Chancellor Media Corporation of Los Angeles ("Chancellor")
and Capstar Broadcasting Corporation ("Capstar") (the "Transaction"). The
Transaction contemplates a series of purchases, sales, exchanges and
understandings to be effected over a period of time consisting of the following:
1. Exchange of SFX Assets. Following the closure of the merger between SFX
Broadcasting, Inc. ("SFX") and an affiliate of Capstar (the "Capstar-SFX
Merger"), Capstar (which, following the closing of the Capstar-SFX Merger, shall
also mean SFX and its affiliates) and Chancellor will complete a series of asset
exchanges and/or purchases in which Capstar will exchange the following
properties for broadcast properties to be acquired or paid for by Chancellor
over a period of up to thirty-six (36) months (the "Exchange Period") (provided
that, if Chancellor is determined to be a "related party" (as such term is
defined in Section 1031(f) of the Internal Revenue Code) of either Capstar or
SFX, Chancellor and Capstar agree to hold any SFX Station and Exchange Station,
respectively, for the full, two-year period required by the Code to maintain the
qualification of the transaction as a like-kind exchange, and such holding
period may extend the Exchange Period as necessary):
KBFB-FM Dallas
KTXQ-FM Dallas
<PAGE> 2
R. Steven Hicks
February 20, 1998
Page
KKRW-FM Houston
KODA-FM Houston
KQUE-AM Houston
KPLN-FM San Diego
KYXY-FM San Diego
WDVE-FM Pittsburgh
WJJJ-FM Pittsburgh
WXDX-FM Pittsburgh
WVTY-FM Pittsburgh
These stations (together, the "SFX Stations") are deemed to have an aggregate
fair market value of $637.5 million. A fair market valuation as to each of the
SFX Stations (the "Station Valuations") is set forth on Schedule A to this
Letter Agreement. The SFX Stations shall be exchanged for (i) radio stations in
Jacksonville and Austin, pursuant to transactions described more specifically in
this letter, and (ii) other radio stations to be identified by Capstar and
acquired or paid for by Chancellor from time to time during the Exchange Period
(all such stations contemplated by (i) and (ii) above, the "Exchange Stations"),
in accordance with the following procedures:
(a) Capstar will identify one or more potential Exchange Stations, at
its sole discretion, during the Exchange Period, to be acquired by Capstar
pursuant to an asset purchase agreement or, as permitted below, to be acquired
by Chancellor pursuant to a stock purchase agreement (an "Exchange Station
Agreement").
(1) If Capstar elects to acquire an Exchange Station pursuant to
an Exchange Station Agreement that is an asset purchase agreement, (i) Capstar
shall negotiate an Exchange Station Agreement with the owner of such Exchange
Station on such terms and conditions as are acceptable to Capstar, (ii)
Chancellor and Capstar shall simultaneously execute Asset Purchase Agreement(s)
(herein so called) acceptable to both Chancellor and Capstar pursuant to which
Chancellor will acquire SFX Station(s), to be identified by Chancellor in its
sole discretion, whose Station Valuation(s) most closely approximate the cash
purchase price (without regard to assumed debt) of the Exchange Station(s), in
exchange for cash in an aggregate amount equal to the fair market value of such
SFX Station(s); (iii) Capstar shall pay any escrow or deposit obligations for
all Exchange Station Agreements; (iv) Capstar shall assign its contractual
rights under the Asset Purchase Agreement(s) to a QI (as defined below) and
Chancellor shall transfer the cash consideration to be paid under such Asset
Purchase Agreement(s) to the QI; and (v) thereafter, Capstar shall assign its
contractual rights under the
<PAGE> 3
R. Steven Hicks
February 20, 1998
Page 3
Exchange Station Agreement to the QI who will transfer cash to the owner of the
Exchange Station(s) in return for the transfer of the Exchange Station(s) to
Capstar.
(2) If Capstar elects to have Chancellor acquire an Exchange Station
pursuant to an Exchange Station Agreement that is a stock purchase agreement,
(i) Capstar shall negotiate an Exchange Station Agreement with the owner of such
Exchange Station, on Chancellor's behalf, on such terms and conditions as are
acceptable to Capstar; (ii) Chancellor and Capstar shall simultaneously execute
Asset Exchange Agreement(s) (herein so called) acceptable to both Chancellor and
Capstar pursuant to which Chancellor and Capstar will exchange the Exchange
Station being acquired pursuant to an Exchange Station Agreement and, subject
to (vi) below, all other assets and liabilities of the company purchased by
Chancellor pursuant to the Exchange Station Agreement for the SFX Station(s), to
be identified by Chancellor in its sole discretion, whose Station Valuation(s)
most closely approximate that of the Exchange Stations (i.e., the cash purchase
price to be paid for the stock of the owner of the Exchange Stations after
making appropriate adjustments for working capital); (iii) Capstar shall pay any
escrow or deposit obligations for all Exchange Station Agreements; (iv)
Chancellor shall bear no residual liability or obligation arising from the
breach or failure to perform by the seller under the Exchange Station Agreement;
(v) in each such case, the Asset Exchange Agreement(s) shall provide that, if
the Asset Exchange Agreement is not consummated for any reason other than due to
breach thereof by Chancellor, Capstar will acquire the stock of the Exchange
Station owner for an amount equal to the sum of (x) the purchase price paid by
Chancellor for such stock, (y) Chancellor's transactional costs, and (z) any
capital expenses approved by Capstar and incurred by Chancellor during its
ownership of such stock; and (vi) in each such case, the Asset Exchange
Agreement(s) shall provide that the net working capital of the company being
acquired pursuant to the Exchange Station Agreements that are stock purchase
agreements will be separately transferred to Capstar (if such net working
capital is a positive amount, Capstar shall pay to Chancellor such amount, and
if such net working capital is a negative amount, Chancellor shall pay to
Capstar such amount). In negotiating such Exchange Station Agreements that are
stock purchase agreements, each Exchange Station Agreement must provide that the
seller of the Exchange Station(s) will pay off all debt (other than current
liabilities) of the company being acquired under the Exchange Station Agreement
at or prior to the closing of such Exchange Station Agreement. For two years
from the date that Chancellor acquires the stock of a company pursuant to an
Exchange Station Agreement that is a stock purchase agreement, Chancellor shall
not liquidate such company or cause such company to merge into a member of
Chancellor's consolidated group.
(3) Prior to closing each Exchange Station Agreement in which
Chancellor is the purchaser of stock, as described in Section 1(a)(2) above, if
Capstar, in its
<PAGE> 4
R. Steven Hicks
February 20, 1998
Page 4
discretion, shall have negotiated a time brokerage agreement (a "TBA") with the
seller of an Exchange Station, then Chancellor shall, upon execution of the
applicable Asset Exchange Agreement and such TBA, immediately assign the TBA to
Capstar and Chancellor shall have no further liabilities thereunder. Each Asset
Exchange Agreement will provide that, upon the acquisition of stock of the owner
of the Exchange Station by Chancellor, Capstar will operate the Exchange Station
under a TBA as soon as it is permitted to do so under law, until the closing of
such Asset Exchange Agreement, and Capstar shall pay to Chancellor an annual TBA
fee equal to ten percent (10%) of the purchase price under the Exchange Station
Agreement (i.e., the cash purchase price to be paid for the stock of the owner
of the Exchange Stations after making appropriate adjustments for working
capital), such fee to be charged and paid monthly in arrears. The TBA will
provide, to the extent possible, that the net working capital for the Exchange
Station will be transferred to Capstar at the commencement of the TBA (if such
net working capital is a positive amount, Capstar shall pay to Chancellor such
amount, and if such net working capital is a negative amount, Chancellor shall
pay to Capstar such amount). All revenues and expenses from station operations
during such TBA period shall belong to Capstar, except for any expenses required
by FCC rules and policies to be retained by the licensee. The TBA between
Chancellor and Capstar shall provide for the reimbursement of any expenses
required by the FCC rules and policies to be retained by the licensee and such
capital expenditures for the Exchange Station as Capstar shall approve (it being
understood that Chancellor shall not make any capital expenditures other than
those required and paid for by Capstar).
(b) Chancellor and Capstar shall utilize their commercially
reasonable efforts to cause these acquisitions and exchanges to occur as
expeditiously as possible, including their full cooperation in obtaining any
necessary governmental consents and authorizations.
(c) The foregoing procedures shall be utilized over the Exchange
Period (on such timetable as Capstar shall determine) until (i) all of the SFX
Stations have been exchanged for Exchange Stations, or (ii) all of the SFX
Stations have been sold to Chancellor for cash.
(d) Capstar shall provide to Chancellor representations and
warranties with respect to the SFX Stations and Capstar's transfer to Chancellor
thereof customary in the industry, only with respect to the following matters:
(i) organization, (ii) authorization, (iii) absence of breaches in connection
with the transfer, (iv) qualifications as an FCC assignor, (v) absence of
conflicting orders, (vi) absence of litigation, (vii) taxes during the period
after the Capstar-SFX Merger and (viii) title. Chancellor shall provide no
representations and warranties with respect to the Exchange Stations except, in
the case of the Chancellor Jacksonville Stations
<PAGE> 5
R. Steven Hicks
February 20, 1998
Page 5
(as defined in Section 4 below) and Exchange Stations that are acquired by
Chancellor under Exchange Station Agreements that are stock purchase agreements,
as to absence of liens and title defects arising during Chancellor's ownership
of such stations.
(e) It is the intention of the parties that these transactions
shall be treated in a tax-efficient manner, and that, to the extent permitted by
law, the transactions will qualify as like-kind exchanges under Section 1031 of
the Internal Revenue Code. However, all risk of favorable tax treatment of the
transactions to Capstar shall be on Capstar.
(f) Exchange Station Agreements which provide for the purchase
of stock, rather than assets, (i) may not have the effect of imposing any
material tax risk on Chancellor and (ii) shall provide for the adjustment of the
Station Valuations called for in the last sentence of this Section 1(f) if the
aggregate basis which Chancellor would enjoy in the SFX Stations if it were
purchasing such stations in asset acquisitions for cash at the agreed-upon
Station Valuation prices would be decreased by more than $120 million (the
"Basket Amount"). (By accepting up to the Basket Amount in diminished basis,
Chancellor only agrees to thereby reduce the amortizable or depreciable asset
value for the SFX Stations, and not to the recognition of gain which could arise
as a result of an exchange that is not qualified under Section 1031 of the
Internal Revenue Code, and Capstar agrees to reimburse Chancellor for any such
gain that causes additional tax obligations for Chancellor.) If the Basket
Amount would be exceeded as a result of a contemplated transaction, the Station
Valuation(s) for the SFX Station(s) to be exchanged for the station(s) acquired
under the stock-based Exchange Station Agreement(s) shall be reduced in an
amount necessary to compensate Chancellor for the reduction in basis beyond the
Basket Amount, and, in such event, the parties shall proceed with such
transaction.
(g) Capstar shall also bear the risk of changes in regulatory
policy (at the Federal Communications Commission ("FCC"), Department of Justice
("DOJ") or elsewhere) which would require the early termination of the
Chancellor TBA's contemplated by Section 6 of this letter agreement. If such
policy change occurs, and termination of such TBA's is thereby required, the
parties will proceed promptly to consummate a sale for cash of all remaining SFX
Stations from Capstar to Chancellor for a price equal to the aggregate Station
Valuations for such remaining SFX Stations no later than the last permissible
date on which the TBA's are permitted to continue under the revised policy.
(h) Capstar shall, in good faith, endeavor first to contract
for asset purchases, rather than stock purchases.
(i) All other provisions of this Section 1 notwithstanding, if,
by the date that is one hundred eighty (180) days before the expiration of the
Exchange Period, any SFX
<PAGE> 6
R. Steven Hicks
February 20, 1998
Page 6
Station has not been exchanged or sold to Chancellor or has not become subject
to an Asset Exchange Agreement or Asset Purchase Agreement, Chancellor shall
have the right to immediately acquire all such remaining SFX Station(s) for a
purchase price in cash equal to the respective Station Valuation(s) for such SFX
Station(s). Accordingly, the parties will no later than such date execute an
Asset Purchase Agreement, with provisions customarily found in such contracts,
and proceed promptly to obtain any necessary government approvals and proceed as
expeditiously as possible toward the consummation of such sales, which the
parties shall use commercially reasonable efforts to cause to occur on or before
the expiration date of the Exchange Period. All Exchange Station Agreements
entered into prior to one hundred eighty days before the expiration of the
Exchange Period must provide that they terminate if not closed within one year
of the original date of such Exchange Station Agreement.
(j) All other provisions of this Section 1 notwithstanding,
Capstar shall have the right, at any time during the Exchange Period, to
designate, upon one hundred twenty (120) days prior written notice, any SFX
Station for sale to Chancellor in cash at a price equal to its Station
Valuation. Upon such designation, the parties shall promptly execute an Asset
Purchase Agreement, with provisions customarily found in such contracts, and
proceed promptly to obtain any necessary government approvals and consummate
that sale.
2. Purchase and Sale of KKPN(FM). The parties acknowledge that, due
to the attributable ownership of Hicks, Muse, Tate & Furst Incorporated ("HMTF")
in both Chancellor and Capstar, the acquisition by Capstar or Chancellor of all
of the SFX Stations which are licensed to or serve the Houston, Texas, market,
together with KKPN-FM (owned by SFX), would, when combined with Chancellor's
existing Houston properties (including KLDE-FM, which is being acquired from
Bonneville International Corporation ("Bonneville")), exceed the FCC's current
multiple ownership limits. Accordingly, Chancellor and Capstar agree that:
(a) Chancellor will undertake to identify and obtain a
purchaser for KKPN-FM, conditioned only on the closing of the Capstar-SFX Merger
and all necessary governmental approvals. (The Capstar-SFX Merger is currently
expected to close on or before May 15, 1998, and Chancellor will use its
commercially reasonable efforts to contract for the sale of KKPN-FM in a manner
that will eliminate any potential delay in the closing of the Capstar-SFX
Merger). Capstar will execute any necessary agreements to facilitate the timely
sale of KKPN-FM. The KKPN-FM license will be assigned directly from SFX to the
purchaser. Capstar shall have the right to approve the terms of any KKPN-FM sale
agreement other than the purchase price.
(b) Chancellor shall be free to obtain any sale price it can
for KKPN-FM. Fifty Million Dollars ($50,000,000) (the "KKPN Capstar Price")
shall be paid at closing by
<PAGE> 7
R. Steven Hicks
February 20, 1998
Page 7
the purchaser of KKPN-FM to Capstar, and any amount of the sale price for
KKPN-FM in excess of the KKPN Capstar Price shall be retained by Chancellor for
its own account. Chancellor may agree to sell KKPN-FM for an amount less than
the KKPN Capstar Price without the consent of Capstar, in which case the entire
sale price shall be paid to Capstar at the closing of the KKPN-FM sale, and
Chancellor will pay the shortfall between the actual sale price and the KKPN
Capstar Price to Capstar at the closing of the sale of KKPN-FM.
(c) If Chancellor has failed by March 1, 1998 to secure the
binding agreement of a qualified purchaser to acquire KKPN-FM, Capstar shall be
permitted to seek and secure such a purchaser. If Capstar has secured such a
purchaser, Chancellor will cooperate in any way reasonably necessary to
consummate the closing of the sale of KKPN-FM to that purchaser, and Chancellor
shall, at the closing of the KKPN-FM sale, pay to Capstar the difference, if
any, between the sale price and the KKPN Capstar Price, up to a maximum of ten
million dollars ($10,000,000).
3. Long Island. Chancellor and Capstar agree that the Asset Exchange
Agreement between SFX and Chancellor dated July 1, 1996 (the "Chancellor-SFX
AEA"), providing for the exchange of SFX's Long Island radio stations (WBLI-FM,
WBAB-FM, WGBB(AM) and WHFM-FM) (the "SFX Long Island Stations"), shall be
terminated at the closing of the Capstar-SFX Merger. The parties will cooperate
in seeking the prompt termination of the DOJ litigation against Chancellor in
connection with Hart-Scott-Rodino review of the Chancellor-SFX AEA (the "DOJ
Litigation"). In addition, the parties agree to the following with regard to the
SFX Long Island Stations:
(a) Chancellor shall prepare a motion to dismiss the DOJ
Litigation without prejudice, and shall use its commercially reasonable efforts
to provide such motion no later than February 23, 1998 to DOJ for its
concurrence. The motion shall provide that the DOJ Litigation should be
terminated on the ground that (1) there is no reasonable possibility that the
DOJ Litigation will be completed by September 2, 1998, (2) Chancellor is
unwilling to extend the Chancellor-SFX AEA beyond its current terms and (3)
accordingly, Chancellor has agreed to (i) terminate the Chancellor SFX-AEA as
soon as practicable, but not later than immediately following the first to occur
of (A) the closing of the Capstar-SFX Merger and (B) September 2, 1998, (ii) not
extend the Chancellor-SFX AEA beyond September 2, 1998, (iii) terminate the time
brokerage agreements regarding the SFX Long Island Stations as soon as
practicable, but not later than September 2, 1998, (iv) not acquire or operate,
or agree to acquire or operate, WBAB-FM and WBLI-FM for a period of three years
or such shorter period as Chancellor owns WALK-FM, (v) provide at least thirty
days prior notice to DOJ before acquiring or operating any other station
licensed to Suffolk County, Long Island for a period of three years or such
shorter
<PAGE> 8
R. Steven Hicks
February 20, 1998
Page 8
period as Chancellor owns WALK-FM (unless such acquisition or operation is
subject to prior Hart-Scott-Rodino notification, in which case such notification
will suffice) and (vi) dispose of WBAB-FM and WBLI-FM expeditiously in the event
that Chancellor acquires such stations for any reason. Chancellor agrees that,
if necessary to obtain concurrence by DOJ to the motion to dismiss, it shall
agree, for purposes of Sections 3(a)(3)(iv) and 3(a)(3)(v) above, to comply with
the obligations set forth in such subsections for a period of up to 10 years.
Chancellor shall use its commercially reasonable efforts to file and prosecute
the motion to dismiss upon receipt of concurrence thereto by DOJ.
(b) Capstar shall be responsible for orderly disposition of the
SFX Long Island Stations. Capstar will commence immediately to find a purchaser
for the SFX Long Island Stations. Such purchaser will be qualified for prompt
approval by both the FCC and DOJ and will not, in the reasonable opinion of
antitrust counsel to Chancellor, inhibit the prompt termination of the DOJ
Litigation. Chancellor and Capstar will cooperate in (i) the execution of any
necessary assignment or sale documents, (ii) the prosecution of any FCC
applications or DOJ approvals which are needed to facilitate the sale or other
disposition of the SFX Long Island Stations, and (iii) the consummation of the
sale or other disposition of the SFX Long Island Stations to one or more third
parties. With respect to this disposition, Chancellor shall provide to Capstar
such financial information regarding the SFX Long Island Stations in
Chancellor's possession as Capstar may reasonably request.
(c) At the closing of the sale of the SFX Long Island Stations,
Capstar shall pay to Chancellor an amount equal to the fees of Chancellor's DOJ
litigation counsel in connection with the DOJ Litigation from and after
September 5, 1997.
(d) Except with respect to the obligations under Section 3(a),
if for any reason the parties fail to consummate their obligations regarding the
SFX Long Island Stations, the remainder of the Transaction shall not be affected
thereby.
4. Jacksonville. As soon as practicable after the date hereof,
Chancellor and Capstar will enter into an Asset Exchange Agreement (the
"Jacksonville Asset Exchange Agreement") under which Chancellor will exchange
stations WAPE-FM and WFYV(FM) (the "Chancellor Jacksonville Stations"), plus
$90,250,000 in cash, for KODA(FM), Houston (the "Jacksonville Exchange"), on the
following terms:
(a) The Chancellor Jacksonville Stations shall be valued at
Fifty Three Million Dollars ($53,000,000) for purposes of the Jacksonville
Exchange.
<PAGE> 9
R. Steven Hicks
February 20, 1998
Page 9
(b) The closing of the Jacksonville Exchange shall be
conditioned upon (i) the termination (without legal challenge by any party) of
the Chancellor-SFX AEA and (ii) the prior or contemporaneous closing of the
Capstar-SFX Merger.
(c) The Jacksonville Exchange shall not be included in any
computation of the Basket Amount or any reduction of Chancellor's tax basis as
contemplated by Section 1(f).
5. Austin. Capstar's agreement dated December 22, 1997 to acquire
stations KASE-FM and KVET-AM-FM, Austin, Texas (the "Austin Stations") for a
purchase price of $90,250,000 (the "Austin Acquisition Agreement") will be
treated as an Exchange Station Agreement for purposes of Section 1 of this
letter agreement. Capstar shall assign its contractual rights under the
Jacksonville Asset Exchange Agreement to a QI and Chancellor shall transfer the
cash consideration to be paid under the Jacksonville Asset Exchange Agreement to
the QI at the closing of such transaction. Thereafter, Capstar will assign the
Austin Acquisition Agreement to the QI, who will transfer cash to the owner of
the Austin Stations in return for the transfer of the Austin Stations to
Capstar. If the closing under the Jacksonville Asset Exchange Agreement is not
consummated simultaneously with the closing of the Capstar-SFX Merger, then for
the period from the closing of the Capstar-SFX Merger until the date that the
Jacksonville Asset Exchange Agreement is consummated, Chancellor shall be paid
an amount per month equal to the difference between the cost of capital that
would be necessary for Chancellor to acquire KODA(FM) and the amount of the
monthly TBA fee that is paid by Chancellor to operate KODA(FM) under a TBA
pursuant to Section 6 of this letter agreement.
6. Time Brokerage Agreements. Chancellor will commence operations of
each and all of the SFX Stations (which are not otherwise acquired by Chancellor
on the Capstar-SFX Merger closing date) under separate time brokerage agreements
(the "TBA's") under the following conditions:
(a) No TBA shall commence until all necessary Hart-Scott-Rodino
waiting periods have expired or DOJ has otherwise approved such operations.
(b) The TBA's shall otherwise commence on the earlier of (i) the
Capstar-SFX Merger closing date, or (ii) such earlier date as may be acceptable
to Chancellor and is approved and agreed to by SFX. The commencement date for
the TBA for each SFX Station may be determined independently, and the delay of
one such TBA shall not preclude earlier commencement of any other TBA which
meets these conditions. Each TBA shall be for a ten year term, with a five year
renewal option, subject to termination upon the closing of the contemplated
exchange or purchase by Chancellor.
<PAGE> 10
R. Steven Hicks
February 20, 1998
Page 10
(c) The TBA's shall utilize form agreements for such operations
customary in the radio industry, and shall provide for the sale of substantially
all of the programming time on each such SFX Station to Chancellor. All revenues
and expenses from station operations during the TBA period shall belong to
Chancellor, except for any expenses required by FCC rules or policies to be
retained by the licensee. The TBA's shall provide for the reimbursement of any
expenses required by the FCC rules and policies to be retained by the licensee
and such capital expenditures for the SFX Station as Chancellor shall approve
(it being understood that Capstar shall not make any capital expenditures other
than those required and paid for by Chancellor).
(d) The TBA fee shall be charged and paid monthly in arrears
during the period of TBA operations, and the monthly fee shall be an amount
equal to ten percent (10%) of the Station Valuation, divided by twelve. The TBA
fee for each SFX Station so operated shall be paid to SFX during the period
prior to the Capstar-SFX Merger closing (if such TBA is permitted by SFX) and to
Capstar thereafter.
7. WFAS Sale. Capstar agrees to (i) use commercially reasonable
efforts to file all necessary notifications and obtain termination or expiration
of the waiting period required under the Hart-Scott-Rodino act with respect to
the disposition of station WFAS-FM to Westchester Radio, L.L.C. (FCC File No.
BAL-971009GE) and (ii) assuming such waiting period has expired or been
terminated, consummate such disposition on or before the date designated by
Chancellor upon 10 business days' prior notice for its closing under an Asset
Exchange Agreement between Chancellor and Bonneville (FCC File Nos.
BALH-971014GG, BALH-971014GI, BALH-971014GL, BALH-971014GH, BALH-971014GJ, and
BAL-971014GK).
8. Damages.
(a) The following shall apply to breaches of this Letter
Agreement, any Asset Exchange Agreement or any Asset Purchase Agreement:
(i) In the event that Chancellor materially breaches this
Letter Agreement, and Capstar is not also in material breach thereof, then if
the Capstar-SFX Merger is terminated as a result of Chancellor's material breach
of this Letter Agreement, Capstar is not in material breach of the Capstar-SFX
Merger Agreement (other than breaches that would not have occurred but for
Chancellor's material breach of this Letter Agreement), and SFX obtains the
liquidated damages provided for in the Capstar-SFX Merger Agreement, Capstar
shall receive from Chancellor liquidated damages in the amount of $100,000,000
(for purposes of this Section 8(a)(i), a "material breach" is limited to the
failure by Chancellor to close the Transaction at the
<PAGE> 11
R. Steven Hicks
February 20, 1998
Page 11
time of the proposed closing of the Capstar-SFX Merger, after all of the
conditions to Chancellor's obligations to close have been satisfied).
(ii) In the event that Chancellor materially breaches this
Letter Agreement, and Capstar is not also in material breach thereof, then if
Capstar is not in material breach of the Capstar-SFX Merger Agreement, and the
Capstar-SFX Merger is deferred beyond June 1, 1998 as a result of Chancellor's
material breach of this Letter Agreement but is ultimately closed, Capstar shall
receive liquidated damages in an amount equal to $35,000,000, plus an amount
equal to all amounts paid by Capstar to the SFX security holders to extend the
date of the Capstar-SFX Merger from June 1, 1998, up to a maximum of $50,000,000
(i.e., the aggregate maximum damages permissible under this clause is
$85,000,000) (for purposes of this Section 8(a)(ii), a "material breach" is
limited to the failure by Chancellor to close the Transaction at the time of the
proposed closing of the Capstar-SFX Merger, after all of the conditions to
Chancellor's obligations to close have been satisfied).
(iii) In the event that Chancellor materially breaches any Asset
Exchange Agreement or Asset Purchase Agreement after the Capstar-SFX Merger has
closed, then (A) if such material breach is "willful" (as defined in Section
8(a)(iv) below), Capstar shall have the right to terminate such Asset Exchange
Agreement or Asset Purchase Agreement and the TBA for the relevant SFX
Station(s) and the Letter Agreement and any other Definitive Agreement (as
defined in Section 14 below) and seek actual damages for such material breach,
subject to Capstar's duty to use its commercially reasonable efforts to mitigate
its damages caused by such material breach (provided, however, that Capstar
shall in all events be obligated to prepay the Note (as defined below) as set
forth in Paragraph 9 of the attached Loan Term Sheet (as defined below) as a
result of such termination, without any right of setoff for such actual damages)
and (B) if such material breach is not "willful," Capstar shall have the right
to terminate such Asset Exchange Agreement or Asset Purchase Agreement and the
TBA for the relevant SFX Station(s), but not the Letter Agreement or any other
Definitive Agreement, and seek actual damages for such material breach, subject
to Capstar's duty to use its commercially reasonable efforts to mitigate its
damages caused by such material breach, provided, that if Chancellor materially
breaches another Asset Exchange Agreement or Asset Purchase Agreement (whether
or not "willful"), Capstar shall have the right to terminate such other Asset
Exchange Agreement or Asset Purchase Agreement and the TBA for the relevant SFX
Station(s) and the Letter Agreement and any other Definitive Agreement, and seek
actual damages for such material breach, subject to Capstar's duty to use its
commercially reasonable efforts to mitigate its damages caused by such material
breach (provided, however, that Capstar will in all events be obligated to
prepay the Note as set forth in Paragraph 9 of the Loan Term Sheet as a result
of such termination, without any right of setoff for such actual damages). (For
purposes of this
<PAGE> 12
R. Steven Hicks
February 20, 1998
Page 12
Section 8(a)(iii), a "material breach" shall be the failure of Chancellor to
close any post-Capstar-SFX Merger Exchange after all of the conditions to
Chancellor's obligations to close have been satisfied, or any other material
breach under the respective Asset Exchange Agreement or Asset Purchase
Agreement; provided that, with respect to any material breach other than a
failure to close after all conditions to close have been satisfied, such
material breach is not cured by Chancellor within 30 days of written notice
provided by Capstar of such material breach).
(iv) A "willful" material breach shall mean (A) a material
breach by the breaching party, (B) written notice by the other party of such
material breach and (C) the failure to use commercially reasonable efforts to
cure such material breach within 30 days after receipt of such notice. For
purposes of this definition of "willful," no party shall claim that a material
breach is "willful" on the ground that it is incurable; provided, however, that
if the material breach has not been cured within such 30 day period, and the
non-breaching party extends the cure period, then the material breach shall be
deemed to be "willful" unless during the extended cure period the breaching
party continues to use commercially reasonable efforts to cure the breach.
(b) Other than as set forth in Section 8(a)(i) and Section 8(a)(ii),
Capstar shall not be entitled to liquidated damages from Chancellor.
(c) In the event Chancellor's material breach of this Letter
Agreement occurs prior to the closing of the Capstar-SFX Merger, Capstar shall
in good faith attempt to proceed with the closing of the Capstar-SFX Merger by
seeking to obtain acceptable alternative financing to replace the financing for
the Capstar-SFX Merger that would otherwise be realized as a result of the
Transaction.
(d) To secure a portion of the liquidated damage obligations
hereunder, Chancellor shall, upon the date that the rights and obligations under
this Letter Agreement become effective under Section 14, deposit into escrow an
irrevocable letter of credit in the amount of $35,000,000, which may be drawn
upon by Capstar after its release from such escrow. The letter of credit shall
be applied to Chancellor's liquidated damage obligations set forth above;
provided, that immediately upon the closing of the Capstar-SFX Merger, such
letter of credit shall be returned to Chancellor.
(e) If the Capstar-SFX Merger is terminated as a result of Capstar's
material breach thereunder (other than breaches that would not have occurred but
for Chancellor's material breach of this Letter Agreement), then (i) if such
material breach is "willful" (as defined in Section 8(a)(iv) above), Capstar
shall reimburse Chancellor for its out-of-pocket expenses incurred in connection
with this Transaction, up to a maximum of $5 million,
<PAGE> 13
R. Steven Hicks
February 20, 1998
Page 13
and Chancellor shall be entitled to seek its additional actual damages for such
breach and (ii) if such material breach is not "willful" (as defined in Section
8(a)(iv) above), Capstar shall reimburse Chancellor for its out-of-pocket
expenses incurred in connection with this Transaction, up to a maximum of $5
million. Nothing in this Section 8(e) is intended to limit Chancellor's rights
to seek actual damages for breaches by Capstar of this Letter Agreement or any
Definitive Agreement.
(f) If the Capstar-SFX Merger is terminated as a result of SFX's
breach thereunder, Chancellor shall, at its option, be entitled to one-third of
any recovery that Capstar is able to obtain as a result of such breach,
provided, that in exercising this option, Chancellor shall be obligated to
reimburse Capstar for one-third of Capstar's costs in seeking such recovery as
such costs are incurred.
(g) Except as set forth in Section 8(a)(iii) and Section 8(e),
nothing in this Section 8 shall be construed to prohibit Capstar or Chancellor
from seeking actual damages for breaches of this Letter Agreement or any the
Definitive Agreement that are not covered by liquidated damage provisions.
9. Houston/Pittsburgh. The parties will use their commercially reasonable
efforts to obtain DOJ approval of the Capstar-SFX Merger and the Transaction. In
this regard, the parties agree that WTAE-AM, Pittsburgh, may be required to be
divested to obtain DOJ approval of the Capstar-SFX Merger and the Transaction.
With respect to WTAE-AM, Capstar shall undertake to identify and obtain a
purchaser for such station. Capstar shall be free to obtain any sale price it
can for WTAE-AM and shall control all aspects of the sale procedure. Capstar
shall bear all risk related to the sale of WTAE-AM, including without limitation
risk of loss of the liquidated damages under the Capstar-SFX Merger Agreement.
10. Note. In connection with the Transaction, Chancellor will, upon the
occurrence of the conditions set forth in the term sheet attached hereto and by
this reference made a part hereof (the "Loan Term Sheet"), provide a $250
million aggregate principal amount loan to Capstar immediately prior to the
closing of the Capstar-SFX Merger. The obligations of Capstar under such loan
will be evidenced by a note (the "Note"), which will have the essential terms
set forth in the Loan Term Sheet.
11. Conditions. The parties' obligations under this Letter Agreement
and each Definitive Agreement are conditioned on the following: (i) receipt of
all necessary FCC approvals; and (ii) expiration or termination of any necessary
waiting periods that may be required under the Hart-Scott-Rodino Act.
Chancellor's obligations under this Letter Agreement and each Definitive
Agreement are further conditioned on the following: (w) the investment of
<PAGE> 14
R. Steven Hicks
February 20, 1998
Page 14
no less than $650 million, in equity securities of Capstar that are subordinate
to the Note, between January 1, 1998 and the closing of the Capstar-SFX Merger;
(x) at the closing of the Capstar-SFX Merger, HMTF and its affiliates shall own
more than 50% of all of the common equity of Capstar; (y) the absence on the
closing date of the Capstar-SFX Merger of any material breach of any covenant,
obligation, representation or warranty by Capstar, SFX and their subsidiaries
under any material debt instrument; and (z) the absence on the closing date of
the Capstar-SFX Merger of any material breach of any covenant, obligation,
representation or warranty by Capstar under this Letter Agreement (both before
and after giving effect to the consummation of the Transaction and the
acquisition by Chancellor of the Note). In the event of a Material Adverse
Effect (as defined in the Capstar-SFX Merger Agreement) on SFX related in any
material respect to the SFX Stations prior to the closing of the Capstar-SFX
Merger, Capstar must obtain Chancellor's consent prior to any waiver of such
Material Adverse Effect, and if Chancellor does not consent to such a waiver,
Chancellor shall have the right to terminate this Letter Agreement. The parties
agree that, (1) in the event of any reduction in purchase price under the
Capstar-SFX Merger that is negotiated as a result of such a Material Adverse
Effect on SFX related in any material respect to the SFX Stations, Chancellor
shall be entitled to share pro rata in any such reduction (i.e., to the
proportional extent that such Material Adverse Effect affects the SFX
Station(s)), to be reflected in an appropriate reduction in the Station
Valuations for the SFX Stations to be acquired by Chancellor hereunder and (2)
in the event of any other reduction in the purchase price under the Capstar-SFX
Merger that is negotiated by Capstar, Chancellor shall be entitled to share pro
rata in any such reduction, to be reflected in an appropriate reduction in the
Station Valuations for the SFX Stations to be acquired by Chancellor hereunder.
12. Governmental Approvals. As soon as reasonably practicable after
the date that the rights and obligations under this Letter Agreement become
effective under Section 14, Chancellor and Capstar will submit this Letter
Agreement to the DOJ and the FCC in order to obtain all necessary government
approvals for the Transaction.
13. Arbitration. The parties agree that any dispute arising out of or
relating to this Letter Agreement or any Definitive Agreement or the breach,
termination, validity hereof or thereof shall be finally settled by arbitration
conducted expeditiously in accordance with the Center for Public Resources Rules
for Nonadministered Arbitration of Business Disputes. The Center for Public
Resources shall appoint a neutral advisor from its National CPR Panel. The
arbitration advisor shall be governed by the United States Arbitration Act, 9
U.S.C. ss.ss. 1-16, and judgment upon the award rendered by the arbitrators may
be entered by any court having jurisdiction thereof. The place of arbitration
shall be Dallas, Texas. Notwithstanding anything to the contrary contained
herein, the provisions of this Section 13 shall not apply with regard to any
<PAGE> 15
R. Steven Hicks
February 20, 1998
Page 15
equitable remedies to which any party may be entitled under this Letter
Agreement or any Definitive Agreement.
14. Conditions Precedent. Except as set forth in Section 16, the
rights and obligations of the parties under this Letter Agreement (including,
without limitation, Chancellor's obligation to provide the letter of credit
referred to in Section 8(d) above) shall not become effective until (i) approval
of the Transaction by a majority of disinterested directors of Chancellor, (ii)
approval of the Transaction by the board of directors of Chancellor, (iii)
receipt by Chancellor of a fairness opinion from a national investment banking
firm regarding the Transaction, (iv) approval of the Transaction by the Limited
Partnership Advisory Committee of Hicks, Muse, Tate & Furst Equity Fund III,
L.P., and receipt by such committee of a fairness opinion regarding the
Transaction from a national investment banking firm, and (v) approval of the
Transaction by the board of directors of Capstar. The parties shall have
twenty-one days after the date hereof to obtain such approvals and opinions (the
"Approval Period"). Each party shall promptly provide any information reasonably
requested by the other party and deemed necessary by the other party to obtain
such approvals and opinions. The appropriate party shall notify the other in
writing immediately upon satisfaction of each condition precedent.
15. Acquisition Proposals. During the Approval Period, Capstar
shall not, nor shall it authorize or permit any officer, director, employee,
affiliate of, or any investment banker, attorney or other advisor or
representative of Capstar to, directly or indirectly, (i) solicit, initiate or
encourage the submission of any Acquisition Proposal (as defined below) or (ii)
participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or take any other action that
constitutes, or may reasonably be expected to lead to, any Acquisition Proposal.
During the Approval Period, Capstar will notify Chancellor immediately of any
inquiries or proposals with respect to any Acquisition Proposal that is received
by, or any such negotiations or discussions that are sought to be initiated
with, Capstar. An "Acquisition Proposal" means any proposal with respect to an
acquisition of all or any portion of the SFX Stations, other than the
transactions contemplated hereby.
16. Binding Nature. The parties agree that this Letter Agreement,
including the Loan Term Sheet, sets forth the essential terms and conditions
regarding the Transaction, and the parties intend by their signatures to be
bound thereby. If the rights and obligations under this Letter Agreement have
not become effective under Section 14 by the end of the Approval Period, this
Letter Agreement shall automatically terminate. Notwithstanding the provisions
of Section 14, the rights and obligations under Sections 3(a), 7, 13, 15 and 16
of this Letter Agreement shall become effective immediately upon execution of
this Letter Agreement (other than the rights and obligations contained in
Section 7(ii), which shall become effective immediately upon
<PAGE> 16
R. Steven Hicks
February 20, 1998
Page 16
satisfaction of the conditions contained in Sections 14(i), 14(ii) and 14(iii)).
The parties shall use their commercially reasonable efforts to negotiate and
finalize forms of Asset Exchange Agreement, Asset Purchase Agreement, TBA, Note,
and associated security documents (together, and upon the execution thereof, the
"Definitive Agreements"). Attached to this Letter Agreement is the form of press
release that will be jointly-issued by Chancellor and Capstar immediately after
execution. This Letter Agreement shall be governed by and construed under the
laws of the State of Texas.
<PAGE> 17
R. Steven Hicks
February 20, 1998
Page 17
Please confirm your agreement with the foregoing by executing this letter
on behalf of Capstar and returning a copy to me.
Sincerely,
CHANCELLOR MEDIA CORPORATION OF LOS ANGELES
By: /s/ Scott K. Ginsburg
---------------------------------------------------------
Scott K. Ginsburg, President and Chief Executive Officer
CAPSTAR BROADCASTING CORPORATION
By: /s/ R. Steven Hicks
---------------------------------------------------------
R. Steven Hicks, President and Chief Executive Officer
<PAGE> 18
TERM SHEET
12% SUBORDINATED SECURED NOTE
<TABLE>
<S> <C> <C>
1. Security: 12% Subordinated Secured Note (the "Note")
2. Borrower: Capstar Broadcasting Corporation ("Capstar").
3. Lender: Chancellor Media Corporation of Los Angeles
("Chancellor").
4. Interest: 12% per annum accruing from the date of issuance, payable
quarterly (subject to Capstar's Deferral Election right
and/or to adjustment, in each case, as set forth below).
Of such amount, 5/6 shall be payable in cash and 1/6
shall, at Capstar's option, either be payable in cash or
added to the principal amount of the Note. To the extent
that any amount not paid in cash is so added to the
principal amount, such amount shall bear interest at the
rate otherwise applicable to the principal amount.
Capstar represents to Chancellor that, at the closing of
the Capstar-SFX Merger, no provision contained or to be
contained in its material debt instruments shall
expressly prohibit interest payments on the Note, it
being understood that financial covenants contained in
such instruments may prevent, directly or indirectly,
such interest payments at a later time.
Upon a Deferral Election, the interest rate on the Note
for the quarterly period in which such Deferral Election
is made (i.e., the quarterly period immediately preceding
the date on which an interest payment is due (the
"Deferred Quarter")) shall increase from 12% per annum to
14% per annum (the "Increased Rate"), of which 6/7 shall
be payable in cash and 1/7 shall, at Capstar's option,
either be payable in cash or added to the principal
amount of the Note. To the extent that any amount not
paid in cash is so added to the principal amount, such
amount shall
</TABLE>
<PAGE> 19
<TABLE>
<S> <C>
bear interest at the rate otherwise applicable to the
principal amount. The Increased Rate shall apply from
the beginning of the Deferred Quarter until the payment
by Capstar of all deferred interest in cash.
If Capstar shall not have completed acquisitions during
the Exchange Period (excluding the Jacksonville Exchange
and the acquisition of the Austin Stations) (x) with an
aggregate purchase price of $100 million by the first
anniversary of the issue date of the Note, (y) with an
aggregate purchase price of $200 million by the end of
the second anniversary of the issue date of the Note, and
(z) with an aggregate purchase price of $300 million by
the end of the third anniversary of the issue date of the
Note, in each case, that are subject to the procedures
described in Section 1 of this Letter Agreement, the
Increased Rate that would apply during any Deferral
Election during each such 12 month period, if any, shall
be increased from 14% per annum to 16% per annum, of
which 7/8 shall be payable in cash and 1/8 shall, at
Capstar's option, either be payable in cash or added to
the principal amount of the Note. To the extent that any
amount not paid in cash is so added to the principal
amount, such amount shall bear interest at the rate
otherwise applicable to the principal amount.
5. Amount at Initial Aggregate commitment of $250 million.
Issuance:
6. Term of Note: Due on the 20th anniversary of issuance or earlier as
provided herein.
7. Ranking: Subordinated, on terms acceptable to Capstar's senior
lenders, to all indebtedness of Capstar. Subject to
the subordination provisions, any new securities will
not prohibit or limit payment of interest on, or
prepayment of, the Note.
</TABLE>
2
<PAGE> 20
<TABLE>
<S> <C>
8. Capstar Prepayment
Rights: Prepayable at option of Capstar any time in increments
of $1,000 principal amount plus accrued interest;
provided, that any optional prepayment by Capstar shall
not affect Chancellor's prepayment rights described in
paragraph 9 below.
Any prepayment payments made hereunder shall be applied
first to accrued interest and thereafter to principal.
9. Capstar Prepayment
Obligations: Chancellor will have the right (but not the obligation)
to require Capstar to prepay that portion of the Note
equal to 50% of the cash purchase price payable by
Chancellor under an Asset Purchase Agreement or 50% of
the cash purchase price payable by Chancellor under an
Exchange Station Agreement that is a stock purchase
agreement (i.e., the cash purchase price to be paid for
the stock of the owner of the Exchange Stations after
making appropriate adjustments for working capital), upon
the consummation of the purchase of an SFX Station under
an Asset Purchase Agreement or the purchase of stock
under an Exchange Station Agreement that is a stock
purchase agreement.
Chancellor will have the option to require Capstar to
prepay any remaining portion of the Note (including
accrued interest) if Chancellor has given notice of
prepayment on the first to occur of (i) 30 days prior to
the closing of the transfer of the final SFX Station to
Chancellor under an Asset Purchase Agreement or Asset
Exchange Agreement and (ii) Chancellor's election under
Section 1(i) of this Letter Agreement to purchase all
remaining SFX Stations for cash, in either case, such
prepayment to occur on the closing of the acquisitions
referred to in clauses (i) or (ii), as applicable, above.
</TABLE>
3
<PAGE> 21
<TABLE>
<S> <C>
In the event of a Deferral Election (as defined in
paragraph 12 below), Chancellor's right to require
Capstar to prepay a portion of the Note shall be
increased such that Chancellor may, with respect to such
Deferral Election, require Capstar to prepay that portion
of the Note equal to a percentage of the purchase price
set forth in the first paragraph of this Paragraph 9
equal to (x) 50% plus (y) the product of 50% multiplied
by a fraction, the numerator of which is the number of
days of such Deferral Election and the denominator of
which is 360.
In the event that Capstar and its subsidiaries acquire
stations during the Exchange Period that are not acquired
in compliance with the procedures set forth in Section 1
of this Letter Agreement (a "Non-Exchange Acquisition"),
Chancellor shall have the right (but not the obligation)
to require Capstar to prepay, at the closing of any such
Non-Exchange Acquisition, that portion of the Note equal
to 100% of the amount that Capstar pays in such
Non-Exchange Acquisitions. This paragraph shall not
apply to (i) transactions of Capstar and its subsidiaries
to acquire stations that are the subject of binding
agreements and pending as of the date that the rights and
obligations under this Letter Agreement become effective
under Section 14of this Letter Agreement or the
reinvestment of proceeds from the sale of radio stations
WFAS-FM, WZZN-FM, WRKI-FM, WAXB-FM, WPUT-AM, WTAE-AM,
WJDX-FM and the SFX Long Island Stations, (ii) the
reinvestment of proceeds of station sales of Capstar and
its subsidiaries that are closed prior to the date that
the rights and obligations under this Letter Agreement
become effective under Section 14 of this Letter
Agreement or that are the subject of
</TABLE>
4
<PAGE> 22
<TABLE>
<S> <C>
binding agreements and pending as of the date that the
rights and obligations under this Letter Agreement become
effective under Section 14 of this Letter Agreement, (iii)
the investment into SBI Holding Corporation or its
subsidiaries of proceeds of station sales consummated
between the date that the rights and obligations under this
Letter Agreement become effective under Section 14 of this
Letter Agreement and the date that the Capstar-SFX Merger is
consummated, (iv) other acquisitions during the Exchange
Period with a maximum aggregate purchase price of $20
million and (v) acquisitions of radio stations by SFX or its
subsidiaries from Capstar or its subsidiaries or by Capstar
or its subsidiaries from SFX or its subsidiaries.
In the event that Capstar terminates the Letter Agreement
or any Definitive Agreement pursuant to Section
8(a)(iii)(A) of the Letter Agreement, Capstar shall have
the obligation to prepay all principal and accrued
interest under the Note within three years of the date of
such termination. In the event that Capstar terminates
the Letter Agreement or any Definitive Agreement pursuant
to Section 8(a)(iii)(B) of the Letter Agreement, Capstar
shall have the obligation to prepay all principal and
accrued interest under the Note immediately upon such
termination.
Any prepayment payments made hereunder shall be applied
first to accrued interest and thereafter to principal.
Capstar represents to Chancellor that, at the closing of
the Capstar-SFX Merger, no provision contained or to be
contained in its material debt instruments shall
expressly prohibit the satisfaction of Capstar's
prepayment obligations under the Note, it being
understood that financial
</TABLE>
5
<PAGE> 23
<TABLE>
<S> <C>
covenants contained in such instruments may prevent,
directly or indirectly, the satisfaction of such prepayment
obligation at a later time.
10. Security for (i) Senior perfected pledge by Capstar of common stock of
Capstar's Capstar Broadcasting Partners, Inc. (100%), (ii) senior
Prepayment perfected pledge by Capstar of common stock of SBI Holding
Obligations; Corporation (a majority interest), and (iii) senior
Guarantee: perfected pledge of all common stock of SFX. In addition,
SBI Holding Corporation shall provide a full and
unconditional senior guarantee of Capstar's prepayment
obligations.
11. Covenants: Debt Incurrence. SBI Holding Corporation and its
subsidiaries will not be permitted, directly or indirectly,
to incur, create, assume, guarantee, acquire or become
liable for indebtedness except in compliance with a 9:1
consolidated indebtedness to trailing four-quarter EBITDA
ratio. Capstar and its subsidiaries will not be permitted,
directly or indirectly, to incur create, assume, guarantee,
acquire or become liable for indebtedness except in
compliance with a 9.5:1 consolidated indebtedness to
trailing four-quarter EBITDA ratio. In each case, the
aggregate liquidation preference of all preferred stock of
the entity and its consolidated subsidiaries shall be
counted as indebtedness. These debt incurrence calculations
will be made in a manner consistent with leverage ratio
calculations (including pro forma adjustments) under the
senior credit agreement of Capstar Radio Broadcasting
Partners, Inc. (as such agreement may be amended or amended
and restated), provided, that for purposes of calculating
leverage ratios hereunder, Capstar and SBI Holding
Corporation shall be entitled during 1998 to include in
their respective EBITDA calculations at least $10 million
and $4 million, respectively, in net revenues from The AMFM
</TABLE>
6
<PAGE> 24
<TABLE>
<S> <C>
Network (whether or not such amounts are actually received),
or such higher amount if the net revenues actually received
by Capstar and SBI Holding Corporation from The AMFM Network
exceed such amounts. Borrowings under working capital lines
of credit of Capstar and its subsidiaries and SBI Holding
Corporation and its subsidiaries shall not count as debt,
except to the extent that the aggregate borrowings under
such lines of credit exceed $50 million, provided, that,
subject to the foregoing limitations, SBI Holding
Corporation may only exclude working capital borrowings
under such lines of credit for the purposes of calculating
its leverage ratio to the extent that it or its subsidiaries
have actually borrowed such amounts.
Restricted Payments. Capstar shall be restricted from
declaring or making payments, dividends and other
distributions on all securities of Capstar that are junior
in right of payment of interest, dividends, distributions or
dissolution or liquidation payments, and from purchasing,
redeeming, retiring or otherwise acquiring any securities of
Capstar that are junior in right of payment of interest,
dividends, distributions or dissolution or liquidation
payments or warrants, rights or options to acquire such
securities, except that, subject to (i) timely payment by
Capstar of all interest on the Note when due and (ii)
compliance with all other obligations under the Note,
Capstar shall be able to make restricted payments in an
aggregate amount equal to $10 million.
12. Deferral Election; Capstar may, at its option but to the Increased Rate as
Events of Default: provided in paragraph 4 above, elect to defer the
payment of any cash interest due under the Note until
Capstar is obligated to prepay the Note or otherwise pay
the Note upon
</TABLE>
7
<PAGE> 25
<TABLE>
<S> <C>
its maturity (a "Deferral Election").
The following shall constitute Events of Default: (i) the
failure to pay the principal on the Note when such principal
becomes due and payable (at maturity, upon optional or
mandatory prepayment, or otherwise); (ii) a default in the
observance or performance of any other obligation, covenant
or agreement under the Note; and (iii) the bankruptcy,
insolvency or reorganization affecting Capstar or any of its
significant subsidiaries.
Upon an Event of Default, Chancellor shall be entitled to
any remedy available to it. Without limiting the foregoing,
upon an Event of Default, all principal and accrued but
unpaid interest on the Note shall, without any action by
Chancellor, become immediately due and payable.
</TABLE>
8
<PAGE> 26
SCHEDULE A
STATION VALUATIONS
------------------
<TABLE>
<S> <C>
- ----------------------- ------------------------------
STATION VALUATION
- ----------------------- ------------------------------
KBFB-FM $55,000,000
- ----------------------- ------------------------------
KTXQ-FM $55,000,000
- ----------------------- ------------------------------
KKRW-FM $83,250,000
- ----------------------- ------------------------------
KODA-FM $143,250,000
- ----------------------- ------------------------------
KQUE-AM $15,000,000
- ----------------------- ------------------------------
KPLN-FM $35,000,000
- ----------------------- ------------------------------
KYXY-FM $83,000,000
- ----------------------- ------------------------------
WDVE-FM $83,000,000
- ----------------------- ------------------------------
WJJJ-FM $20,000,000
- ----------------------- ------------------------------
WXDX-FM $30,000,000
- ----------------------- ------------------------------
WVTY-FM $35,000,000
- ----------------------- ------------------------------
</TABLE>
