<PAGE>
SFX BROADCASTING, INC.
----------------------
1996 ANNUAL REPORT
<PAGE>
SFX BROADCASTING, INC. LOGO
To the Stockholders of SFX Broadcasting, Inc.:
1996 was a year of extraordinary growth and accomplishment for our company. As
you know, at the beginning of the year the Telecommunications Act of 1966 was
passed, thus opening a floodgate of growth opportunities for those companies
with the resources and foresight to forge ahead in this rapidly consolidating
industry. When the year began, we owned thirteen radio stations in six markets.
Our current and pending interests now include 80 stations in 23 markets. The
plan for much of this growth was already outlined to stockholders at the
beginning of last year. At the time, the acquisition of the HMW, Liberty, Prism
and MMR properties had already been announced but not yet concluded. By the
time we had completed the last of these transactions, the merger of MMR in
November, we had already announced our next large transaction, in fact the
largest in our history, the now soon-to-be-completed Secret acquisition. These
transactions totaled over $700 million.
But the importance of our executing this strategy and assembling this very
powerful group of radio properties extends beyond a simple station count. Our
success is best credited by measuring how well we have managed this growth
process, integrating each subsequent acquisition into our existing base of
stations, augmenting and improving our portfolio through highly selective
purchases and swaps, and then raising our acquired properties to new levels of
financial performance. To begin with, our acquisition regimen has been based on
acquiring successful properties at prudent prices. With regard to our major
acquisitions in 1996, our combined purchase price for these properties was only
7.5 times their projected 1997 broadcast cash flow. Clearly, these are highly
accretive transactions in that the acquisitions were consummated at multiples of
broadcast cash flow significantly below the multiples at which our common stock
has historically traded. Another part of our purchasing discipline has been to
assemble market clusters in areas of regional strength. In 17 of our 23 markets
we operate three or more radio stations, and in the Carolinas for example, home
to two of the fastest growing markets in the country, we operate a total of 15
stations. Within our markets, we have always sought to operate highly ranked
stations. Our success by this measure is borne out by the fact in 18 of our
markets, we are ranked number one by either station or station group. But our
most important achievement has been our ability to continually increase our
broadcast cash flow by improving station performance through aggressive sales
and inventory management as well as strict cost controls. On a pro forma
same-station basis, for the four quarters in 1996, we increased broadcast cash
flow by 30% on average over the previous year; and for those stations owned for
more than one year, we achieved broadcast cash flow margins in excess of 40%.
We believe that these two accomplishments are both significant for our
industry.
Our overall financial results, which show dramatic improvements in revenues,
broadcast cash flow and margins, further demonstrate our achievements in 1996.
For the year, net revenues increased 86% to $143.1 million from $76.8 million
in 1995. Broadcast cash flow grew 95% to $50.2 million from $25.8 million.
Earnings before interest, taxes, depreciation and amortization for the year
were $43.9 million up 100% from $22.0 million in the previous year. On a pro
forma basis, assuming all stations owned and
150 East 58th Street
New York, New York 10155
212.407.9191
<PAGE>
To the Stockholders of SFX Broadcasting, Inc.
Page 2
operated as of December 31, 1996 were owned for all periods reported, net
revenues for the year would have increased approximately 10%, over 1995. In
addition, on a pro forma basis, broadcast cash flow for 1996 would have
increased approximately 26% over 1995. Also, assuming all stations, including
pending acquisitions, were owned for the entire year, broadcast cash flow would
have been approximately $100 million.
In addition to this robust growth in our core radio business, we also expended
the company's interests by our entry into the concert promotion business. We
have entered into two major transactions thus far, and we believe that they
represent not only a very important development for SFX, but also an entirely
new force in the music industry. Our first acquisition, New York based
Delsener/Slater Enterprises, was completed this past January, and in March we
entered into a letter of intent to purchase one of the largest concert
promoters in the Midwest, Sunshine Promotions, located in Indiana. The
traditional ability of SFX to broadcast recorded music over our radio stations
combined with our new delivery channel for live musical entertainment creates
many exciting promotional opportunities. Also, with the additional resources
of SFX, these two companies will be able to extend their reach into new areas
of operations. Already, Delsener/Slater was able to sign three long term
agreements with concert arenas in New Jersey, Connecticut and Upstate New York.
These new venues significantly enhance SFX' presence in the Northeast corridor,
where we already have a strong radio presence, and in turn SFX' stations bring
additional market reach and promotional opportunities to our concert business.
1996 was also a very important year for us with regard to our financing. In May
we completed two major financings selling $450 million of Senior Subordinated
Notes due 2006 and $150 million of Convertible Exchangeable Preferred Stock due
2007. Also in May and again in September, The Bank of New York increased our
credit facility, which now stands at $225 million. Our latest financing was in
January of this year, when we sold $225 million of Exchangeable PIK Preferred
Stock. We are now adequately funded to complete all announced acquisitions.
After opportunistically taking advantage of these varied capital sources and
with the dramatic increases and future predictability of the growth in our cash
flow from both our acquired properties and core holdings, we feel highly
confident that 1997 will find us ending the year with our leverage at more
attractive levels. Although 1997 may not be as aggressive a year in terms of
our acquisition pace, we believe that our recent and pending transactions
position us well to achieve record results for 1997 and 1998.
I would like to thank our employees who have done a remarkable job this past
year in bringing about this rapid and successful transformation of our company.
They have exhibited the highest degree of professionalism and dedication in
their contribution to our impressive performance. I would also like to thank
you, our stockholders for your continued support. As stockholders ourselves, we
have participated along side you in the successes of our company. We now look
forward to the year ahead with the expectation that we will continue this
successful tradition, building a company in whose prosperity we all will share.
/s/ Robert F.X. Sillerman /s/ Michael G. Ferrel
- ------------------------- ---------------------
Robert F.X. Sillerman Michael G. Ferrel
Executive Chairman President and Chief Executive Officer
<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 0-22486
-------------
SFX BROADCASTING, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 13-3649750
(State or other Juridiction (I.R.S. Employer
of Incorporation) Identification No.)
150 EAST 58TH STREET, 19TH FLOOR
NEW YORK, NEW YORK 10155
(Address of Principal Executive Offices) (Zip Code)
(212) 407-9191
(Registrant's telephone number, including area code)
-------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, $.01 PAR VALUE
CLASS B WARRANTS
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value as of the close of business on March 24, 1997 of the
voting stock held by non-affiliates of the registrant was $242,943,180.
The number of shares of the registrant's Class A Common Stock, $.01 par
value, and Class B Common Stock, $.01 par value, outstanding as of March 24,
1997 was 8,314,186 and 1,064,936, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1997 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K Annual
Report.
===============================================================================
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
SFX Broadcasting, Inc., a Delaware corporation (the "Company"), was
incorporated in Delaware in 1992 principally to acquire and operate radio
stations. Upon consummation of the Company's initial public offering in the
fall of 1993, the Company owned and operated or provided programming to nine
radio stations in six markets. During the past three years, the Company has
significantly expanded its radio station operations. The Company is currently
one of the largest radio station groups in the United States and owns or
operates, provides programming to or sells advertising on behalf of 67 radio
stations in 20 markets. The Company's radio stations are diverse in terms of
format and geographic markets and are organized into five contiguous regional
clusters designed to maximize market penetration. Upon consummation of the
Pending Acquisitions and the Pending Disposition (as defined herein), the
Company will own or operate, provide programming to or sell advertising on
behalf of 80 radio stations (61 FM and 19 AM stations) in 23 markets. In
addition, the Company will rank number one or two in 1996 combined market
revenues in 18 of its 23 markets and will own or operate two or more stations
in 22 of these markets.
The following chart sets forth certain information with respect to the
Company's stations after giving effect to the Pending Acquisitions and the
Pending Disposition:
<TABLE>
<CAPTION>
NUMBER OF
STATIONS
OPERATED
FOLLOWING
PENDING 1996 1996
NUMBER OF NUMBER OF ACQUISITIONS COMBINED COMBINED COMBINED
STATIONS STATIONS AND MARKET MARKET MARKET
MARKET CURRENTLY TO BE PENDING AUDIENCE REVENUE REVENUE
MARKET RANK (1) OPERATED(2) ACQUIRED DISPOSITION SHARE SHARE RANK
- --------------------------- -------- ----------- ----------- ---------- ---------- ---------- ----------
AM FM
---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NORTHEAST REGION
Providence, RI............. 31 3 -- 1 2 22.3% 28.0% 2
Hartford, CT............... 42 5 -- 1 4 33.1% 33.8% 2
Albany, NY................. 57 5 -- 2 3 26.1% 30.2% 1
Springfield/Northampton,
MA........................ 77 3 -- 1 2 20.3% 29.9% 1
New Haven, CT.............. 97 2(4) -- -- 2 31.9% 50.3% 1
MID-SOUTH ATLANTIC REGION
Charlotte, NC.............. 37 2 1 -- 3 24.9% 27.7% 2
Greensboro, NC............. 41 4 -- 2 2 15.6% 18.0% 4
Nashville, TN.............. 44 2 -- -- 2 25.0% 28.0% 1
Greenville-Spartanburg,
SC........................ 59 4 -- 1 3 35.4% 46.3% 1
MID-ATLANTIC REGION
Pittsburgh, PA............. 20 -- 5 1 4 27.0% 33.5% 1
Milwaukee, WI.............. 29 -- 2 1 1 8.7% 8.2% 4
Indianapolis, IN........... 36 -- 3 1 2 20.5% 26.8% 2
Raleigh-Durham, NC......... 48 4 -- -- 4 32.0% 40.6% 1
Richmond, VA............... 56 1 4 -- 5 29.6% 34.8% 2
SOUTHERN REGION
Jacksonville, FL........... 53 4 2(5) 2 4 36.8% 45.3% 1
Daytona Beach, FL.......... 93 1 -- -- 1 12.4% 33.3% 1
Jackson, MS................ 118 6 -- 2 4 36.2% 56.6% 1
Biloxi, MS................. 133 2 -- -- 2 31.8% 47.6% 1
1
<PAGE>
NUMBER OF
STATIONS
OPERATED
FOLLOWING
PENDING 1996 1996
NUMBER OF NUMBER OF ACQUISITIONS COMBINED COMBINED COMBINED
STATIONS STATIONS AND MARKET MARKET MARKET
MARKET CURRENTLY TO BE PENDING AUDIENCE REVENUE REVENUE
MARKET RANK (1) OPERATED(2) ACQUIRED DISPOSITION SHARE SHARE RANK
- --------------------------- -------- ----------- ----------- ---------- ---------- ---------- ----------
AM FM
---- ----
SOUTHWEST REGION
Dallas, TX................. 7 -- 2 -- 2 6.4% 5.7% 5
Houston, TX................ 9 4 -- 1 3 16.9% 15.6% 2
San Diego, CA.............. 14 2 -- -- 2 10.3% 11.0% 3
Tucson, AZ................. 60 4 -- 2 2 26.1% 26.2% 1
Wichita, KS................ 90 3 -- 1 2 18.6% 21.0% 3
-------- ----------- ----------- ---- ---- ---------- ---------- ----------
Total..................... 61 19 19 61
</TABLE>
- --------------
(1) Based upon BIA Publications, Inc.'s ("BIA") 1996 Market, Stations
Revenues and Ranking.
(2) Does not include seven radio stations which are currently owned by the
Company or which the Company has agreed to acquire and are to be
transferred in the Pending Disposition, the Chancellor Exchange, the
CBS Exchange and the Charlotte Exchange (each as defined herein).
(3) Ranks radio stations currently operated and radio stations anticipated
to be operated by the Company upon the consummation of the Pending
Acquisitions and the Pending Disposition against radio stations
actually owned and operated in 1996 by other market participants.
(4) Includes one station which the Company does not own or operate but
sells advertising on behalf of pursuant to a Joint Sales Agreement
("JSA").
(5) The Company currently provides programming and sells advertising on
these stations pursuant to a Local Marketing Agreement ("LMA").
OPERATING STRATEGY
Operate Highly Ranked Stations. The Company believes that operating highly
ranked stations, measured in terms of combined market audience share, provides
important advantages because such stations are regarded as an efficient means
of targeting advertising dollars at well-defined audiences. Such stations can
better capitalize on the operating leverage inherent in the radio industry
because a significant portion of the total costs of operating a radio station
are fixed and, therefore, increased revenues generally result in
disproportionately larger increases in Broadcast Cash Flow (as defined herein).
Assemble Market Clusters with Regional Concentrations. The Company has
capitalized and intends to continue to capitalize on the recently enacted
Telecommunications Act of 1996 (the "Telecom Act") by assembling and operating
a cluster of stations in each of its principal markets. The Company believes
that, by having a larger share of the total advertising inventory in a
particular market, it can offer advertisers attractive packages of advertising
options. The Company also believes that its cluster approach will allow it to
operate its stations with more highly skilled local management teams and
eliminate duplicative operating and overhead expenses. By assembling market
clusters with a regional concentration, the Company believes that it will be
able to increase revenues by targeting regionally-based advertisers and
capturing a larger share of their advertising budgets. The Company believes
that its cluster approach will allow it to compete more effectively against
other advertising mediums including newspaper and television. The Pending
Acquisitions will strengthen the Company's existing clusters of stations and
create additional clusters within regions in which it already operates.
Enhance Revenues and Control Costs. The Company seeks to maximize Broadcast
Cash Flow by employing management techniques to enhance revenues while
maintaining strict cost controls. Key elements of the Company's strategy
include:
Aggressive Sales and Inventory Management. In each of its market clusters,
the Company utilizes sophisticated sales reporting systems to monitor its
sales activity and to formulate and implement
2
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pricing strategies and inventory controls. The Company believes that having
a larger share of the total advertising inventory in a particular market
enhances its ability to identify market trends, as well as to compete on a
more equal basis with non-radio competitors which now control in excess of
90% of the advertising revenue in the Company's markets.
Targeted Programming. The Company utilizes extensive market research to
refine the programming at each of its stations and to position each of the
stations within a particular cluster to maximize the total audience share
and market revenue of the cluster as a whole. The Company's cluster approach
is designed to afford it the flexibility either to develop strong
programming formats for its market leading stations or to develop
independently successful program formats to meet the needs of particular
market conditions.
Strict Cost Controls. The Company's management imposes strict financial
reporting requirements and expense budget limitations on each of its
stations. In addition, management maintains a centralized accounting system
which allows it to monitor the performance and operations of each of its
stations. Such centralization allows the Company to achieve expense savings
in certain areas, including purchasing and administrative expenses. The
Company also achieves expense savings through the elimination of certain
duplicative costs within its markets and market clusters.
Leverage Regional Management Structure. The Company emphasizes both regional
and local management of its radio stations. In July 1996, in connection with
its rapid growth, the Company implemented a new regional management structure.
The regional operations are currently managed under the direction of five
regional vice presidents, each of whom reports directly to the Company's Chief
Executive Officer and Chief Operating Officer. Each of these regional vice
presidents is an experienced executive with over 15 years of radio broadcasting
experience. Through this regional management structure, the Company believes
that it will be able to more readily transfer the programming and sales
successes of individual stations and clusters to other stations and clusters
within the same region. The Company believes that regional management and
coordination will enable it to maximize the benefits of operating a large
number of radio stations in numerous markets while maintaining controls over
local operations. Local management is primarily responsible for building and
developing a sales team capable of converting the station's audience rankings
into revenues. The Company's general managers and sales managers are motivated
through incentive compensation based primarily upon their station's cash flow
performance. The stations to be acquired in the Pending Acquisitions are in
regions where the Company has already established a regional management
structure.
Invest in Complementary Businesses. The Company intends to selectively
pursue acquisitions of, and other business arrangements with, complementary
businesses that provide opportunities to capitalize on the Company's core
capabilities as one of the largest radio station groups in the United States.
Concert Promotion Business. Following the Company's strategy to invest in
businesses which complement its radio station operations, the Company has
become a leading promoter of music concerts and other entertainment events
through a series of completed and contracted for acquisitions of significant
concert promoters. The Company intends to concentrate its concert promotion
activities in markets where a single concert promoter owns or has long-term
leases to operate the principal venues within such market, particularly in
markets where the Company currently owns and/or operates radio stations.
Management believes that the concert promotion industry presently bears many
characteristics similar to the radio station industry prior to the recent
significant consolidations. In particular, the concert promotion business is
highly fragmented consisting principally of regional and local companies.
Management believes that significant opportunities exist for profitable
growth in the concert promotion industry. Moreover, management believes that
concert promotion businesses are generally available for acquisition at
significantly lower multiples of cash flow than radio broadcasting
businesses.
The following chart sets forth certain information with respect to certain
major venues which the Company will own, operate through long-term leases or
exclusively produce events for, following the consummation of the Pending
Acquisitions (as defined herein):
3
<PAGE>
<TABLE>
<CAPTION>
LOCATION VENUE SEATING CAPACITY
-------- ----- ----------------
<S> <C> <C>
Long Island, New York Jones Beach Marine Amphitheater 11,100
Holmdel, New Jersey PNC Bank Arts Center (formerly the
Garden State Arts Center) 10,800(1)
Hartford, Connecticut Meadows Music Theater 25,000
Rochester, New York Finger Lakes Performing Arts (2) 12,700
Indianapolis, Indiana Deer Creek Music Center (3) 21,000
Columbus, Ohio Polaris Amphitheater (3) 20,000
Indianapolis, Indiana Murat Centre (3) 2,700 seat theater and
2,200 seat ballroom
</TABLE>
- --------------
(1) The Company, in connection with Pavilion Partners, has entered into a
new 22 year lease agreement which grants Pavilion Partners the right to
expand the capacity to 17,500 prior to the start of the 1998 concert
season.
(2) The Company has entered into a letter of intent to be the exclusive
promoter of this venue.
(3) The Company will own or operate these venues upon the consummation of
the Sunshine Acquisition (as defined herein).
Investment in Music Technologies LLC. In August 1996, the Company made an
equity investment in a newly formed company, Music Technologies LLC ("Music
Technologies"). Music Technologies was formed to provide music research
services to radio broadcasting companies including the Company. In exchange for
the Company's investment, Music Technologies agreed to provide certain music
testing services to the Company at cost. Music Technologies began performing
music tests for the Company during the first quarter of 1997. As of March 1997,
Music Technologies has not provided significant services for other broadcasting
companies.
RADIO BROADCASTING
RECENTLY COMPLETED ACQUISITIONS AND DISPOSITIONS
From January 1, 1996 through the date hereof, the Company acquired or
entered into agreements to acquire 67 stations in 19 markets, net of certain
dispositions. The major acquisitions and dispositions during this period were
as follows:
The Liberty Acquisition
In July 1996, the Company acquired Liberty Broadcasting Inc. ("Liberty") for
a purchase price of approximately $239.7 million, including $10.4 million for
working capital (the "Liberty Acquisition"). Liberty was a privately-held radio
broadcasting company which owned and operated or provided programming to or
sold advertising on behalf of 14 FM and six AM radio stations (the "Liberty
Stations") operating in six markets. The Liberty Acquisition significantly
expanded the Company's presence in Providence, Rhode Island; Hartford,
Connecticut; and in Albany, New York in the Northeast Region, as well as in
Richmond, Virginia. Also in July 1996, the Company sold three of the Liberty
Stations operating in the Washington D.C./Baltimore, Maryland market for $25.0
million (the "Washington Dispositions").
The Prism Acquisition
In July 1996, the Company acquired from Prism Radio Partners L.P. ("Prism"),
a privately-held radio broadcasting company, substantially all of the assets of
eight FM and five AM radio stations located in four markets: Jacksonville,
Florida; Raleigh, North Carolina; Tucson, Arizona; and Wichita, Kansas. In
September 1996, the Company also acquired from Prism substantially all of the
assets of three radio stations operating in Louisville, Kentucky (the
"Louisville Acquisition" and collectively, the "Prism
4
<PAGE>
Acquisition"). The total purchase price for the Prism Acquisition was
approximately $105.3 million. In October 1996, the Company sold the Louisville
stations (the "Louisville Dispositions") for $18.5 million. The Prism
Acquisition significantly expanded the Company's presence in the Southern,
Mid-Atlantic and Southwest Regions.
The MMR Merger
In November 1996, the Company consummated the merger of Multi-Market Radio,
Inc. ("MMR") (the "MMR Merger"), pursuant to which it acquired MMR in exchange
for approximately 1,800,000 shares of capital stock of the Company and other
equity securities having a total value of approximately $71.5 million.
Concurrently with the consummation of the MMR Merger, the Company paid
approximately $43.0 million to satisfy outstanding indebtedness of MMR. MMR was
a publicly held radio broadcasting company which owned and operated or provided
programming to or sold advertising on behalf of 13 FM and one AM radio station
operating in seven markets. As a result of the MMR Merger, the Company
significantly expanded its presence in the following markets: Hartford and New
Haven, Connecticut and Springfield/Northampton, Massachusetts in the Northeast
Region; Daytona Beach, Florida and Biloxi, Mississippi in the Southern Region;
and Myrtle Beach, South Carolina.
Additional Acquisitions
The Company also expanded its presence in certain key markets in North
Carolina. In February 1996, the Company acquired radio stations WTDR-FM and
WLYT-FM (formerly WEZC-FM), both operating in Charlotte, North Carolina, for an
aggregate purchase price of $24.3 million (the "Charlotte Acquisition"). In
June 1996, the Company acquired substantially all of the assets of WROQ-FM,
operating in Greenville, South Carolina, for approximately $14.0 million (the
"Greenville Acquisition"). The Greenville Acquisition increased the number of
radio stations the Company owns in the Greenville-Spartanburg market to four.
Also in June 1996, the Company acquired substantially all of the assets of
WTRG-FM and WRDU-FM, both operating in Raleigh, North Carolina, and WMFR-AM,
WMAG-FM and WTCK-AM (formerly WWWB-AM), each operating in Greensboro, North
Carolina, for approximately $36.8 million (the "Raleigh-Greensboro
Acquisition"). As a result of the Raleigh-Greensboro Acquisition, the Company
owns four radio stations in each of the Raleigh-Durham market and the
Greensboro market.
In November 1996, the Company consummated the sale of KTCK-AM, operating in
Dallas, Texas, for a net consideration of $13.4 million (the "Dallas
Disposition").
In February 1997, the Company purchased WWYZ-FM, operating in Hartford,
Connecticut, for a purchase price of $25.5 million (the "Hartford
Acquisition"). The Hartford Acquisition increased the number of stations the
Company owns in the Hartford market to five.
In March 1997, the Company acquired two radio stations operating in Houston,
Texas, for a purchase price of approximately $43.0 million, exclusive of
certain additional contingent liabilities which may become payable (the "Texas
Coast Acquisition"). The Texas Coast Acquisition increased the number of
stations the Company owns in the Houston market to four.
In addition, the Company augmented its existing radio station markets by
acquiring three stations in Jackson, Mississippi (the "Jackson Acquisition"),
one station in Greensboro, North Carolina (the "Greensboro Acquisition") and
one station in Albany, New York (the "Albany Acquisition") and exchanging the
assets of a Dallas, Texas station for a station operating in Houston, Texas
(the "Houston Exchange").
PENDING ACQUISITIONS AND PENDING DISPOSITION
In October 1996, the Company entered into an agreement, which was
subsequently amended, with Secret Communications Limited Partnership, a
privately-held entity ("Secret Communications"), which, as amended, provides
for the acquisition by the Company of substantially all of the assets used in
the operation of three radio stations located in Indianapolis, Indiana and four
radio stations located in
5
<PAGE>
Pittsburgh, Pennsylvania for $255.0 million (the "Secret Acquisition"). Two of
the radio stations in Pittsburgh are not yet owned by Secret Communications but
must be acquired prior to the consummation of the acquisition, and Secret
Communications currently provides services to these stations pursuant to an
LMA. The agreement provides the Company the right to acquire the Indianapolis
stations, prior to the acquisition of the Pittsburgh stations, for $127.5
million. Management believes that the acquisition offers significant
opportunity to improve revenues at the acquired stations. In the Pittsburgh
market, management anticipates that the Company will benefit from several
recent actions taken by Secret Communications, including the adoption of a new
format at one station, completion of a facilities swap which resulted in one of
the stations moving to a stronger signal with improved coverage of the market
area and consolidation of certain selling and administrative functions.
In addition, pursuant to separate agreements, the Company has also agreed
to: (i) acquire substantially all the assets of four radio stations operating
in Richmond, Virginia, where the Company currently owns one station, for a
purchase price of $40.4 million and certain contingent payments (the "Richmond
Acquisition"); (ii) exchange one radio station operating in Washington,
D.C./Baltimore, Maryland, for two radio stations operating in Dallas, Texas
(the "CBS Exchange"); (iii) exchange four radio stations owned by the Company
and located in Long Island, New York, for two radio stations operating in
Jacksonville, Florida, where the Company currently owns four stations, and a
cash payment of $11.0 million (the "Chancellor Exchange"); (iv) exchange one
radio station operating in Pittsburgh, Pennsylvania which the Company is
acquiring from Secret Communications and $20.0 million in cash for one radio
station operating in Charlotte, North Carolina, (the "Charlotte Exchange"); (v)
sell one radio station operating in Little Rock, Arkansas, for a sale price of
$4.1 million (the "Little Rock Disposition"); and (vi) pursuant to a letter of
intent, to acquire two radio stations (operating in Pittsburgh, Pennsylvania,
and two radio stations operating in Milwaukee, Wisconsin from the Hearst
Corporation for $35.0 million (the "Hearst Acquisition"). The parties intend to
complete the Hearst Acquisition using a structure which will facilitate a like
kind exchange under Section 1031 of the Internal Revenue Code for the benefit
of the Hearst Corporation.
CONCERT PROMOTION
RECENTLY COMPLETED ACQUISITIONS
In January 1997, the Company acquired Delsener/Slater Enterprises, Ltd
("Delsener/Slater"), a concert promotion company which has long-term leases, or
is the exclusive promoter, for many of the major concert venues in the New York
City metropolitan area including the Jones Beach Marine Amphitheater and the
PNC Bank Arts Center (formerly the Garden State Arts Center), for an aggregate
consideration of approximately $24.0 million.
In March 1997, the Company consummated the acquisition of certain companies
which hold a thirty-seven year lease to operate the Meadows Music Theater, a
25,000 seat outdoor complex, located in Hartford, Connecticut, for a purchase
price of $1.0 million in cash, shares of Class A Common Stock with a value of
approximately $9.0 million, which are callable by the Company under certain
circumstances, and the assumption of approximately $14.0 million in debt.
Also in March, 1997, the Company, in partnership with Pavilion Partners,
entered into an a twenty-two year lease to operate the PNC Bank Arts Center, a
10,800 seat complex located in Holmdel, New Jersey. The lease also granted
Pavilion Partners the right to expand the capacity to 17,500 prior to the 1998
season.
PENDING ACQUISITIONS
In March, 1997, the Company entered into a letter of intent with Sunshine
Promotions, Inc. ("Sunshine"), one of the largest concert promoters in the
Midwest, to acquire substantially all of the assets of Sunshine and certain
other related companies for an aggregate purchase price of approximately $59.0
million consisting of $50.0 million in cash at closing, $2.0 million in cash
payable over five years, shares of the Company's Class A Common Stock par value
$.01 per share (the "Class A Common Stock") with
6
<PAGE>
a maximum value of approximately $4.0 million and the assumption of
approximately $3.0 million in debt. The assets to be acquired include Deer
Creek Music Center, a 21,000 seat complex located in Indianapolis, Indiana, the
Polaris Amphitheater, a 20,000 seat complex located in Columbus, Ohio and a 99
year lease to operate Murat Centre, a 2,700 seat theater and 2,200 seat
ballroom, located in Indianapolis, Indiana.
Also in March, 1997, the Company entered into a letter of intent with Finger
Lakes Performing Arts Center, a 12,700 seat complex located in Rochester, New
York, to be the exclusive promoter of concerts at the facility (the "Finger
Lakes Transaction").
The Secret Communications Acquisition, the Richmond Acquisition, the CBS
Exchange, the Chancellor Exchange, the Charlotte Exchange, the Sunshine
Acquisition, the Finger Lakes Transaction and the Hearst Acquisition are
referred to herein collectively as the "Pending Acquisitions." The Little Rock
Disposition is referred to herein as the "Pending Disposition."
The Company anticipates that it will consummate all of the Pending
Acquisitions and the Pending Disposition in the second and third quarters of
1997.
The timing and completion of the Pending Acquisitions and the Pending
Disposition are subject to a number of conditions, certain of which are beyond
the Company's control. Each of the Pending Acquisitions and the Pending
Disposition is subject to the approval of the Federal Communications Commission
(the "FCC") (other than the Sunshine Acquisition) and the Company's lenders.
Additionally, the Department of Justice, Antitrust Division (the "Antitrust
Division") has indicated its intention to review matters related to the
concentration of ownership within markets even when the ownership in question
is permitted under the provisions of the Telecom Act. Certain of the Pending
Acquisitions have been subject to inquiries from the Antitrust Division. While
the Company believes that each of the Pending Acquisitions and the Pending
Disposition does not substantially lessen competition, there can be no
assurance that the Antitrust Division will not take a contrary position, which
could delay or prevent the consummation of any or all of the Pending
Acquisitions or require the Company to restructure its ownership in the
relevant market or markets. The Company's ability to consummate the Pending
Acquisitions is also subject to the availability of funds under the Company's
$225.0 million senior credit facility (the "Credit Agreement") and other
sources of financing which the Company is currently evaluating. In addition,
the Sunshine Acquisition, the Finger Lakes Transaction, and the Hearst
Acquisition are subject to the execution of definitive acquisition agreements.
Based upon discussions with its commercial and investment bankers, management
believes that financing to complete the Pending Acquisitions will be available
on acceptable terms.
7
<PAGE>
THE STATIONS
The following table summarizes certain information with respect to the radio
stations the Company will own and operate, provide programming to or sell
advertising on behalf of, after giving effect to the Pending Acquisitions and
the Pending Disposition.
<TABLE>
<CAPTION>
1996 TOTAL
STATION RANK STATION NUMBER OF EXPIRATION
MARKET TARGET AMONG TARGET AUDIENCE REVENUE STATIONS DATE OF FCC
STATION(1) RANK(2) STATION FORMAT(2) DEMOGRAPHICS(3) DEMOGRAPHICS(2) SHARE(2) RANK(2) MARKET(2) AUTHORIZATION
- ---------- ------- ----------------- --------------- --------------- -------- ------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NORTHEAST REGION
Providence, RI 31
WSNE-FM............. Adult Contemporary ("AC") Adults 25-54 3 6.6% 6 30 4/1/98
WHJY-FM............. Album Oriented Rock Adults 18-34 1 9.9% 1 30 4/1/98
WHJJ-AM............. News/Talk Adults 35-64 7 5.8% 9 30 4/1/98
Hartford, CT 42
WHCN-FM............. Album Oriented Rock Adults 25-54 3 5.9% 8 20 4/1/98
WMRQ-FM............. Modern Rock Adults 18-34 1 7.0% 9 20 4/1/98
WPOP-AM............. News/Talk Adults 35-64 16 1.6% 12 20 4/1/98
WWYZ-FM............. Country Adults 25-54 3 10.3% 4 20 4/1/98
WKSS-FM............. Top 40 Adults 18-34 4 8.3% 5 20 4/1/98
Albany, NY 57
WGNA-FM............. Country Adults 25-54 1 14.1% 1 40 6/1/98
WGNA-AM............. Country Adults 25-54 23 0.3% 25 40 6/1/98
WPYX-FM (4)......... Album Oriented Rock Adults 18-34 1 8.3% 2 40 6/1/98
WTRY-AM............. Oldies Adults 35-64 9 1.7% 21 40 6/1/98
WTRY-FM (5)......... Oldies Adults 25-54 13 1.7% 22 40 6/1/98
Springfield/
Northampton, MA (6) 77
WHMP-FM............. Alternative Adults 18-34 7 2.6% 6 16 4/1/98
WHMP-AM ........... Talk Adults 35-64 15 2.1% 7 16 4/1/98
WPKX-FM ............ Country Adults 25-54 1 15.6% 2 16 4/1/98
New Haven, CT 97
WPLR-FM ............ Album Oriented Rock Adults 18-34 1 20.1% 1 8 4/1/98
WYBC-FM (7) ........ Urban AC Adults 18-34 4 11.8% 4 8 4/1/98
MID-SOUTH ATLANTIC
REGION
Charlotte, NC 37
WLYT-FM ............ AC Adults 25-54 3 7.5% 6 40 12/1/03
WRFX-FM (8) ........ Album Oriented Rock Adults 25-54 1 9.7% 2 40 12/1/03
WTDR-FM ............ Country Adults 25-54 4 7.7% 7 40 12/1/03
Greensboro, NC 41
WMAG-FM ............ AC Adults 25-54 4 8.8% 3 34 12/1/03
WTCK-AM (9) ........ Sports Adults 25-54 NR 0.1% 19 34 12/1/03
WMFR-AM ............ News/Talk Adults 25-54 20 1.5% 12 34 12/1/03
WHSL-FM ............ Country Adults 25-54 7 5.2% 10 34 12/1/03
Nashville, TN 44
WSIX-FM ............ Country Adults 25-54 1 17.5% 1 45 8/1/04
WRVW-FM ............ AC Adults 18-34 2 7.5% 7 45 8/1/04
Greenville-
Spartanburg, SC 59
WSSL-FM ............ Country Adults 25-54 1 14.8% 1 36 12/1/03
WMYI-FM ............ AC Adults 25-54 5 9.2% 3 36 12/1/03
WGVL-AM ............ Talk Adults 25-54 18 0.3% NR 36 12/1/03
WROQ-FM ............ Classic Rock Adults 25-54 3 11.1% 2 36 12/1/03
MID-ATLANTIC REGION
Pittsburgh, PA (10) 20
WDVE-FM (11) ....... Rock Adults 25-54 1 10.2% 2 47 8/1/98
WXDX-FM (11) ....... Alternative Adults 18-34 2 3.5% 13 47 8/1/98
WJJJ-FM (11) ....... Smooth Jazz Adults 25-54 9 4.2% 14 47 8/1/98
WVTY-FM (12) ....... AC Adults 25-54 5 4.7% 5 47 8/1/98
WTAE-AM (12) ....... Talk Adults 25-54 13 4.4% 6 47 8/1/98
Milwaukee, WI 29
WLTQ-FM (12) ....... AC Adults 25-54 10 3.4% 8 31 12/1/04
WISN-AM (12) ....... Talk Adults 25-54 8 5.3% 6 31 12/1/04
8
<PAGE>
1996 TOTAL
STATION RANK STATION NUMBER OF EXPIRATION
MARKET TARGET AMONG TARGET AUDIENCE REVENUE STATIONS DATE OF FCC
STATION(1) RANK(2) STATION FORMAT(2) DEMOGRAPHICS(3) DEMOGRAPHICS(2) SHARE(2) RANK(2) MARKET(2) AUTHORIZATION
- ---------- ------- ----------------- --------------- --------------- -------- ------- --------- -------------
Indianapolis, IN 36
WFBQ-FM (11) ....... Album Oriented Rock Adults 25-54 1 13.2% 1 30 8/1/04
WRZX-FM (11) ....... Alternative Adults 18-34 2 5.6% 7 30 8/1/04
WNDE-AM (11) ...... News/Talk Adults 25-54 14 1.7% 14 30 8/1/04
Raleigh-Durham, NC 48
WRSN-FM (13) ....... AC Adults 25-54 10 5.5% 9 33 12/1/03
WDCG-FM ............ Contemporary Hit Radio Adults 18-34 1 10.8% 2 33 12/1/03
WRDU-FM ............ Album Oriented Rock Adults 25-54 4 7.1% 3 33 12/1/03
WTRG-FM ............ Classic Hits Adults 35-64 3 8.6% 4 33 12/1/03
Richmond, VA 56
WMXB-FM ............ AC Adults 25-34 6 6.1% 5 26 10/1/03
WVGO-FM (14) ....... Oldies Adults 18-49 12 0.5% 11 26 10/1/03
WKLR-FM (14)(15) ... 70s Oldies Adults 25-54 21 3.5% 9 26 10/1/03
WKHK-FM (14) ....... Country Adults 18-54 12 14.9% 1 26 10/1/03
WBZU-FM (16) ....... Alternative Adults 18-34 3 4.6% 10 26 10/1/03
SOUTHERN REGION (17)
Jacksonville, FL 53
WKQL-FM ............ Oldies/Adult Adults 25-54 2 5.8% 7 34 2/1/04
WIVY-FM ............ Soft Rock Adults 25-54 6 5.0% 8 34 2/1/04
WOKV-AM ............ News/Talk Adults 18-49 11 6.0% 5 34 2/1/04
WBWL-AM (18) ....... Nostalgia Adults 50 & over 34 2/1/04
WFYV-FM (19) ....... Classic Rock Adults 18-49 9.8% 2 34 2/1/04
WAPE-FM (19) ....... AC Adults 18-49 2 8.6% 3 34 2/1/04
Daytona Beach, FL 93
WGNE-FM ............ Country Adults 25-54 2 12.4% 1 14 2/1/04
Jackson, MS 118
WMSI-FM ............ Country Adults 25-54 1 14.5% 1 28 6/1/04
WKTF-FM ............ Country Adults 25-54 12 3.6% 8 28 6/1/04
WJDS-AM ............ AC Adults 25-54 14 0.9% 14 28 6/1/04
WSTZ-FM ............ Album Oriented Rock Adults 25-54 6 7.4% 4 28 6/1/04
WJDX-FM ............ AC Adults 25-54 3 7.1% 3 28 6/1/04
WZRX-AM ............ Gospel Adults 25-54 10 2.1% 13 28 6/1/04
Biloxi, MS 133
WKNN-FM ............ Country Adults 25-54 1 21.7% 1 20 6/1/04
WMJY-FM ............ AC Adults 25-54 2 10.1% 2 20 6/1/04
SOUTHWEST REGION
Dallas, TX 7
KTXQ-FM (20) ....... Album Oriented Rock Adults 25-49 18 3.5% 12 49 8/1/97
KRRW-FM (20) ....... 70s Oldies Adults 25-54 17 2.9% 18 49 8/1/97
Houston, TX 9
KODA-FM ............ AC Adults 25-54 2 7.3% 3 53 8/1/97
KKRW-FM ............ 70s Oldies Adults 18-34 10 3.8% 11 53 8/1/97
KQUE-FM (21) ....... AC Adults 18-34 4 5.8% 16 53 8/1/97
KNUZ-AM (21) ....... Nostalgia Adults 35-64 NR NR NR 53 8/1/97
San Diego, CA 14
KYXY-FM ............ AC Adults 25-54 1 8.0% 2 37 12/1/97
KPLN-FM ............ Classic Rock Adults 25-54 7 2.3% 17 37 12/1/97
Tucson, AZ 60
KRQQ-FM ............ Contemporary Hit Radio Adults 18-34 3 9.4% 3 27 10/1/97
KWFM-FM ............ Oldies Adults 25-54 NR 5.9% 6 27 10/1/97
KCEE-AM ............ Nostalgia Adults 61 & over 10 4.1% 13 27 10/1/97
KNST-AM ............ News/Talk Adults 25-54 4 6.7% 5 27 10/1/97
Wichita, KS 90
KRZZ-FM ............ Classic Rock Adults 18-34 3 7.1% 6 23 6/1/97
KKRD-FM ............ Contemporary Hit Radio Adults 18-34 3 7.4% 3 23 6/1/97
KNSS-AM ............ News/Talk Adults 25-54 11 4.1% 9 23 6/1/97
</TABLE>
9
<PAGE>
- --------------
NR Not rated.
(1) Some stations are licensed to a different community located within
the market they serve.
(2) Based upon BIA's 1996 Station Share, Target Demo and Target Demo
Ranking.
(3) Due to variations that may exist within the same-station programming
format, the demographic target may be different even though the station
program format is the same.
(4) FCC records indicate that a complaint is pending at the FCC against
WPYX-FM regarding the broadcast of allegedly indecent material.
(5) WTRY-FM changed its call letters from WYSR-FM.
(6) Northampton is not separately rated by Arbitron and, accordingly, the
number of stations in the market represents the number of stations in
the combined Springfield/Northampton, Massachusetts market.
(7) The Company sells advertising on WYBC-FM pursuant to a JSA.
(8) The Company has agreed to acquire WRFX-FM, operating in Charlotte,
North Carolina, from EZ Communications in exchange for WDSY-FM,
operating in Pittsburgh, Pennsylvania, and $20.0 million in cash.
(9) WTCK-AM changed its call letters from WWWB-AM.
(10) Does not include WDSY, operating in Pittsburgh, Pennsylvania, which is
to be disposed of in the Charlotte Exchange.
(11) On October 15, 1996, the Company agreed to acquire these stations from
Secret Communications, which owns or has agreed to acquire each of the
indicated stations.
(12) In March 1997, the Company entered into a letter of intent with the
Hearst Corporation to acquire these stations.
(13) WRSN-FM changed its call letters from WZZU-FM.
(14) In August 1996, the Company agreed to acquire substantially all of
ABS Communications L.L.C. ("ABS") which owns or has agreed to acquire
each of the four indicated stations.
(15) WKLR-FM changed its call letters from WLEE-FM.
(16) On October 15, 1996, the FCC issued the licensee of WBZU-FM a notice of
apparent liability for a forfeiture in the amount of $10,000 for
apparent violation of federal regulations by airing indecent
programming.
(17) Does not include KOLL-FM, Little Rock, Arkansas, which the Company has
agreed to sell.
(18) WBWL-AM changed its call letters from WPDQ-AM.
(19) Pursuant to the Chancellor Exchange, the Company has agreed to
acquire WFYV-FM and WAPE-FM in exchange for four radio stations
currently owned by the Company (but not listed in the table) operating
in Long Island, New York. Chancellor currently provides programming to
and sells advertising on the four Long Island stations pursuant to an
LMA with the Company. The Company has been providing programming to and
selling advertising on WFYV-FM and WAPE-FM since August 1, 1996.
(20) To be acquired by the Company in the CBS Exchange.
(21) On February 6, 1996 the FCC fined the then-owner of KNUZ-AM and
KQUE-FM $18,500 for failure to engage in sufficient recruitment
efforts, and placed the two stations under two-year equal employment
opportunity reporting conditions. The first report was timely filed by
the station owner on April 1, 1996. The second and final report is due
on April 1, 1997.
<PAGE>
BROADCASTING REVENUES
The primary source of the Company's revenues is the sale of broadcasting
time for local, regional and national advertising. A station's sales staff
generates most of the station's local and regional advertising sales. To
generate national advertising sales, the Company engages an advertising
representative for each of its stations who specializes in national advertising
sales and who is compensated on a commission-only basis. Most advertising
contracts are short-term and generally run only for a few weeks.
The Company believes that radio is an efficient and cost-effective means for
advertisers to reach specific demographic groups. Radio is a precisely-targeted
medium and is highly flexible due to the short lead time between production and
broadcast and due to the relative ease of production of commercials. To ensure
that an advertising message will be heard mainly by its targeted customer base,
an advertiser can choose to advertise on a station with a format that appeals
to a specific demographic group. In addition, radio can more readily reach
people in the workplace and in their cars than television and other media.
Advertising rates charged by a radio station are based primarily on the
station's ability to attract audiences in the demographic groups targeted by
advertisers (as measured by ratings service surveys
10
<PAGE>
quantifying the number of listeners tuned to the station at various times of
the day and week) and on the supply of and demand for radio advertising time,
as well as competing forms of advertising. Rates are generally highest during
morning and afternoon drive-time hours.
Depending on the format of a particular station, there are predetermined
numbers of advertisements that are broadcast each hour. The Company endeavors
to determine the number of advertisements broadcast per hour that can maximize
available revenue dollars without jeopardizing listening levels. Although the
number of advertisements broadcast during a given time period may vary, the
total number of slots available for broadcast advertising on a particular
station generally does not vary significantly from year to year.
CONCERT PROMOTION REVENUES
Revenues from the Company's concert promotion activities are derived
primarily from the sale of tickets at events which the Company promotes. In
addition, the Company derives revenue from the operation of certain activities
which are ancillary to the concert promotion business, including the production
and marketing of concert tours, the sale of advertising signage and the
operation or rental to third parties of food, beverage, merchandising and
parking concessions. The Company's revenues in the concert promotion business
are dependent, to a large extent, on the caliber of talent which it can attract
and "book" at events which it promotes as well as the Company's ability to
predict the popularity of events prior to ticket sales.
COMPETITION
The radio broadcasting industry is highly competitive and the Company's
stations are located in highly competitive markets. The financial results of
each of the Company's stations are dependent to a significant degree upon its
audience ratings and its share of the overall advertising revenue within the
station's geographic market. Each of the Company's stations competes for
audience share and advertising revenue directly with other FM and AM radio
stations, as well as with other media, within their respective markets. Radio
stations compete for listeners primarily on the basis of program content and by
hiring high-profile talent with appeal to a particular demographic group. The
Company competes for advertising revenues principally through effective
promotion of its stations' listener demographics and audience shares, and
through the number of listeners in a target group that can be reached for the
price charged for the air-time.
The Company's audience ratings and market share are subject to change, and
any adverse change in audience rating and market share in any particular market
could have a material and adverse effect on the Company's net revenues.
Although the Company competes with other radio stations with comparable
programming formats in most of its markets, if another station in the market
were to convert its programming format to a format similar to one of the
Company's radio stations, if a new radio station were to adopt a competitive
format, or if an existing competitor were to strengthen its operations, the
Company's stations could suffer a reduction in ratings or advertising revenue
and could require increased promotional and other expenses. In addition,
certain of the Company's stations compete, and in the future other stations may
compete, with groups of stations in a market operated by a single operator. As
a result of the Telecom Act, the radio broadcasting industry has become
increasingly consolidated, resulting in the existence of radio broadcasting
companies which are significantly larger, with greater financial resources,
than the Company. Furthermore, the Telecom Act will permit other radio
broadcasting companies to enter the markets in which the Company operates or
may operate in the future. Although the Company believes that each of its
stations is able to compete effectively in its market, there can be no
assurance that any of the Company's stations will be able to maintain or
increase its current audience ratings and advertising revenue market share.
The Company's stations also compete for advertising revenues with other
media, including newspapers, broadcast television, cable television, magazines,
billboard advertising, transit advertising and direct mail advertising. By
building in each of its markets a strong base of listeners comprised of
specific demographic groups, the Company is able to attract advertisers seeking
to reach those listeners.
11
<PAGE>
Other factors that affect a station's competitive position include its
authorized power, terrain, assigned frequency, audience characteristics, local
program acceptance and the number and characteristics of other stations in the
market area. 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 or the introduction
of digital audio broadcasting. See "--Federal Regulation of Radio
Broadcasting--Proposed Changes." The radio broadcasting industry historically
has grown despite the introduction of new technologies for the delivery of
entertainment and information, such as television broadcasting, cable
television, audio tapes and compact disks. There can be no assurance, however,
that the development or introduction in the future of any new media technology
will not have an adverse effect on the radio broadcasting industry.
As a result of the Company's recent expansion into the concert promotion
industry, the Company will also face competition from other businesses in this
field. The concert promotion industry is highly competitive. The Company's
venues and other entertainment services will compete with other live
entertainment, including sports activities, as well as the electronic
entertainment industry. In the live entertainment industry, the Company will be
competing with a number of large and small entertainment promoters and venue
owners for bookings of concerts and other events. The Company's entertainment
services will compete with advertising and other sales marketing agencies.
SEASONALITY
The Company's revenues vary throughout the year. With respect to the radio
broadcasting industry, the company's first quarter generally reflects the
lowest revenues and its fourth quarter generally reflects the highest revenues
each year. The concert promotion business is generally most active in the late
spring and summer. Accordingly, the second and third fiscal quarters should
reflect a substantial portion of the revenues from the Company's concert
promotion activities.
EMPLOYEES
As of March 17, 1997, the Company had approximately 1,110 full-time and 510
part-time employees, none of whom were represented by unions. Management
believes that relations with employees are good. Following consummation of the
Pending Acquisitions and the Pending Disposition, the Company anticipates that
it will have approximately 1,380 full-time and 660 part-time employees. The
Company will be required to hire a significant number of seasonal workers to
operate its outdoor amphitheaters during the summer concert season.
The Company employs several high-profile on-air personalities with large,
loyal audiences in their respective markets. The Company endeavors to enter
into employment agreements with those on-air personalities and station general
managers whose services are deemed by the Company to be important for its
continued success. In addition, the Company has entered into long-term
employment agreements with certain of its executive officers and managers in
the concert promotion business.
FEDERAL REGULATION OF RADIO BROADCASTING
Adoption of the Telecom Act in February 1996 eliminated the national limits
and liberalized the local limits on radio station ownership by a single
company. However, the Antitrust Division has indicated that, in certain cases,
ownership of the number of radio stations permitted by the Telecom Act may
result in the undue concentration of ownership within a market or otherwise
have an anti-competitive effect. The Antitrust Division is increasingly
scrutinizing acquisitions of radio stations and the entering into of JSAs and
LMAs. In particular, the Department of Justice (the "DOJ") has indicated that a
prospective buyer of a radio station may not enter into an LMA in connection
with the acquisition of such station before expiration of the applicable
waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"). In a recent case, the DOJ has also, for the first
time, required the termination of a radio station JSA that, in the opinion of
the DOJ, would have given a radio station owner, together with its proposed
acquisition of other radio stations in the market, control over more than 60%
of the sales of radio advertising time in the market. Certain of the Pending
Acquisitions and the JSAs
12
<PAGE>
entered into by the Company have been the subject of inquiries from the
Antitrust Division. There can be no assurance that future inquiries or policy
and rule-making activities of the FCC or the Antitrust Division will not impact
the Company's operations (including existing stations or markets), expansion
strategy or its ability to realize the benefits which management had
anticipated obtaining following the adoption of the Telecom Act.
The ownership, operation and sale of radio stations are subject to the
jurisdiction of the FCC, which acts under authority granted by the
Communications Act of 1934, as amended (the "Communications Act"). Among other
things, the FCC assigns frequency bands for broadcasting; determines the
particular frequencies, locations and operating power of stations; issues,
renews, revokes and modifies station licenses; determines whether to approve
changes in ownership or control of station licenses; regulates equipment used
by stations; adopts and implements regulations and policies that directly or
indirectly affect the ownership, operation and employment practices of
stations; and has the power to impose penalties for violations of its rules or
the Communications Act.
The following is a brief summary of certain provisions of the Communications
Act and of specific FCC regulations and policies. Reference should be made to
the Communications Act, FCC rules and the public notices and rulings of the FCC
for further information concerning the nature and extent of federal regulation
of broadcast stations.
FCC Licenses. Radio stations operate pursuant to broadcasting licenses that
are granted by the FCC for maximum terms of eight years and are subject to
renewal upon application to the FCC. During certain periods when renewal
applications are pending, petitions to deny license renewals can be filed by
interested parties, including members of the public. The FCC will grant a
renewal application if it finds that the station has served the public
interest, convenience and necessity, that there have been no serious violations
by the licensee of the Communications Act or the rules and regulations of the
FCC, and that there have been no other violations by the licensee of the
Communications Act or the rules and regulations of the FCC that, when taken
together, would constitute a pattern of abuse.
Ownership Matters. The Communications Act prohibits the assignment of a
broadcast license or the transfer of control of a broadcast licensee without
the prior approval of the FCC. In determining whether to grant or renew a
broadcast license, the FCC considers a number of factors pertaining to the
licensee, including compliance with various rules limiting common ownership of
media properties, the "character" of the licensee and those persons holding
"attributable" interests therein and compliance with the Communications Act's
limitations on alien ownership.
To obtain the FCC's prior consent to transfer control of or assign a
broadcast license, appropriate applications must be filed with the FCC. If the
transfer or assignment application involves a "substantial change" in ownership
or control, the application is placed on public notice for a period of
approximately 30 days during which petitions to deny the application may be
filed by interested parties, including members of the public. If the transfer
or assignment application does not involve a "substantial change" in ownership
or control, it is a "pro forma" application. The "pro forma" application is
nevertheless subject to having informal objections filed against it. If the FCC
grants a transfer or assignment application, interested parties have
approximately 30 days from public notice of the grant to seek reconsideration
or review of that grant. The FCC normally has approximately an additional ten
days to set aside such grant on its own motion.
Pursuant to the Telecom Act, the limit on the number of radio stations one
entity may own nationally has been eliminated and the limits on the number of
radio stations one entity may own locally have been increased as follows: (i)
in a market with 45 or more commercial radio stations, an entity may own up to
eight commercial radio stations, not more than five of which are in the same
service (FM or AM), (ii) in a market with between 30 and 44 (inclusive)
commercial radio stations, an entity may own up to seven commercial radio
stations, not more than four of which are in the same service, (iii) in a
market with between 15 and 29 (inclusive) commercial radio stations, an entity
may own up to six commercial radio stations, not more than four of which are in
the same service and (iv) in a market with 14 or fewer commercial radio
stations, an entity may own up to five commercial radio stations, not more than
three of which are in the same service, except that an entity may not own more
than 50% of the stations in such
13
<PAGE>
market. FCC ownership rules continue to permit an entity to own one FM and one
AM station locally regardless of market size. For the purposes of these rules,
in general, a radio station being programmed pursuant to an LMA by an entity is
not counted as an owned station for purposes of determining the programming
entity's local ownership limits unless the entity already owns a radio station
in the market of the station with which the entity has the LMA; a radio station
whose advertising time is being sold pursuant to a JSA is currently not counted
as an owned station of the entity selling the advertising time even if that
entity owns a radio station in the market of the station with which the entity
has the JSA. As a result of the elimination of the national ownership limits
and the liberalization of the local ownership limits effected by the Telecom
Act, radio station acquisitions are subject to antitrust review by the
Antitrust Division even if approved by the FCC. The Antitrust Division has
articulated what it believes to be the relevant market for competitive analysis
in the radio broadcasting industry, but no court has determined its validity.
The Antitrust Division has also indicated an intention to review such
acquisitions carefully.
The Communications Act and FCC rules also prohibit the common ownership,
operation or control (i) of a radio broadcast station and a television
broadcast station serving the same geographic market, subject to a presumptive
waiver of such prohibition for stations located in the largest television
markets if certain conditions are satisfied (the Telecom Act directs the FCC to
extend such waiver policy to the top 50 television markets), and (ii) of a
radio broadcast station and a daily newspaper serving the same geographic
market. Under these rules, absent waivers, the Company would not be permitted
to acquire any daily newspaper or television broadcast station (other than
low-power television) in any geographic market in which it owns broadcast
properties. The FCC has pending an inquiry to determine whether it should
liberalize its waiver policy with respect to common ownership of a daily
newspaper and one or more radio stations in the same market.
The FCC generally applies its ownership limits to "attributable" interests
held by an individual, corporation, partnership or other association. In the
case of corporations holding (or through subsidiaries controlling) broadcast
licenses, the interests of officers, directors and those who, directly or
indirectly, have the right to vote 5% or more of the corporation's stock (or
10% or more of such stock in the case of insurance companies, investment
companies and bank trust departments that are passive investors) are generally
attributable except that, in general, no minority voting stock interest will be
attributable if there is a single holder of more than 50% of the outstanding
voting power of the corporation. The FCC has outstanding a notice of proposed
rulemaking that, among other things, seeks comment on whether the FCC should
modify its attribution rules by (i) restricting the availability of the single
majority stockholder exemption, (ii) attributing under certain circumstances
certain interests such as non-voting stock or debt, and (iii) attributing JSAs
under certain circumstances. The Company cannot predict the outcome of this
proceeding or how it will affect the Company's business. Furthermore, the
single majority stockholder exemption would no longer apply to the Company if
conversion of the Company's 6 1/2% Series D Cumulative Convertible Exchangeable
Preferred Stock due 2007 (the "Series D Preferred Stock") or of the 6 1/2%
Series D Exchange Notes due May 31, 1997 (the "Series D Exchange Notes") into
Class A Common Stock caused Robert F.X. Sillerman's voting power in the Company
to drop to 50% or less (an event that would require prior FCC consent). In such
event, all stockholders holding 5% or more of the total voting power in the
Company would have an attributable interest in the Company, and their other
media interests, if any, could therefore adversely affect the Company's ability
to acquire or to hold interests in radio stations in particular markets. Also,
under certain circumstances, the FCC's "cross-interest" policy may prohibit one
party from acquiring an attributable interest in one media outlet (newspaper,
radio and television station) and a substantial non-attributable economic
interest in another media outlet in the same market.
Mr. Sillerman, the Executive Chairman of the Company, has non-voting common
and preferred stock interests in Triathlon Broadcasting Company, a publicly
traded radio broadcasting company ("Triathlon"), which has attributable
interests in radio stations in small and medium markets primarily located in
the Midwest and Western United States. Heretofore, the FCC has not considered
Mr. Sillerman's interest in Triathlon to be an attributable one. However, Mr.
Sillerman's non-voting stock interests in Triathlon are convertible into voting
stock interests under certain circumstances, including the receipt of necessary
FCC
14
<PAGE>
approval. The FCC is examining, through outstanding rulemaking and adjudicatory
proceedings, whether to change the criteria for considering an interest to be
attributable. Some commentators in the rulemaking proceedings have urged that
the test of attribution should not be voting power but rather influence over
the licensee. Fisher Wayland Cooper Leader & Zaragoza LLP, FCC counsel to the
Company, has advised the Company that, to the extent that the FCC adopts this
standard, certain contractual arrangements between Sillerman Communications
Management Company ("SCMC"), a corporation controlled by Mr. Sillerman, and
Triathlon may cause Mr. Sillerman's interest in Triathlon to be attributable.
If the FCC were to determine that Mr. Sillerman's interest in Triathlon was
attributable, then Mr. Sillerman may be required to reduce the number of his
attributable interests to the then-applicable permissible limits contained in
the FCC's ownership rules.
The Communications Act prohibits the issuance of a broadcast license to, or
the holding of a broadcast license by, any corporation of which more than 20%
of the capital stock is owned of record or voted by non-U.S. citizens or their
representatives or a foreign government or a representative thereof or a
corporation organized under the laws of a foreign country ("Aliens"). The
Communications Act also authorizes the FCC, if the FCC determines that it would
be in the public interest, to prohibit the issuance of a broadcast license to,
or the holding of a broadcast license by, any corporation directly or
indirectly controlled by any other corporation of which more than 25% of the
capital stock is owned of record or voted by Aliens. The Company has been
advised that the FCC staff has interpreted this provision to require a finding
that such a grant or holding would be in the public interest before a broadcast
license may be granted to or held by any such corporation. The Company has also
been advised that the FCC staff has made such a finding only in limited
circumstances. The FCC has issued interpretations of existing law under which
these restrictions in modified form apply to other forms of business
organizations, including partnerships. As a result of these provisions, the
licenses granted to the radio station subsidiaries of the Company by the FCC
could be revoked if, among other restrictions imposed by the FCC, more than 25%
of the Company's stock were directly or indirectly owned or voted by Aliens.
The Certificate of Incorporation contains limitations on Alien ownership and
control of the Company that are substantially similar to those contained in the
Communications Act.
Local Marketing Agreements. Over the past few years, a number of radio
stations, including certain of the Company's stations, have entered into what
have commonly been referred to as LMAs. While these agreements may take varying
forms, pursuant to a typical LMA, separately owned and licensed radio stations
agree to enter into cooperative arrangements of varying sorts, subject to
compliance with the requirements of antitrust laws and with the FCC's rules and
policies. Under these types of arrangements, separately-owned stations could
agree to function cooperatively in terms of programming, advertising sales,
etc., subject to the requirement that the licensee of each station shall
maintain independent control over the programming and operations of its own
station. One typical type of LMA is a programming agreement between two
separately-owned radio stations serving a common service area, whereby the
licensee of one station programs substantial portions of the broadcast day on
the other licensee's station, subject to ultimate editorial and other controls
being exercised by the latter licensee, and sells advertising time during such
program segments. Such arrangements are an extension of the concept of "time
brokerage" agreements, under which a licensee of a station sells blocks of time
on its station to an entity or entities which program the blocks of time and
which sell their own commercial advertising announcements during the time
periods in question.
The FCC has specifically revised its cross-interest policy to make that
policy inapplicable to time brokerage arrangements. Furthermore, over the past
few years, the staff of the FCC's Mass Media Bureau has held that LMAs are not
contrary to the Communications Act, provided that the licensee of the station
which is being substantially programmed by another entity maintains complete
responsibility for and control over programming and operations of its broadcast
station and assures compliance with applicable FCC rules and policies.
The FCC's multiple ownership rules specifically permit radio station LMAs to
continue to be entered into and implemented, but provide that a station
brokering more than 15% of the time on another station serving the same market
will be considered to have an attributable ownership interest in the brokered
station for purposes of the FCC's multiple ownership rules. As a result, in a
market in which the Company
15
<PAGE>
owns a radio station, the Company would not be permitted to enter into an LMA
with another local radio station which it could not own under the local
ownership rules, unless the Company's programming constitutes 15% or less of
the other local station's programming time on a weekly basis. The FCC's rules
also prohibit a broadcast licensee from simulcasting more than 25% of its
programming on another station in the same broadcast service (i.e., AM-AM or
FM-FM) through a time brokerage or LMA arrangement where the brokered and
brokering stations which it owns or programs serve substantially the same area.
Joint Sales Agreements. Under a typical JSA, the licensee of one radio
station sells the advertising time of another licensee's radio station.
Currently, JSAs are not deemed by the FCC to be attributable. However, the FCC
has outstanding a notice of proposed rule making concerning, among other
things, whether JSAs should be considered attributable interests under certain
circumstances. The attribution of radio station JSAs has become less of a
concern from the standpoint of compliance with the FCC multiple ownership rules
as a result of the general liberalization of the ownership limits on radio
stations authorized by the Telecom Act. If JSAs become attributable interests
as a result of such rule making, the Company would be required to terminate any
JSA it might have with a radio station with which the Company could not have an
LMA.
Programming and Operation. The Communications Act requires broadcasters to
serve the "public interest." The FCC gradually has relaxed or eliminated many
of the more formalized procedures it had developed in the past to promote the
broadcast of certain type of programming responsive to the needs of a station's
community of license. A licensee continues to be required, however, to present
programming that is responsive to issues of the station's community, and to
maintain certain records demonstrating such responsiveness. Complaints from
listeners concerning a station's programming often will be considered by the
FCC when it evaluates renewal applications of a licensee, although such
complaints may be filed at any time and generally may be considered by the FCC
at any time. Stations also must follow various rules promulgated under the
Communications Act that regulate, among other things, political advertising,
sponsorship identifications, the advertisement of contests and lotteries,
obscene and indecent broadcasts, and technical operations, including limits on
radio frequency radiation. In addition, licensees must develop and implement
affirmative action programs designed to promote equal employment opportunities,
and must submit reports to the FCC with respect to these matters on an annual
basis and in connection with a renewal application.
Failure to observe these or other rules and policies can result in the
imposition of various sanctions, including monetary forfeitures, the grant of
"short" (less than the maximum) renewal terms or, for particularly egregious
violations, the denial of a license renewal application or the revocation of a
license.
Proposed Changes. The Congress and/or the FCC have under consideration, and
in the future may consider and adopt, new laws, regulations and policies
regarding a wide variety of matters that could affect, directly or indirectly,
the operation, ownership and profitability of the Company's radio broadcast
stations, result in the loss of audience share and advertising revenues for the
Company's radio broadcast stations, and affect the ability of the Company to
acquire additional radio broadcast stations or finance such acquisitions. Such
matters may include: changes to the license renewal process; spectrum use or
other fees on FCC licensees; revisions to the FCC's equal employment
opportunity rules and other matters relating to minority and female involvement
in the broadcasting industry; proposals to change rules relating to political
broadcasting; technical and frequency allocation matters; proposals to permit
expanded use of FM translator stations; proposals to restrict or prohibit the
advertising of beer, wine and other alcoholic beverages on radio; changes in
the FCC's cross-interest, multiple ownership and attribution policies; changes
to broadcast technical requirements; delivery by telephone companies of audio
and video programming to the home through existing phone lines; proposals to
limit the tax deductibility of advertising expenses by advertisers; and
proposals to auction the right to use the radio broadcast spectrum to the
highest bidder.
The FCC has authorized the use of a new technology, digital audio
broadcasting ("DAB"), to deliver audio programming by satellite and is
considering terrestrial DAB. DAB will provide a medium for the delivery by
satellite or terrestrial means of multiple new audio programming formats to
local and national audiences. It is not presently known precisely how in the
future this technology may be used by existing radio broadcast stations either
on existing or alternate broadcasting frequencies.
16
<PAGE>
The Company cannot predict what other matters might be considered in the
future by the FCC and/or Congress. The implementation of the Telecom Act or any
of these proposals or changes may have a material adverse impact on the
Company's business, competitive position or results of operations.
FORWARD-LOOKING INFORMATION
Except for the historical information contained in this Form 10-K, certain
items herein, including without limitation certain matters discussed under Part
I, Item 3, "Legal Proceedings" and under Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" (the
"MD&A"), are forward-looking statements. The matters referred to in such
statements could be affected by the risks and uncertainties involved in the
Company's business, including without limitation the effect of economic and
market conditions, the level and volatility of interest rates, the impact of
current or pending legislation and regulation and the other risks and
uncertainties detailed in Part I, Item 1, "Competition" and "Federal Regulation
of Radio Broadcasting" and in Part II, Item 7, the MD&A.
ITEM 2. PROPERTIES.
The Company's corporate headquarters are located in New York, New York. The
types of properties required to support each of the Company's radio stations
include offices, studios and transmitter sites. The transmitter site for each
station is generally located so as to provide maximum market coverage
consistent with the station's license. The types of properties used in
connection with the Company's concert promotion business include indoor and
outdoor concert facilities and offices. All of the property owned by the
Company secures the Company's borrowings under the Credit Agreement.
No one property is material to the Company's overall operations. The
majority of the Company's offices and studios used in connection with the
operations of the Company's radio stations are leased, with lease terms that
expire in one to eight years. The Company owns or leases all of its transmitter
antenna sites with lease terms that expire in one to fifty years. The Company
does not anticipate any difficulties in renewing those leases that expire
within the next five years or in leasing other space if required. The Company
owns substantially all of the equipment used in its radio broadcasting
business.
In addition, the Company leases certain concert facilities including Jones
Beach Marine Amphitheater, Meadows Music Theartre and PNC Bank Arts Center,
with lease terms that expire in 1999, 2034 and 2017, respecively.
Management believes that its properties are in good condition and are
suitable for its operations, however, the Company continually looks for
opportunities to upgrade its properties.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit filed October 21, 1996 by Cardinal
Communications Partners, L.P. in the District Court of Dallas County, Texas
(No. 9611157). Also named as a defendant is Robert F.X. Sillerman, Executive
Chairman of the Company. The complaint alleges that Cardinal is entitled to
contingent payments related to its sale of radio station KTCK-AM operating in
Dallas, Texas, to the Company in April 1995 and the Company's subsequent sale
of KTCK-AM, in October 1996 in the Dallas Disposition. The complaint seeks a
declaratory judgment and actual and punitive damages in an unspecified amount,
as well as attorneys' fees, based on claims of breach of contract, fraud,
negligent misrepresentation, quantum meruit and unjust enrichment. The Company
intends to defend the case vigorously. However, recent discussions between
counsel for both sides have resulted in an agreement to submit the matter to
non-binding mediation in April 1997.
In addition, the Company has received a subpoena from the Antitrust
Division, seeking information related to the Company's LMAs and JSAs. The
subpoena focuses primarily on a JSA between the Company and Triathlon with
respect to certain stations operating in Wichita, Kansas, which has since been
terminated. The Company responded to the subpoena in February 1997.
The Company, together with, in some instances, certain of its directors and
officers, is a defendant or co-defendant in various legal actions involving
employment related matters and various other claims
17
<PAGE>
incidental to the conduct of its business. However, in the opinion of
management, there are no other material threatened or pending legal proceedings
against the Company, which if adversely decided, would have a material effect
on the financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's annual meeting of stockholders (the "Annual Meeting") was held
on November 22, 1996. On October 1, 1996, the record date for the Annual
Meeting, there were 6,431,897 outstanding shares of Class A Common Stock (the
"Class A Shares") and 856,126 shares of Class B Common Stock (the "Class B
Shares" and, collectively with the Class A Shares, the "Shares"). The Shares
present at the Annual Meeting represented 96.1% of the combined voting power of
the outstanding Shares as of the record date. Class A Shares and Class B Shares
vote together on most matters, with each Class A Share entitled to one vote and
each Class B Share entitled to ten votes, except that the holders of Class A
Shares are entitled to elect by a separate class vote a number of directors,
which is currently three. In addition, the Class A Shares were entitled to a
separate class vote with respect to the second matter considered at the Annual
Meeting and the Class B Shares were entitled to a separate class vote with
respect to the third matter considered at the Annual Meeting.
The first matter voted upon at the Annual Meeting was a proposal to approve
the Amended and Restated Agreement and Plan of Merger, dated as of April 15,
1996, as amended on May 6, 1996, July 30, 1996 and September 30, 1996, among
the Company, SFX Merger Company and MMR and the MMR Merger. MMR was organized
in 1992 by Robert F.X. Sillerman, Executive Chairman of the Board of Directors
and controlling stockholder of the Company, Michael G. Ferrel, Chief Executive
Officer and a Director of the Company, and Howard J. Tytel, a Director and
Executive Vice President of the Company. Mr. Sillerman owned a substantial
equity interest in MMR which was exchanged for common stock of the Company upon
the consummation of the MMR Merger. The proposal received the affirmative vote
of 5,384,738 Class A Shares and 856,126 Class B Shares and the negative vote of
3,884 Class A Shares and 0 Class B Shares, with 2,783 Class A Shares abstaining
and 729,817 broker non-votes. The votes in favor of the proposal represented
93.1% of the combined voting power of the outstanding Shares represented in
person or by proxy at the Annual Meeting and voting on the proposal, and
therefore the proposal was approved.
The second matter voted upon was a proposal to approve an amendment to the
Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation") to increase the number of authorized Class A Shares from
10,000,000 to 100,000,000. The proposal received the affirmative vote of
5,405,421 Class A Shares and 856,126 Class B Shares and the negative vote of
22,109 Class A Shares and 0 Class B Shares, with 4,913 Class A Shares
abstaining and 729,817 broker non-votes. The votes in favor of the proposal
represented 93.1% of the combined voting power of the outstanding Shares as of
the record date and 84% of the vote of the outstanding Class A Shares as of the
record date, and therefore the proposal was approved.
The third matter voted upon was a proposal to approve an amendment to the
Certificate of Incorporation to increase the number of authorized Class B
Shares from 1,000,000 to 10,000,000. The proposal received the affirmative vote
of 5,376,794 Class A Shares and 856,126 Class B Shares and the negative vote of
50,736 Class A Shares and 0 Class B Shares, with 4,240 Class A Shares
abstaining and 729,817 broker non-votes. The votes in favor of the proposal
represented 93% of the combined voting power of the outstanding Shares as of
the record date and 100% of the vote of the outstanding Class B Shares as of
the record date, and therefore the proposal was approved.
The fourth matter voted upon was a proposal to approve the issuance to SCMC
of warrants to purchase 300,000 Class A Shares, which were immediately
exercisable upon approval of such proposal, at an initial exercise price of
$33.75 per share, as partial consideration for SCMC terminating its financial
consulting arrangement with the Company and assigning to the Company its rights
to receive fees for consulting and marketing services payable by MMR and
another publicly-held radio broadcasting company over the next eight years. The
proposal received the affirmative vote of 5,215,762 Class A Shares and 856,126
Class B Shares and the negative vote of 174,671 Class A Shares and 0 Class B
Shares, with 7,830 Class A Shares abstaining and 729,817 broker non-votes. The
votes in favor of the proposal
18
<PAGE>
represented 98.7% of the combined voting power of the Shares represented in
person or by proxy at the Annual Meeting and voting on the proposal, and
therefore the proposal was approved.
In the election of directors, the fifth proposal voted upon, the following
persons received the number of votes set opposite their respective names:
NOMINEES ELECTED BY HOLDERS OF CLASS A SHARES AND CLASS B SHARES
<TABLE>
<CAPTION>
NAME VOTES RECEIVED VOTES WITHHELD
- ---------------------- -------------- --------------
<S> <C> <C>
Robert F.X. Sillerman 14,679,191 30,990
Geoffrey Armstrong ... 14,678,991 31,190
Howard J. Tytel ....... 14,679,191 30,990
Richard A. Liese ...... 14,677,891 32,290
Thomas P. Benson ...... 14,679,191 30,990
</TABLE>
Such nominees received the highest number of the votes cast at the Annual
Meeting for the directors to be elected by the holders of the Class A Shares
and Class B Shares, voting together, and therefore such persons were duly
elected as directors of the Company.
NOMINEES ELECTED BY HOLDERS OF CLASS A SHARES
<TABLE>
<CAPTION>
NAME VOTES RECEIVED VOTES WITHHELD
- ---------------------- -------------- --------------
<S> <C> <C>
James F. O'Grady, Jr. 6,116,781 32,140
Paul Kramer ........... 6,117,931 30,990
Edward F. Dugan ....... 6,117,931 30,990
</TABLE>
Such nominees received the highest number of the votes cast at the Annual
Meeting for the directors to be elected by the holders of Class A Shares and
therefore such persons were duly elected as directors of the Company.
The sixth matter voted upon was a proposal to approve the Company's 1996
Stock Option Plan and the performance goal included therein. The proposal
received the affirmative vote of 5,037,318 Class A Shares and 856,126 Class B
Shares and the negative vote of 381,766 Class A Shares and 0 Class B Shares,
with 104,740 Class A Shares abstaining and 729,817 broker non-votes. The votes
in favor of the proposal represented 92.4% of the combined voting power of the
Shares represented in person or by proxy at the Annual Meeting and voting on
the proposal, and therefore the proposal was approved.
The seventh matter voted upon was a proposal to ratify the appointment of
Ernst & Young LLP as independent auditors of the Company for the fiscal year
ending December 31, 1996. The proposal received the affirmative vote of
6,146,088 Class A Shares and 856,126 Class B Shares and the negative vote of
2,813 Class A Shares and 0 Class B Shares voting by proxy, with 2,413 Class A
Shares abstaining. The votes in favor of the proposal represented 99.9% of the
combined voting power of the Shares represented in person or by proxy at the
Annual Meeting, and therefore the proposal was approved.
19
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION FOR SECURITIES
The Company's Class A Common Stock and Class B Warrants trade on the Nasdaq
Stock Market under the symbols SFXBA and SFXBW, respectively. The high and low
sales for the Company's Class A Common Stock and Class B Warrants for the years
ended December 31, 1996 and 1995 were:
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B WARRANTS(1)
-------------------------------------- ----------------------------------
1996 1995 1996 1995
------------------ ------------------ ----------------- ---------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- --------------- -------- -------- -------- -------- -------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31........ $35.00 $25.50 $26.00 $17.00 $2-3/4 $1-7/16 $1-1/2 $ 3/4
June 30......... $39.25 $31.50 $26.25 $20.50 $2-9/16 $1-1/2 $2-3/8 $ 15/16
September 30 ... $48.00 $37.50 $29.75 $24.75 $2-11/16 $1-15/16 $2-3/8 $1-1/2
December 31..... $48.25 $24.75 $30.25 $24.00 $6 $1-7/8 $2-1/8 $1-1/16
</TABLE>
- --------------
(1) The Company assumed the Class B Warrants from MMR pursuant to the MMR
Merger. Each Class B Warrant is exercisable for .2983 shares of Class A
Common Stock. Prior to the MMR Merger the Class B Warrants traded under
the symbol "RDIOAZ."
As of March 27, 1997, there were approximately 98 holders of record of the
Company's outstanding Class A Common Stock, and three holders of record of the
Company's outstanding Class B Common Stock.
The Company has not paid any dividends on its common stock. The Company
intends to retain future earnings for use in its business and does not
anticipate paying any cash or stock dividends on shares of its common stock in
the foreseeable future. In addition, the certificates of designations with
respect to the Series D Preferred Stock and the Company's 12 5/8% Series E
Cumulative Exchangeable Preferred Stock (the "Series E Preferred Stock")
prevents the payment of dividends on the common stock unless all dividends on
the outstanding shares of Series D Preferred Stock and Series D Preferred Stock
have been paid. The Credit Agreement and the indenture governing the Company's
Senior Subordinated Notes due 2006 (the "Notes") also restrict the Company's
ability to pay cash dividends unless certain financial tests (including a ratio
of debt to cash flow) and an additional restricted payments test are met.
RECENT SALES OF UNREGISTERED SECURITIES
In May 1996, the Company sold $450.0 million in aggregate principal amount
of Notes and $149.5 million in aggregate liquidation preference of its Series D
Preferred Stock to qualified institutional buyers (as defined in Rule 144A) and
to a limited amount of accredited purchasers in reliance on the exemption from
registration provided by Rule 144A promulgated under the Securities Act of
1933, as amended. Goldman, Sachs & Co., Lehman Brothers Inc. and BT Securities
Corporation, the underwriters for the private placements, received an aggregate
of $17,877,500 in underwriting discounts and commissions.
Each share of Series D Preferred Stock is convertible at the option of the
holder thereof into 1.0987 Class A Shares (subject to adjustments in certain
events) at any time prior to the close of business on May 31, 2007. In the
event that either (i) an insufficient number of Class A Shares are available
for issuance upon such conversion or (ii) the Company is restricted by FCC
rules from issuing Class A Shares upon such conversion, then the Company will
be required to pay each holder of Series D Preferred Stock seeking to convert
an amount per share equal to 110% of the current market price of the Class A
Common Stock as of the date of such conversion.
Pursuant to its contractual obligations with the original purchasers of the
Notes and Series D Preferred Stock, the Company filed registration statements
with the Securities and Exchange Commission
20
<PAGE>
(the "Commission") relating to an exchange offer for the Notes and a "shelf"
offering of the Series D Preferred Stock by the holders thereof. Such
registration statements were declared effective in July 1996 and the exchange
offer was subsequently completed with full participation by the holders of the
Notes.
In March 1997, the Company issued 250,838 shares of Class A Common Stock in
connection with the acquisition of certain companies which collectively own and
operate the Meadows Music Theater. The shares where issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................... $ 15,003 $ 34,233 $ 55,556 $ 76,830 $ 143,061
Station operating expenses................. 9,624 21,555 33,956 51,039 92,816
Depreciation, amortization, duopoly
integration costs and acquisition related
costs (2)................................. 3,208 4,475 5,873 9,137 17,311
Corporate, general & administrative
expenses.................................. 769 1,808 2,964 3,797 6,313
Non-recurring and unusual charges,
including adjustments to broadcast rights
agreements (3)............................ -- 13,980 -- 5,000 28,994
----------- ----------- ----------- ----------- -----------
Operating income (loss).................... 1,402 (7,585) 12,763 7,857 (2,373)
Interest income............................ -- (17) 121 (650) (4,017)
Interest expense........................... 3,610 7,351 9,332 12,903 34,897
Loss on sale of radio station.............. -- -- -- -- 1,900
----------- ----------- ----------- ----------- -----------
Net loss before income taxes extraordinary
loss and cumulative effect of a change in
accounting principle...................... (2,208) (14,919) 3,310 (4,396) (35,153)
Income tax expense......................... -- 1,015 1,474 -- 480
Extraordinary loss on debt retirement ..... -- 1,665 -- -- 15,219
Cumulative effect of a change in
accounting principle...................... -- 182 -- -- --
----------- ----------- ----------- ----------- -----------
Net loss................................... (2,208) (17,781) 1,836 (4,396) (50,852)
Redeemable preferred stock dividends and
accretion (4)............................. 385 557 348 291 6,061
Net income (loss) applicable to common
stockholders ............................. $ (2,593) $ (18,338) $ 1,488 $ (4,687) $ (56,913)
=========== =========== =========== =========== ===========
Net income (loss) per share ............... $ (2.20) $ (7.08) $ 0.26 $ (0.71) $ (7.52)
=========== =========== =========== =========== ===========
Weighted average common shares
outstanding............................... 1,178,570 2,589,285 5,792,385 6,595,728 7,563,600
=========== =========== =========== =========== ===========
OTHER OPERATING DATA:
Broadcast Cash Flow (5) ................... $ 5,379 $ 12,678 $ 21,600 $ 25,791 $ 50,245
EBITDA (5)................................. 4,610 10,870 18,636 21,994 43,932
Cash capital expenditures.................. 115 569 1,951 3,261 3,224
Net cash provided by (used in) operating
activities................................ 1,171 76 1,174 499 (13,447)
Net cash (used in) provided by investing
activities................................ (115) (56,568) (6,184) (25,697) (470,513)
Net cash (used in) provided by financing
activities................................ (495) 66,122 (2,083) 33,897 502,668
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 657 $ 10,287 $ 3,194 $ 11,893 $ 10,601
Working capital (deficit).................. (37,470) 22,088 18,698 19,334 48,363
Intangible assets, net..................... 27,856 107,290 102,152 129,543 664,103
Total assets............................... 36,127 152,871 145,808 187,337 859,327
Total debt and capital lease obligations .. 39,011 81,627 81,516 81,850 481,460
Redeemable preferred stock................. 3,892 3,701 2,466 3,285 152,053
Shareholders' equity (deficit)............. (9,411) 48,598 48,856 83,061 94,517
</TABLE>
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(1) The Company's consolidated financial statements tend not to be directly
comparable from period to period due to acquisition activity. The
selected financial data of the Company and its predecessors include (i)
the historical financial statements of Capstar Communications, Inc.
("Capstar") (ii) the
22
<PAGE>
historical financial statements of the Company since its formation on
February 26, 1992 , (iii) the results of operations of Command, WMYI-FM,
WKTF-FM, WRVW-FM, KYXY-FM and KTCK-AM from the date of their acquisition
in July 1993, April 1993, December 1993, December 1994, April 1995 and
September 1995, respectively, and (iv) the results of operations of
radio stations acquired, sold or exchanged pursuant to the Charlotte
Acquisition in February 1996, the Raleigh-Greensboro Acquisition in June
1996, the Prism Acquisition, Liberty Acquisition and Washington
Dispositions each occurring in July 1996, the Jackson Acquisitions in
July and August 1996, the Dallas Disposition in October 1996, the MMR
Merger in November 1996, and the Greensboro Acquisition and the Houston
Exchange in December 1996. The acquisitions were accounted for using the
purchase method of accounting.
(2) In 1995, costs of $1,380,000 relating to the integration of KYXY-FM
operating in San Diego and the reformatting of its duopoly partner and
in 1996 costs of $785,000 related to the integration and reformatting of
the Charlotte stations and $352,000 related to the relocation of certain
corporate office functions were included in depreciation, amortization,
duopoly integration costs and acquisition related costs.
(3) In 1993, a non cash non-recurring and unusual charge was incurred
relating to the valuation of founders shares at the offering date and
certain pooling costs related to the Capstar merger. In 1995, a $5.0
million charge was incurred with respect to the diminished value of the
Texas Rangers contract. In 1996, non-recurring and unusual charges of
$28,994,000 in 1996 which consisted primarily of (i) payments in excess
of the fair market value of stock repurchased from the Company's former
president totaling $12,510,000 (ii) a write-off of $2,330,000 a loan
made to the Company's former president and accrued interest thereon,
(iii) $5,586,000 relating to a write-off of a $2.0 million loan to SCMC
and accrued interest thereon and the issuance of 600,000 warrants to
SCMC, (iv) $4,575,000 for the repurchase of Mr. Armstrong's options,
and (v) a charge of $1,600,000 related to the termination of Texas
Rangers.
(4) Includes preferred stock dividends and accretion on Series A, B, C and D
Redeemable Preferred Stock.
(5) EBITDA is defined as net revenues less station operating expenses and
corporate general and administrative expenses. Broadcast Cash Flow is
defined as EBITDA before corporate, general and administrative
expenses. Although EBITDA and Broadcast Cash Flow are not measures of
performance calculated in accordance with generally accepted accounting
principles ("GAAP"), the Company believes that EBITDA and Broadcast
Cash Flow are accepted by the broadcasting industry as generally
recognized measures of performance and are used by analysts who report
publicly on the performance of broadcasting companies. In addition,
EBITDA is the basis for determining compliance with several covenants
in the Indentures and the Credit Agreement.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BASIS OF PRESENTATION
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and related notes thereto. The following discussion
contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, risks and uncertainties relating to leverage,
the need for additional funds, consummation of the Pending Acquisitions,
integration of the recently completed acquisitions, the ability of the Company
to achieve certain cost savings, the management of growth, the introduction of
new technology, changes in the regulatory environment, the popularity of radio
as a broadcasting and advertising medium and changing consumer tastes. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
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<PAGE>
GENERAL
The Company currently owns and operates, provides programming to or sells
advertising on behalf of 67 radio stations located in 20 markets. Following
completion of the Pending Acquisitions and the Pending Dispositions, the
Company will own and operate, provide programming to or sell advertising on
behalf of 80 radio stations located in 23 markets.
The performance of a radio station group, such as the Company, is
customarily measured by its ability to generate Broadcast Cash Flow. Broadcast
Cash Flow is defined as net revenues (including, where applicable, fees earned
by the Company pursuant to the SCMC Termination Agreement as defined herein)
less station operating expenses. Although Broadcast Cash Flow is not a measure
of performance calculated in accordance with generally accepted accounting
principles ("GAAP"), the Company believes that Broadcast Cash Flow is accepted
by the broadcasting industry as a generally recognized measure of performance
and is used by analysts who report publicly on the performance of broadcasting
companies. Nevertheless, this measure should not be considered in isolation or
as a substitute for operating income, net income, net cash provided by
operating activities or any other measure for determining the Company's
operating performance or liquidity which is calculated in accordance with GAAP.
The primary source of the Company's revenue is the sale of advertising time
on its radio stations. Pursuant to an agreement with SCMC (the "SCMC
Termination Agreement"), the Company receives fees for certain financial
consulting and administrative services provided to Triathlon. Fee revenue from
the SCMC Termination Agreement will fluctuate principally based upon the level
of acquisition and financing activity of Triathlon, above the minimum annual
fees of $1,000,000. The Company's most significant station operating expenses
are employee salaries and commissions, programming expenses and advertising and
promotional expenditures. The Company strives to control these expenses by
working closely with local station management.
The Company's revenues are primarily affected by the advertising rates its
radio stations can obtain in the face of competition from radio and other
media. The Company's advertising rates are in large part based on a station's
ability to attract audiences in the demographic groups targeted by its
advertisers, as measured principally by Arbitron (an independent rating
service) on a quarterly basis. Because audience ratings in local markets are
crucial to a station's financial success, the Company endeavors to develop
strong listener loyalty. The Company believes that the diversification of
formats on its stations helps to insulate it from the effects of changes in the
musical tastes of the public in any particular format. The number of
advertisements that can be broadcast without jeopardizing listening levels (and
the resulting ratings) is limited in part by the format of a particular
station. The Company's stations strive to maximize revenue by constantly
managing the number of commercials available for sale and adjusting prices
based upon local competitive conditions. In the broadcasting industry, radio
stations often utilize trade (or barter) agreements which exchange advertising
time for goods or services (such as travel or lodging), instead of for cash.
The Company seeks to minimize its use of such agreements. The Company's
advertising contracts are generally short-term. The Company generates most of
its revenue from local advertising, which is sold primarily by a station's
sales staff. In 1996, approximately 78% of the Company's revenues were from
local advertising. To generate national advertising sales, the Company engages
independent advertising sales representatives that specialize in national sales
for each of its stations.
The radio broadcasting industry is highly competitive and the Company's
stations are located in highly competitive markets. The financial results of
each of the Company's stations are dependent to a significant degree upon its
audience ratings and its share of the overall advertising revenue within the
station's geographic market. Each of the Company's stations competes for
audience share and advertising revenue directly with other FM and AM radio
stations, as well as with other media, within their respective markets. The
Company's audience ratings and market share are subject to change, and any
adverse change in audience rating and market share in any particular market
could have a material and adverse effect on the Company's net revenues.
Although the Company competes with other radio stations with comparable
programming formats in most of its markets, if another station in the market
were to convert its programming format to a format similar to one of the
Company's radio stations, if a new radio station were to adopt a competitive
format, or if an existing competitor were to strengthen its operations, the
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<PAGE>
Company's stations could suffer a reduction in ratings or advertising revenue
and could require increased promotional and other expenses. In addition,
certain of the Company's stations compete, and in the future other stations may
compete, with groups of stations in a market operated by a single operator. As
a result of the Telecom Act, the radio broadcasting industry has become
increasingly consolidated, resulting in the existence of radio broadcasting
companies which are significantly larger, with greater financial resources,
than the Company. Furthermore, the Telecom Act will permit other radio
broadcasting companies to enter the markets in which the Company operates or
may operate in the future. Although the Company believes that each of its
stations is able to compete effectively in its market, there can be no
assurance that any of the Company's stations will be able to maintain or
increase current audience ratings and advertising revenue market share. The
Company's stations also compete with other advertising media such as
newspapers, television, magazines, billboard advertising, transit advertising
and direct mail advertising. Radio broadcasting is also subject to competition
from new media technologies that are being developed or introduced, such as the
delivery of audio programming by cable television systems or the introduction
of digital audio broadcasting. The Company cannot predict the effect, if any of
these new technologies may have on the radio broadcasting industry.
In addition to its radio station operations, in the first quarter of 1997,
the Company through completed and pending acquisitions, became one of the
leading promoters of music concerts and other entertainment events. The Company
anticipates that the primary source of revenues from its concert promotion
activities will be from the sale of tickets at events which the Company
promotes. The Company anticipates that the most significant expenses with
respect to its concert promotion activities will be talent and other expenses
associated with producing an event. The booking of talent in the concert
promotion business generally involves contracts for limited engagements often
involving a small number of performances. The Company believes that the concert
promotion business is highly competitive, and will compete with other live
entertainment, including sports activities as well as the electronic
entertainment industry.
The Company's revenues vary throughout the year. As is typical in the radio
broadcasting industry, the Company's first calendar quarter generally produces
the lowest revenues for the year, and the fourth calendar quarter generally
produces the highest revenues for the year. The Company's operating results in
any period may be affected by the incurrence of advertising and promotion
expenses that do not necessarily produce commensurate revenues until the impact
of the advertising and promotion is realized in future periods. The Company
anticipates that the second and third quarters will reflect the highest
revenues from the Company's concert promotion activities.
RESULTS OF OPERATIONS
The Company's consolidated financial statements tend not to be directly
comparable from period to period due to acquisition activity. The major
acquisitions during the three years ended December 31, 1996, all of which have
been accounted for using the purchase method of accounting, were as follows:
1994 Acquisitions: In December 1994, the Company acquired WRVW-FM in
Nashville, Tennessee.
1995 Acquisitions: In April 1995, the Company acquired KYXY-FM in San
Diego, California, and in September 1995, the Company purchased KTCK-AM in
Dallas, Texas. The Company had been providing programming and selling
advertising pursuant to an LMA with KYXY-FM since January 1995 and KTCK-AM
since March 1995. In addition, the Company provided programming and sold
advertising pursuant to an LMA with WTDR-FM and WLYT-FM in Charlotte, North
Carolina beginning April 1995.
1996 Acquisitions: In February 1996, the Company acquired substantially
all the assets of WTDR-FM and WLYT-FM in Charlotte, North Carolina pursuant
to the Charlotte Acquisition. In June 1996, the Company acquired
substantially all of the assets of WROQ-FM, Greenville, South Carolina,
pursuant to the Greenville Acquisition and WTRG-FM and WRDU-FM, both
operating in Raleigh, North Carolina, and WMFR-AM, WMAG-FM and WTCK-AM
(formerly WWWB-AM), each operating in Greensboro, North Carolina pursuant
to the Raleigh-Greensboro Acquisition.
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<PAGE>
The Company acquired from Prism pursuant to the Prism Acquisition (i),
substantially all of the assets used in the operation of eight FM and five AM
radio stations located in four markets: Jacksonville, Florida; Raleigh, North
Carolina; Tucson, Arizona and Wichita, Kansas, in July 1996, and (ii)
substantially all of the assets of three radio stations operating in
Louisville, Kentucky, in September 1996. In October 1996, the Company sold the
Louisville Stations pursuant to the Louisville Dispositions.
In July 1996, the Company acquired Liberty, a privately-held radio
broadcasting company which owned and operated or provided programming to or
sold advertising on behalf of 14 FM and six AM radio stations located in six
markets: Washington, DC/Baltimore, Maryland; Nassau-Suffolk, New York;
Providence, Rhode Island; Hartford, Connecticut; Albany, New York and Richmond,
Virginia. In July 1996, the Company sold three of the Liberty Stations
operating in the Washington, DC/Baltimore, Maryland market pursuant to the
Washington Dispositions.
In July 1996, the Company acquired substantially all of the assets of
WJDX-FM, Jackson, Mississippi and in August 1996, the Company acquired
substantially all of the assets of WSTZ-FM and WZRX-AM, each operating in
Jackson and Mississippi, pursuant to collectively, the Jackson Acquisitions.
In October 1996, the Company sold radio station KTCK-AM, Dallas, Texas
pursuant to the Dallas Disposition.
In November 1996, the Company acquired MMR, a radio broadcasting company
which owned and operated, provided programming to or sold advertising on behalf
of sixteen FM stations and one AM station located in eight markets: New Haven,
Connecticut; Hartford, Connecticut; Springfield/ Northampton, Massachusetts;
Daytona Beach, Florida; Augusta, Georgia; Biloxi, Mississippi; Myrtle Beach,
South Carolina and Little Rock, Arkansas pursuant to the MMR Merger. Of the
seventeen stations MMR had entered into agreements to sell two stations
operating in Myrtle Beach, South Carolina and one station operating in Little
Rock, Arkansas (the "MMR Dispositions"). MMR had also decided not to renew its
JSA with one station operating in Augusta, Georgia and its LMA with one station
operating in Myrtle Beach, South Carolina.
In December 1996, the Company acquired WHSL-FM operating in Greensboro,
North Carolina pursuant to the Greensboro Acquisition.
Also, in December 1996, the company exchanged the assets of KRLD-FM
operating in Dallas, Texas, along with the Texas State Networks for the assets
of KKRW-FM operating in Houston, Texas pursuant to the Houston Exchange.
The Charlotte Acquisition, the Greenville Acquisition, the
Raleigh-Greensboro Acquisition, the Prism Acquisition, the Liberty Acquisition,
the Washington Dispositions, the Jackson Acquisitions, the Dallas Disposition,
the MMR Merger, the Greensboro Acquisition and the Houston Exchange are
collectively herein referred to as the "1996 Acquisitions".
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
For the year ended December 31, 1996, net revenues increased 86% to
$143,061,000 from $76,830,000 primarily as a result of the 1996 Acquisitions
(excluding the Charlotte Acquisition which the Company operated pursuant to an
LMA prior to the acquisition) which increased net revenues by $58,880,000. Net
revenue from the Company's existing stations (excluding the 1996 Acquisitions
and the Charlotte Acquisition which the Company did not operate for the entire
1995 period) increased $4,743,000 as a result of strong radio advertising
growth in all of the Company's markets combined with improved inventory
management, ratings and other factors generally affecting sales and rates. On a
same station basis, assuming all stations owned and operated as of December 31,
1996 were owned for all periods reported, net revenues would have increased 10%
from 1995.
Station operating expenses increased 82% to $92,816,000 from $51,039,000
primarily due to the inclusion of expenses related to the 1996 Acquisitions
(excluding the Charlotte Acquisition) of $38,525,000 and to increases in
variable expenses related to the increases in net revenue at the existing
stations.
26
<PAGE>
Depreciation, amortization, duopoly integration costs and acquisition
related costs increased 89% to $17,311,000 from $9,137,000 due to the inclusion
of depreciation and amortization related to the 1996 Acquisitions. Duopoly
integration costs and acquisition related costs decreased from $1,380,000 in
1995 to $1,137,000 in 1996.
Corporate expenses were $6,313,000 and $3,797,000 for the years ended
December 31, 1996 and 1995, respectively. The increase reflects the growth in
the Company's overall operations. Corporate expenses declined as a percentage
of net revenues. Included in corporate expenses in 1996 were fees received from
MMR and Triathlon of $802,000.
The Company recorded a loss on sale of KTCK-AM Dallas of $1,900,000 in 1996.
The Company recorded non-recurring and unusual charges of $28,994,000 in
1996 which consisted primarily of (i) $12,510,000 relating to payments in
excess of the fair market value of stock repurchased from the Company's former
president (ii) a write-off of a $2,330,000 loan made to the Company's former
president and accrued interest thereon, (iii) $5,586,000 relating to a
write-off of a $2.0 million loan to SCMC and accrued interest thereon and the
issuance of 600,000 warrants to SCMC, (iv) $4,575,000 for the repurchase of Mr.
Armstrong's options, and (v) a charge of $1,600,000 related to the termination
of Texas Rangers. In 1995, the Company recorded a $5.0 million charge related
to the write down in value of the Company's broadcast rights of Texas Rangers
baseball.
Operating loss was $2,373,000 for the year ended December 31, 1996 compared
to operating income of $7,857,000 for the same period in 1995 due to the
results discussed above.
Interest expense, net of interest income, increased 152% to $30,880,000 from
$12,253,000 in the year ended December 31, 1996, primarily due to interest on
the $450.0 million aggregate principal amount of 11.375% Senior Subordinated
Notes issued in May 1996 (the "Note Offering"). Additionally, interest on
borrowings related to the Charlotte Acquisition and the MMR Merger contributed
to the increase.
The Company incurred an extraordinary loss totaling $15,219,000 for the year
ended December 31, 1996 which consisted primarily of payments of $9.0 million
for the repurchase premium and consent payments related to the early redemption
of $79.4 million of the Company's 11 3/8% Senior Subordinated Notes due 2000
(the "Old Notes") in the tender offer and the related consent solicitations and
the write-off of $5.6 million of debt issue costs.
The Company recorded income tax expense of $480,000 for the year ended
December 31, 1996 related to state and local taxes. The Company did not record
income tax expense in 1995.
The Company's net loss was $50,852,000 in 1996 compared to a net loss of
$4,396,000 in 1995 due to the factors discussed above.
Net loss applicable to common stock increased to $56,913,000 in 1996 from
$4,687,000 in 1995 due to dividends on the Series D Preferred Stock issued in
May 1996 (the "Series D Preferred Stock Offering") and the increase in the net
loss discussed above.
Broadcast Cash Flow increased 95% to $50,245,000 for the year ended December
31, 1996 from $25,791,000 for 1995. The increase was primarily a result of the
inclusion of the results of the 1996 Acquisitions (excluding the Charlotte
Acquisitions) of $20,356,000 and as well as improved results of $3,073,000 at
the Company's existing stations in all markets, except Jackson, Mississippi. On
a same station basis, assuming all stations owned and operated as of December
31, 1996 were owned for all periods reported, Broadcast Cash Flow would have
increased approximately 26% from 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
For the year ended December 31, 1995, net revenues increased 38.3% to
$76,830,000 from $55,556,000 due to revenue increases at the Houston,
Nashville, Greenville, and Jackson properties and the inclusion of net revenues
of $16,729,000 for KYXY-FM, KTCK-AM, and the Charlotte Acquisitions for the
portion of the year the Company owned and/or operated the stations. The revenue
increase was partially offset by a slight decline in revenue in the Dallas
market due to the lack of advertiser interest in baseball broadcasts and a
decline in revenue in San Diego due to the January 1995 reformatting of KPLN-FM
27
<PAGE>
(formerly KMKX-FM). The increase in net revenue from existing operations was
related to strong radio advertising growth averaging approximately 8% in the
Company's markets, combined with improved inventory management, ratings and
other factors generally affecting sales and rates. On a same station basis,
assuming all stations owned and/or operated by the Company in 1995 had been
owned for all periods reported, and the Company's San Diego stations attained
the same market revenue share for the entire year as they did in the fourth
quarter of 1995, net revenues would have increased 15.4% from 1994 reaching
$79,871,000.
Station operating expenses increased 50.3% to $51,039,000 from $33,956,000
primarily due to the inclusion of expenses related to the operations of KYXY-FM
for $4,715,000, KTCK-AM for $3,713,000, and WTDR-FM and WLYT-FM (formerly
WEZC-FM) for $3,454,000 during the portion of the year the Company owned and/or
operated the stations and higher marketing costs in Charlotte, San Diego and
Greenville. Management believes that the increased investment in marketing
during the year has resulted in improved station selling position. On a same
station basis, assuming all stations owned and/or operated by the Company in
1995 had been owned for all periods reported, including certain cost savings
implemented during 1995, station operating expenses would have increased 15.5%
as compared to 1995 and station operating expenses as a percent of net revenue
would have remained constant from 1995.
Depreciation, amortization and duopoly integration costs increased 55.6% to
$9,137,000 in 1995 from $5,873,000 in 1994, primarily due to the acquisitions
described above and to costs of $1,380,000 incurred related to the integration
of the San Diego stations and the reformatting of its duopoly partner KPLN-FM.
Corporate expenses were $3,797,000 and $2,964,000 for the twelve months
ended December 31, 1995 and 1994, respectively. Corporate, general and
administrative expense as a percentage of net revenue was 5% for both 1995 and
1994.
Operating income was $7,857,000 as compared to income of $12,763,000 in
1994. The decrease from the prior year was due primarily to a $5,000,000
pre-tax charge related to the estimated losses on Texas Rangers baseball
broadcast rights.
Interest expense, net of investment income (loss), increased 29.6% to
$12,253,000 primarily due to the inclusion of $2,847,000 in LMA payments in
Charlotte and Dallas representing financing payments to the current owners.
Additionally, borrowings related to the Acquisition of the assets of KYXY-FM in
San Diego contributed to the increase. These borrowings were repaid in July
1995 with the proceeds of the Company's 1995 public offering of common stock
(the "1995 Stock Offering"). During 1995, the Company recorded investment
income of $650,000 compared to $121,000 of net investment losses in 1994. The
investment income in 1995 is related to the interest earned on the excess
proceeds of the 1995 Stock Offering.
The Company recorded no income tax expense for the twelve months ended
December 31, 1995 due to a net loss for the year, compared to income tax
expense of $1,474,000 for the twelve months ended December 31, 1994. The
Company has considered prudent and feasible tax planning strategies in
assessing the need for a valuation allowance and has assumed $650,000 of
benefit attributable to such strategies. In event the Company were to determine
in the future that such strategies would not be implemented, an adjustment to
the deferred tax liability would be charged to income in the period such
determination was made.
Net loss was $4,396,000 for the year ended December 31, 1995 compared to a
net income of $1,836,000 for the same period in 1994 due to the factors
discussed above.
Broadcast Cash Flow increased 19.4% to $25,791,000 for the twelve months
ended December 31, 1995 from $21,600,000 marketing at the Dallas, Greenville
and San Diego properties has resulted in improved selling position at these
properties even though it has adversely affected Broadcast Cash Flow. On a same
station basis, assuming all stations owned and/or operated by the Company in
1995 had been owned for all periods reported, including certain cost savings
implemented during 1995, Broadcast Cash Flow would have increased 15.1% to
$27,900,000 from $24,231,000 in 1994.
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations for the year ended December 31, 1996 was $13,447,000
as compared to cash provided by operations of $499,000 in 1995 and $1,174,000
in 1994. The cash used in operations in 1996 was primarily attributable to the
cash portion of the non-recurring and unusual charges and to the required
investment in working capital of radio stations acquired without the related
working capital. The decrease in 1995 as compared to 1994 was primarily
attributable to higher investments in working capital of stations acquired in
1995.
The Company used cash in investing activities for the years ended December
31, 1996, 1995 and 1994 of $470,5513,000, $25,697,000 and $6,184,000,
respectively. Cash used in investing activities in 1996 related primarily to
the Charlotte, Greenville, Raleigh-Greensboro, Liberty, Prism, Jackson,
Greensboro Acquisitions, and the MMR Merger. In addition, proceeds from sale of
radio stations in 1996 of $56.9 million was offset by deposits and other
payments for Pending Acquisitions of $30.8 million and capital expenditures of
$3.2 million. Cash used in 1995 was primarily attributable to the purchases of
KYXY-FM in San Diego and KTCK-AM in Dallas and the purchase of property and
equipment, and was partially offset by the sale of short term investments.
Cash provided by financing activities for the years ended December 31, 1996
and 1995 was $502,668,000 and $33,897,000, respectively. The Company used cash
in financing activities for the year ended December 31, 1994 of $2,083,000. In
1996, cash provided by financing activities related primarily to $644,945,000
of proceeds from the Note Offering and the Series D Preferred Stock Offering
and borrowings under a credit agreements partially offset by payments on
subordinated debt, senior loans and capital lease obligations of $110,396,000
during 1996. In 1995, cash provided by financing activities related primarily
to proceeds of the 1995 Stock Offering. In 1994, cash used in financing
activities primarily related to the redemption of 2,000 shares of the Company's
Series A and B Redeemable Preferred Stock for $1,750,000.
The Company's principal need for funds has historically been to fund the
acquisition of radio stations, including related working capital needs, and, to
a lesser extent, capital expenditures and the redemption of outstanding
securities. The Company's principal sources of funds for these requirements
have historically been the proceeds from offerings of equity and debt
securities, borrowings under credit agreements and, to a significantly lesser
extent, cash flows from operations.
1996 Acquisitions and Dispositions. During 1996 the Company paid $21.5
million, $14.3 million, $37.3 million, $6.7 million, $106.7 million, $240.7
million, $6.7 million and net cash of $55.4 million for the Charlotte
Acquisition, the Greenville Acquisition, the Raleigh-Greensboro Acquisition,
the Jackson Acquisitions, the Prism Acquisition, the Liberty Acquisition, the
Greensboro Acquisition and the MMR Merger, respectively. In addition, the
Company received $18.5 million, $25.0 million and $13.4 million for the
Louisville Dispositions, the Washington Dispositions and the Dallas
Disposition, respectively.
The primary sources of funds for the Charlotte Acquisition were proceeds
from the 1995 Stock Offering and funds available under the Company's senior
secured credit facility for borrowings of up to $50.0 million (the "Old Credit
Agreement"). The Greenville Acquisition, Raleigh-Greensboro Acquisition,
Jackson Acquisitions, Prism Acquisition, Liberty Acquisition and Greensboro
Acquisition were primarily funded with proceeds from the Note Offering and the
Series D Preferred Stock Offering. The MMR Merger was funded primarily with
proceeds from the Note Offering, the Series D Preferred Stock Offering and the
Credit Agreement.
In December 1996, the Company loaned to ABS $14.5 million to finance the
purchase by ABS of two radio stations operating in Richmond, Virginia, in
connection with the Richmond Acquisition. The Company has also paid a $2.0
million deposit to ABS pursuant to its agreement to purchase substantially all
of ABS. The primary source of funds for this loan was borrowings under the
Credit Agreement.
1997 Acquisition and Dispositions. In January 1997, the Company consummated
the Delsener/ Slater Acquisition, pursuant to which it purchased
Delsener/Slater, a concert promotion company based in New York City, for an
aggregate consideration of approximately $24.0 million. Of this amount, $3.0
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million is to be paid, without interest, over five years, and $1.0 million is
to be paid, without interest, over ten years. The deferred payments are subject
to acceleration in certain circumstances. The primary source of funds for this
acquisition was borrowings under the Credit Agreement.
Also in January 1997, the Company consummated the Albany Acquisition,
pursuant to which it purchased one radio station operating in Albany, New York,
for a purchase price of $1.0 million. The primary source of funds for this
acquisition was borrowings under the Credit Agreement.
In February 1997, the Company consummated the acquisition of radio station
WWYZ-FM in Hartford, Connecticut, for a purchase price of $25.5 million. The
primary source of funds for this acquisition was proceeds from the Company's
Public Offering of $225.0 million aggregate liquidation preference 12 5/8%,
Series E Cumulative Exchangeable Preferred Stock (the "Series E Preferred Stock
Offering").
Also, in February 1997, the Company consummated the acquisition of radio
stations KQUE-FM and KNUZ-AM in Houston, Texas, for a purchase price of
approximately $43.0 million plus certain contingent payments of up to $750,000.
The primary source of funds for this acquisition was proceeds from the Series E
Preferred Stock Offering.
In March 1997, the Company completed the sale of two radio stations
operating in the Myrtle Beach, South Carolina market for $5.1 million payable
in installments over a five year period (present value of approximately $4.3
million). As these stations were acquired in November 1996 pursuant to the MMR
Merger, no gain or loss will be recognized on the transaction.
Also, in March 1997, the Company consummated the acquisition of certain
companies which collectively own and operate the Meadows Music Theater in
Hartford, Connecticut for $1.0 million in cash, shares of SFX Class A Common
Stock with a value of approximately $9.0 million and the assumption of
approximately $14.0 million of debt.
Pending Acquisitions and Dispositions. In October 1996, the Company entered
into an agreement, as amended, with Secret Communications, pursuant to which
the Company agreed to acquire substantially all of the assets used in the
operation by Secret Communications of seven radio stations located in two
markets (Indianapolis, Indiana and Pittsburgh, Pennsylvania). Two of the radio
stations operating in Pittsburgh are not yet owned by Secret Communications but
are anticipated to be acquired prior to the consummation of the Secret
Communications Acquisition, and Secret Communications currently provides
programming and sells advertising on these stations pursuant to an LMA. The
purchase price of the acquisition is $255.0 million, of which the Company has
paid a $10.0 million deposit and segregated $5.0 million pursuant to a letter
of credit to secure its obligations under the purchase agreement. The agreement
provides the Company the right to acquire the Indianapolis stations, prior to
the acquisition of the Pittsburgh stations, for $127.5 million.
In addition, pursuant to separate agreements, the Company has also agreed
to: (i) acquire substantially all of the assets of four radio stations
operating in Richmond, Virginia, where the Company currently owns one station
(the "Richmond Acquisition"); (ii) exchange one radio station operating in
Washington, D.C./Baltimore, Maryland, for two radio stations operating in
Dallas, Texas (the "CBS Exchange"); (iii) exchange four radio stations owned by
the Company and located on Long Island, New York, for two radio stations
operating in Jacksonville, Florida, where the Company currently owns four
stations, and a cash payment (the "Chancellor Exchange"); (iv) exchange one
radio station in Pittsburgh, Pennsylvania, which the Company is acquiring from
Secret Communications and $20.0 million in cash for one radio station in
Charlotte, North Carolina where the Company currently owns two stations (the
"Charlotte Exchange"); (v) pursuant to a letter of intent, acquire Sunshine, a
concert promotion company based in Indianapolis, Indiana, and certain related
companies, for approximately $59.0 million consisting of $50.0 million in cash
at closing $2.0 million in cash payable over 5 years, shares of Class A Common
Stock issuable over a two year period with a maximum value of approximately
$4.0 million and the assumption of approximately $3.0 million of debt; (vi)
acquire two radio stations operating in Pittsburgh, Pennsylvania and two in
Milwaukee, Wisconsin for $35.0 million (the "Hearst Acquisition"); and (vii)
sell one radio station operating in Little Rock, Arkansas (the "Little Rock
Disposition").
30
<PAGE>
The aggregate cash sale price of the Chancellor Exchange and the Little Rock
Disposition transactions is $15.1 million, of which the purchasers have
deposited in escrow or paid $3.5 million.
The Company anticipates that it will consummate all of the Pending
Acquisitions and the Pending Dispositions as follows:
<TABLE>
<CAPTION>
CASH PURCHASE
(SALE)
PRICE (1) ANTICIPATED DATE OF
TRANSACTION (IN MILLIONS) CONSUMMATION
- ----------- ------------- ------------
<S> <C> <C>
Little Rock Disposition $ (4.1) 2nd quarter 1997
CBS Exchange -- 2nd quarter 1997
Richmond Acquisition 40.4 2nd quarter 1997
Chancellor Exchange (11.0) 2nd quarter 1997
Secret Communications
Acquisition 255.0 2nd quarter 1997
Charlotte Exchange 20.0 2nd quarter 1997
Sunshine Promotions
Acquisition 52.0 2nd quarter 1997
Hearst Acquisition 35.0 3rd quarter 1997
</TABLE>
(1) Represents the gross cash sales or purchase price for the corresponding
transaction. Certain of these amounts do not reflect amounts advanced or
placed in escrow, payable over a period of time or payable in stock of
the Company.
The timing and completion of each of the above transactions are subject to a
number of closing conditions, certain of which are beyond the Company's
control. The Pending Acquisitions and the Pending Disposition are subject to
the approval of the FCC (other than the Sunshine Acquisition) and the Company's
lenders. Additionally, the Antitrust Division has indicated its intention to
review matters related to the concentration of ownership within markets even
when the ownership in question is in compliance with the provisions of the
Telecom Act. While the Company believes that each of the Pending Acquisitions
and the Pending Disposition does not substantially lessen competition, there
can be no assurance that the Antitrust Division will not take a contrary
position, which could delay or prevent the consummation of any of the Pending
Acquisitions or require the Company to restructure its ownership in the
relevant market or markets. In addition, the Sunshine Acquisition and the
Hearst Acquisition are subject to the execution of definitive acquisition
agreements.
The Company intends to finance the Pending Acquisitions from cash on hand
(approximately $105.0 million as of March 28, 1997), the Chancellor Exchange,
and the Little Rock Disposition, borrowings under the Credit Agreement and
other financing sources which the Company is currently evaluating. Based on
discussions with its commercial and investment bankers, management believes
that financing to complete the Pending Acquisitions will be available on
acceptable terms.
Capital expenditures totaled $3,224,000 in 1996, $3,261,000 in 1995 and
$1,951,000 in 1994. 1996 capital expenditures consisted of upgrades to the
Company's broadcasting, office and computer equipment in various markets.
Capital expenditures in 1995 included (i) the consolidation of the operations
of WSIX-FM and WRVW-FM, including a real estate acquisition, building
improvements and the replacement of certain broadcast equipment, and (ii)
leasehold improvements and the replacement of certain broadcast equipment
related to the relocation of KRLD-AM and TSN to the Ballpark in Arlington.
The Company is also required to make a payment of $1.0 million in 1997 to
redeem the outstanding shares of Series B Preferred Stock.
Sources of Liquidity. In May 1996, the Company issued New Notes due 2006 in
an aggregate principal amount of $450.0 million. Interest on the New Notes
accrues at the rate of 10.75% per year and is payable on May 15 and November 15
of each year. The New Notes are general senior subordinated unsecured
obligations of the Company. The New Notes are guaranteed on a senior
subordinated basis by
31
<PAGE>
each of the Company's subsidiaries. The New Note Indenture contains certain
covenants which limit the ability of the Company and certain of its
subsidiaries to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur indebtedness that
is senior in right of payment to the New Notes, incur liens, impose
restrictions on the ability of a subsidiary to pay dividends or make certain
payments to the Company and its subsidiaries, merge or consolidate with any
other person or dispose of all or substantially all of the assets of the
Company.
Concurrently with the Note Offering, the Company sold in a private placement
2,990,000 shares of Series D Preferred Stock aggregating $149.5 million in
liquidation preference (the "Series D Preferred Stock Offering"). Dividends of
$0.8125 per share of Series D Preferred Stock are payable quarterly in cash.
Accumulated unpaid dividends bear interest at the annual rate of 6.5%. The
shares of Series D Preferred Stock are convertible into shares of Class A
Common Stock at any time prior to May 31, 2007, unless previously redeemed or
repurchased, at a conversion price of $45.51 per share (equivalent to a
conversion rate of 1.0987 shares of Class A Common Stock per share of Series D
Preferred Stock), subject to adjustment in certain events. The shares of Series
D Preferred Stock are exchangeable in full (but not in part), at the Company's
option, subject to compliance with covenants contained in the Company's debt
agreements, for Series D Exchange Notes. The Certificate of Designations of the
Series D Preferred Stock contains certain covenants which, among other things,
limit the ability of the Company and its subsidiaries to engage in transactions
with affiliates.
On November 22, 1996, the Company entered into the Credit Agreement, a
senior revolving credit facility providing for borrowings of up to $225.0
million. Borrowings under the Credit Agreement may be used to finance permitted
acquisitions, for working capital and general corporate purposes, and for
letters of credit up to $20.0 million. The facility converts into a five-year
term loan on September 30, 1998, with repayment due in quarterly installments
commencing December 31, 1998, and with the final payment due September 30,
2003. The principal will be amortized by 5% in 1998, 15% in 1999, 20% in 2000,
20% in 2001, 22% in 2002 and 18% in 2003. Interest on the funds borrowed under
the Credit Agreement is based on a floating rate selected by the Company of
either (i) the higher of (a) the Bank of New York's prime rate and (b) the
federal funds rate plus 0.5%, plus a margin which varies from 0.25% to 1.5%,
based on the Company's then-current leverage ratio, or (ii) the LIBOR rate plus
a margin which varies from 1.5% to 2.75%, based on the Company's then-current
leverage ratio. The Company must prepay certain outstanding borrowings in
advance of their scheduled due dates in certain circumstances. The Company must
also pay annual commitment fees of 0.5% of the unutilized total commitments
under the Credit Agreement. The Company's obligations under the Credit
Agreement are secured by substantially all of its assets, including property,
stock of subsidiaries and accounts receivable, and are guaranteed by the
Company's subsidiaries. As of March 28, 1997, the Company had no outstanding
borrowings under the Credit Agreement.
On January 23, 1997, the Company completed the sale of $225.0 million of
Series E Cumulative Exchangeable Preferred Stock ("Series E Preferred Stock").
Dividends on the Series E Preferred Stock accrue at the rate of 12.625% per
annum and are payable on January 15 and July 15 of each year. Dividends may be
paid, at the Company's option, through January 15, 2000, in cash or additional
shares of Series E Preferred Stock. The Company used $50.0 million of the net
proceeds to repay borrowings under the Credit Agreement.
Subject to certain conditions, the shares of Series E Preferred Stock are
exchangeable in whole or in part on a pro rata basis, at the option of the
Company, on any dividend payment date, for the Company's 12 5/8% Senior
Subordinated Exchange Debentures due 2006. The Series E Preferred Stock is
redeemable at the Company's option, in whole or in part, at any time on or
after January 15, 2002, at the redemption prices set forth herein, plus
accumulated and unpaid dividends to the date of redemption. In addition, prior
to January 15, 2000, the Company may, at its option and subject to certain
conditions, redeem up to 50% of the aggregate of (i) the liquidation preference
of the Series E Preferred Stock issued (whether initially issued or issued in
lieu of cash dividends) less the liquidation preference of Series E Preferred
Stock exchanged for Exchange Debentures and (ii) the principal amount of
Exchange Debentures issued (whether issued in exchange for Series E Preferred
Stock or in lieu of cash interest), with the net proceeds
32
<PAGE>
of one or more common equity offerings at a redemption price of 112.625% of the
liquidation preference or principal amount, as the case may be. The Company is
required, subject to certain conditions, to redeem all of the Series E
Preferred Stock outstanding on October 31, 2006, at a redemption price equal to
100% of the liquidation preferences thereof, plus accumulated and unpaid
dividends to the date of redemption. Upon the occurrence of a Change of Control
(as defined therein), each holder of Series E Preferred Stock may require the
Company to offer to purchase all of that holder's shares of Series E Preferred
Stock at a price equal to 101% of the liquidation preference thereof, plus
accumulated and unpaid dividends to the date of purchase. The Series E
Preferred Stock will rank junior to the Series D Preferred Stock and senior to
all other outstanding classes or series of capital stock, with respect to
dividend rights and rights on liquidation of the Company.
The Company will require financing in addition to cash on hand in order to
consummate the Pending Acquisitions, which the Company anticipates obtaining
through borrowings under the Credit Agreement, proceeds from the Chancellor
Exchange and the Pending Dispositions and other financing sources which the
Company is currently evaluating. There can be no assurance that the Chancellor
Exchange or the Pending Dispositions will be successfully consummated or that
the Company will be able to successfully arrange for additional financing. The
Company expects to make borrowings under the Credit Agreement of $225.0 million
in order to consummate the Pending Acquisitions which it expects to occur in
the second quarter of 1997. The Credit Agreement prohibits the Company from
utilizing funds available thereunder unless the Company meets certain specified
financial tests, such as total leverage and senior leverage ratios and pro
forma interest expense. The ability of the Company to meet such tests is
dependent on the cash flow of the Company, giving effect to the consummation of
the acquisitions and dispositions of the Company. There can be no assurance
that the Company will have adequate borrowing capacity under the Credit
Agreement or will be able to obtain additional financing on terms acceptable to
the Company or at all. If the Company is unable to consummate the Pending
Acquisitions because of its failure to obtain financing or for any other
reason, it may forfeit deposits up to an aggregate amount of approximately
$22.0 million.
As a result of the foregoing, there can be no assurance as to when the
Pending Acquisitions or the Pending Disposition will be consummated or that
they will be consummated on the terms described herein or at all.
The Company expects that any additional acquisitions will be financed
through funds generated from operations, cash on hand, funds which may be
available under the Credit Agreement and additional debt and equity financing.
The availability of additional acquisition financing cannot be assured, and,
depending on the terms of the proposed acquisition financing, could be
restricted by the terms of the Credit Agreement, the debt incurrence test under
the Note Indenture, the Series D Preferred Stock and/or the Series E Preferred
Stock.
The Company's ability to make scheduled payments of principal, to pay
interest on or to refinance its debt (including the Notes and the Company's
borrowings under the Credit Agreement), to make dividend payments on the Series
D Preferred Stock and the Series E Preferred Stock and to redeem the Series B
Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and
the Series E Preferred Stock depends on its future financial performance,
which, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors beyond its control, as
well as the success of the radio stations to be acquired and the integration of
these stations into the Company's operations. The Company's borrowings under
the Credit Agreement will be, and other future borrowings may be, at variable
rates of interest, which will result in higher interest expense in the event of
increases in interest rates. There can be no assurance that the Chancellor
Exchange or the Pending Dispositions will be consummated, that the Company will
be able to borrow under the Credit Agreement, that the Company's business will
generate sufficient cash flow from operations, that anticipated improvements in
operating results will be achieved or that future working capital borrowings
will be available in an amount to enable the Company to service its debt, to
make dividend, and redemption payments and to make necessary capital or other
expenditures. The Company may be required to refinance a portion of the
principal amount of the Notes, or the aggregate liquidation preference of the
33
<PAGE>
Series E Preferred Stock and the Series D Preferred Stock prior to their
maturities. There can be no assurance that the Company will be able to raise
additional capital through the sale of securities, the disposition of radio
stations or otherwise for any such refinancing.
CHARGES TO OPERATIONS
Pursuant to an agreement between the Company and D. Geoffrey Armstrong, the
Company's Chief Operating Officer (the "Armstrong Agreement"), Mr. Armstrong's
employment may be terminated by either party during the one-month period
commencing on November 22, 1997 upon 30 days' written notice. If his employment
agreement is terminated, Mr. Armstrong will receive a payment of $1.2 million
pursuant to the provisions of his employment agreement which are currently
deferred, and the Company will purchase all of his outstanding options under
the Company's stock option plans for an amount equal to the difference between
(x) the number of such options multiplied by the respective exercise price of
such options and (y) the number of such options multiplied by the greater of
$40.00 and the average trading price of a share of Class A Common Stock during
the 20 days prior to five days before the effective date of the termination of
the employment agreement. In the event that the Company is required to purchase
Mr. Armstrong's options, based upon a repurchase price of $40.00 per share, the
Company will make a payment to Mr. Armstrong of approximately $3.25 million.
Should the employment contract be terminated and the stock options be
repurchased, the Company will record a charge to earnings equal to the amount
paid for the options.
The Company's Compensation Committee, Independent Directors and Mr.
Sillerman have agreed that the Company will enter into a new employment
agreement with Mr. Sillerman, pursuant to which Mr. Sillerman will continue in
his position with the Company for a five-year term, subject to renewal for an
additional five-year term. Mr. Sillerman's annual base pay under the agreement
will be $400,000, initially, subject to periodic adjustments. The Board of
Directors and the Compensation Committee also approved a $2.5 million loan to
Mr. Sillerman, which loan will be a full-recourse obligation of Mr. Sillerman
and bear interest. Mr. Sillerman has indicated his intention to use a portion
of the proceeds from the loan to acquire additional common equity in the
Company.
The employment agreement, which has not yet been finalized, will include the
issuance of stock options or their equivalent both during the term of the
employment agreement and in the event of a Change of Control of the Company in
amounts to be determined by the Board of Directors and the Compensation
Committee. It is anticipated that, except as described above, the provisions of
Mr. Sillerman's employment agreement, including those with respect to changes
of control of the Company, will be similar to those in his existing employment
agreement.
The Pending Acquisitions will be accounted for using the purchase method of
accounting and the intangible assets created in the purchase transactions will
be amortized against future earnings of the combined companies. The amount of
such amortization will be substantial and will continue to affect the Company's
operating results in the future. These expenses, however, do not result in an
outflow of cash by the Company and do not impact the Company's Broadcast Cash
Flow.
At December 31, 1996, the aggregate contractual maturities of long-term debt
for the years ended December 31, 1997, 1998, 1999, 2000 and thereafter
(excluding borrowings under the Credit Agreement, which was repaid in 1997) are
$231,000, $309,000, $0, $566,000 and $450,000,000 respectively. (The Company
had capital lease obligations of $354,000 as of December 31, 1996.) Future
minimum payments for all noncancellable capital leases with initial terms of
one or more years for the years ended December 31, 1997, 1998, 1999, 2000 and
thereafter are $179,000, $141,000, $63,000, $17,000 and $4,000 respectively.
The Company is also required to make a payment of $1.0 million in 1997 to
redeem its Series B Redeemable Preferred Stock. The Company believes it will
require additional financing to be able to make these payments, together with
capital expenditures and principal amortization payments under the New Credit
Agreement, and through funds generated from its operations.
34
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on page F1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's
accountants on accounting matters or financial disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is incorporated by reference to the
Company's definitive Proxy Statement for the 1997 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated by reference to the
Company's definitive Proxy Statement for the 1997 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated by reference to the
Company's definitive Proxy Statement for the 1997 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated by reference to the
Company's definitive Proxy Statement for the 1997 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements of SFX
Broadcasting, Inc. and subsidiaries are filed As a part of this report
or are incorporated herein by reference:
Report of Independent Auditors
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1996
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended December 31, 1996
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1996
Notes to Consolidated Financial Statements
(2) The following financial statement schedule of SFX Broadcasting, Inc.
and Subsidiaries is filed as a part of this report or incorporated
herein by reference:
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
35
<PAGE>
(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3.1 Restated Certificate of Incorporation, as amended (incorporated
by reference to Exhibit 3.1 to Form 8-K (Commission File No.
0-22486) filed with the Commission on November 27, 1996).
3.2 By-laws, as amended (incorporated by reference to Exhibit 3.1 to
Amendment No. 1 to Registration Statement Form S-3 (Reg. No.
333-15469) filed with the Commission on November 21, 1996).
4.1 Form of Certificate of Designations for Series E Cumulative
Exchangeable Preferred Stock (incorporated by reference to the
Registration Statement Form S-3 (Reg. No. 333-16995) filed with
the Commission on November 27, 1996).
4.2 Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred
Stock and Qualifications, Limitations and Restrictions thereof of
6 1/2% Series D Cumulative Convertible Exchangeable Preferred
Stock due May 31, 2007 (incorporated by reference to Exhibit 3.5
to Registration Statement Form S-4 (Reg. No. 333-06553) filed
with the Commission on June 21, 1996).
4.3 Warrant Agreement, dated as of March 23, 1994, by and among MMR,
American Stock Transfer & Trust Company, as warrant agent and
certain underwriters (incorporated by reference to Exhibit 4.2 to
Amendment No. 2 to Registration Statement on Form SB-2 (Reg. No.
33-74526) filed with the Commission on March 18, 1994).
4.4 Supplemental Warrant Agreement, dated as of November 22, 1996
(incorporated by reference to Exhibit 4.2 to Form 8-K (Commission
File No. 0-22080) filed with the Commission on November 27,
1996).
4.5 Unit Purchase Options, dated March 23, 1994 (incorporated by
reference to Exhibit 4.1 to Amendment No. 2 to Registration
Statement on Form SB-2 (Reg. No. 33-74526) filed with the
Commission on March 18, 1994).
4.6 Common Stock Purchase Warrant, dated July 29, 1993 (incorporated
by reference to Exhibit 10.38 to Form 10-KSB (Commission File No.
0-22486) for the year ended December 31, 1994).
4.7 Common Stock Purchase Warrants dated November 22, 1996
(incorporated by reference to Exhibit 4.2 to Form 8-K (Commission
File No. 0-22080) filed with the Commission on November 27,
1996).
4.8 Assumption of Warrants dated November 22, 1996 (incorporated by
reference to Exhibit 4.2 to Form 8-K (Commission File No.
0-22080) filed with the Commission on November 27, 1996).
10.1 Amended and Restated Employment Agreement between the Company and
Mr. Sillerman (incorporated by reference to Exhibit 10.26 to
Amendment No. 2 to Registration Statement Form S-1 (Reg. No.
33-92086) filed with the Commission on June 26, 1995).
10.2 Amended and Restated Employment Agreement between the Company and
Mr. Hicks (incorporated by reference to Exhibit 10.27 to
amendment No. 2 to Registration Statement Form S-1 (Reg. No.
33-92086) filed with the Commission on June 26, 1995).
10.3 Amended and Restated Employment Agreement between the Company and
Mr. Armstrong (incorporated by reference to Exhibit 10.28 to
Amendment No. 2 to Registration Statement Form S-1 (Reg. No.
33-92086) filed with the Commission on June 26, 1995).
10.4 Asset Purchase Agreement between Trumper Communications of North
Carolina Limited Partnership and SFX Broadcasting of North
Carolina, Inc. dated as of April 1, 1995 (incorporated by
reference to Exhibit 10.29 to Amendment No. 2 to Registration
Statement Form S-1 (Reg. No. 33-92086) filed with the Commission
on June 26, 1995).
36
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.5 Asset Purchase Agreement between Cardinal Communications
Partners, L.P., SFX Broadcasting of Texas (KTCK), Inc. and the
Company, dated as of April 24, 1995 (incorporated by reference to
Exhibit 10.30 to Amendment No. 2 to Registration Statement Form
S-1 (Reg. No. 33-92086) filed with the Commission on June 26,
1995).
10.6 Senior Promissory Note of Sillerman Communications Management
Corporation to the Company in the amount of $2,000,000, dated as
of January 23, 1995 (incorporated by reference to Exhibit 10.31
to Amendment No. 2 to Registration Statement Form S-1 (Reg. No.
33-92086) filed with the Commission on June 26, 1995).
10.7 First Amendment to Amended and Restated Credit Agreement between
the Company and The Bank of New York as Agents thereunder, dated
as of April 21, 1995 (incorporated by reference to Exhibit 10.32
to Amendment No. 2 to Registration Statement Form S-1 (Reg. No.
33-92086) filed with the Commission on June 26, 1995).
10.8 Stock Exchange Agreement between Equitable Deal Flow Fund, L.P.,
the Equitable Life Assurance Society of the United States,
Equitable Variable Life Insurance Company and the Company, dated
as of December 2, 1994 (incorporated by reference to Exhibit
10.33 to Amendment No. 2 to Registration Statement Form S-1 (Reg.
No. 33-92086) filed with the Commission on June 26, 1995).
10.9 Stock Purchase Agreement among the Company, Liberty Broadcasting,
Incorporated, Josephthall, Littlejohn and Levy Fund, L.P.,
Michael Craven and James Thompson dated as of November 15, 1995
(incorporated by reference to Exhibit 10.34 to Form 10-K
(Commission File No. 0-22486) for the year ended December 31,
1995).
10.10 Letter Agreement between SFX Broadcasting, Inc. and Multi-Market
Radio, Inc. regarding exchange of assets dated November 17, 1995
(incorporated by reference to Exhibit 10.35 to Form 10-K
(Commission File No. 0-22486) for the year ended December 31,
1995).
10.11 Joint Sales Agreement between SFX Broadcasting of Jackson, Inc.
and Multi-Market Radio Acquisition Corporation (incorporated by
reference to Exhibit 10.36 to Form 10-K (Commission File No.
0-22486) for the year ended December 31, 1995).
10.12 Joint Sales Agreement between SFX Broadcasting of South Carolina
(WMYI), Inc. and Multi-Market Radio Acquisition Corporation
(incorporated by reference to Exhibit 10.37 to Form 10-K
(Commission File No. 0-22486) for the year ended December 31,
1995).
10.13 Joint Sales Agreement between Multi-Market Radio Acquisition
Corporation and the Company (incorporated by reference to Exhibit
10.38 to Form 10-K (Commission File No. 0-22486) for the year
ended December 31, 1995).
10.14 Programming Agreement between the Company and Trumper
Communications of North Carolina Limited Partnership
(incorporated by reference to Exhibit 10.39 to Form 10-K
(Commission File No. 0-22486) for the year ended December 31,
1995).
10.15 Asset Purchase Agreement between Prism Radio Partners, L.P. and
the Company (incorporated by reference to Exhibit 10.40 to Form
10-K (Commission File No. 0-22486) for the year ended December
31, 1995).
10.16 Joint Sales Agreement between the Company and HMW Communications,
Inc. (incorporated by reference to Exhibit 10.42 to Form 10-K
(Commission File No. 0-22486) for the year ended December 31,
1995).
10.17 Asset Purchase Agreement between the Company and HMW
Communications, Inc. (incorporated by reference to Exhibit 10.42
to Form 10-K (Commission File No. 0-22486) for the year ended
December 31, 1995).
10.18 Asset Purchase Agreement between Texas Coast Broadcasters, Inc.
and Multi-Market Radio, Inc. (incorporated by reference to
Exhibit 99.1 to Form 10-K (Commission File No. 0-22486) for the
year ended December 31, 1995).
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<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.19 Asset Purchase Agreement between Lewis Broadcasting Corporation
and Multi-Market Radio Acquisition Corporation (incorporated by
reference to Exhibit 99.2 to Form 10-K (Commission File No.
0-22486) for the year ended December 31, 1995).
10.20 Asset Purchase Agreement between ABS Greenville Partners, L.P.
and Multi-Market Radio Acquisition Corporation (incorporated by
reference to Exhibit 99.3 to Form 10-K (Commission File No.
0-22486) for the year ended December 31, 1995).
10.21 Asset Purchase Agreement between Multi-Market Radio, Inc. and
Puritan Radiocasting Company (incorporated by reference to
Exhibit 10.1 to MMR's 10-Q (Commission File No. 0-22080) for the
quarter ended March 31, 1996).
10.22 Asset Purchase Agreement between MMR and Wilks Broadcast
Acquisitions, Inc. (incorporated by reference to Exhibit 10.3 to
MMR's 10-Q ( Commission File No. 0-22080) for the quarter ended
March 31, 1996).
10.23 Letter of Intent between MMR and Jones Eastern Radio of Augusta,
Inc. (incorporated by reference to Exhibit 10.5 to MMR's 10-Q (
Commission File No. 0-22080) for the quarter ended March
31,1996).
10.24 Amended and Restated Agreement and Plan of Merger, dated April
15, 1996, among the Company, SFX Merger Company and MMR
(composite version incorporated by reference to Annex B to the
Joint Proxy Statement/Prospectus to Form S-4 (Commission File No.
333-13337) filed with the Commission on October 3, 1996).
10.25 Asset Purchase Agreement between HMW Communications, Inc. and
Multi-Market Radio Acquisition Corporation (incorporated by
reference to Exhibit 99.4 to Form 10-K (Commission File No.
0-22486) for the year ended December 31, 1995).
10.26 Joint Sales Agreement between HMW Communications, Inc. and
Multi-Market Radio Acquisition Corporation (incorporated by
reference to Exhibit 99.6 to Form 10-K (Commission File No.
0-22486) for the year ended December 31, 1995).
10.27 Termination and Assignment Agreement, dated as of April 15, 1996,
between Sillerman Communications Management Corporation and the
Company (incorporated by reference to Exhibit 10.1 to Form 8-K
(Commission File No. 0-22486) filed with the Commission on April
18, 1996).
10.28 Warrant to purchase 300,000 shares of Class A Common Stock of the
Company issued to SCMC (incorporated by reference to Exhibit 10.3
to Form 8-K (Commission File No. 0-22486) filed with the
Commission on October 3, 1996).
10.29 Warrant to purchase 300,000 shares of Class A Common Stock of the
Company issued to SCMC (incorporated by reference to Exhibit 10.4
to Form 8-K (Commission File No. 0-22486) filed with the
Commission on October 3, 1996).
10.30 Agreement, dated as of April 16, 1996, between the Company and R.
Steven Hicks (incorporated by reference to Exhibit 10.2 to Form
8-K (Commission File No. 0-22486) filed with the Commission on
April 18, 1996).
10.31 Asset Purchase Agreement, dated May 1, 1996, among the Company,
KIRO, Inc, and Bonneville Holding Company (incorporated by
reference to Exhibit 10.2 to Form 8-K (Commission File No.
0-22486) filed with the Commission on May 9, 1996).
10.32 Letter Agreement, dated May 16, 1996, between the Company and the
Bank of New York (incorporated by reference to Exhibit 10.1 to
Form 8-K (Commission File No. 0-22486) filed with the Commission
on May 24, 1996).
10.33 Consent Agreement, dated May 17, 1996, among The Huff Alternative
Income Fund, L.P., Multi-Market Radio, Inc. and the Company
(incorporated by reference to Exhibit 10.2 to MMR's Form 8-K
(Commission File No. 0-22080) filed with the Commission on
September 10, 1996).
38
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.34 Asset Purchase Agreement, dated May 13, 1996, between SFX
Acquisition Corporation and Clear Channel Radio, Inc.
(incorporated by reference to Exhibit 10.2 to Form 8-K
(Commission File No. 0-22486) filed with the Commission on May
24, 1996).
10.35 Asset Purchase Agreement, dated May 13, 1996, between SFX
Acquisition Corporation and Regent Broadcasting of Louisville,
Inc. (incorporated by reference to Exhibit 10.3 to Form 8-K
(Commission File No. 0-22486) filed with the Commission on May
24, 1996).
10.36 Amended and Restated Agreement, dated June 19, 1996, between the
Company and R. Steven Hicks (incorporated by reference to Exhibit
10.1 to Form 8-K (Commission File No. 0-22486) filed with the
Commission on June 21, 1996).
10.37 Amended and Restated Employment Agreement, dated June 19, 1996,
between the Company and Tom Benson (incorporated by reference to
Exhibit 10.1 to Form 8-K (Commission File No. 0-22486) filed with
the Commission on June 21, 1996).
10.38 Time Brokerage Agreement between ABS Greenville Partners, L.P.
and Multi-Market Radio Acquisition Corporation (incorporated by
reference to Exhibit 99.7 to Form 10-K (Commission File No.
0-22486) for the year ended December 31, 1995).
10.39 Exchange Agreement, dated July 1, 1996, between Chancellor Radio
Broadcasting Company and SFX Broadcasting, Inc. (incorporated by
reference to Exhibit 10.59 to Amendment No. 1 to the Form S-4 of
SFX Broadcasting, Inc. (Commission File No. 333-06553) filed with
the Commission on July 16, 1996).
10.40 Asset Purchase Agreement between SFX Broadcasting of Texas (KTCK)
Licensee, Inc., SFX Broadcasting of Texas (KTCK), Inc. and KRBE
Co. (incorporated by reference to Exhibit 10.58 to Amendment No.
1 to Form (Reg. No. 333-06553) filed with the Commission on July
16, 1996).
10.41 Asset Purchase Agreement between Jared Broadcasting Company of
Albany, Incorporated (incorporated by reference to Exhibit 2.13
to Form 10-Q (Commission File No. 0-22486) for the quarter ended
September 30, 1996).
10.42 Letter of Intent, dated August 9, 1996, between the Company,
Kenneth A. Brown, ABS Communications, Inc., ABS Communications,
L.L.C., ABS Richmond Partners, L.P., ABS Richmond Partners II,
L.P., EBF, Inc. and EBF Partners (incorporated by reference to
Exhibit 2.11 to Form 10-Q (Commission File No. 0-22486) for the
quarter ended September 30, 1996).
10.43 Letter of Intent, dated August 28, 1996, between SFX
Broadcasting, Inc. and EZ Communications,Inc. (incorporated by
reference to Exhibit 2.3 to Form 8-K (Commission File No.
0-22486) filed with the Commission on October 3, 1996).
10.44 Loan Agreement, dated September 4, 1996, between the Company and
MMR (incorporated by reference to Exhibit 2.4 to Form 8-K
(Commission File No. 0-22486) filed with the Commission on
October 3, 1996).
10.45 Asset Exchange Agreement, dated as of September 24, 1996, among
WHFS, Inc. Liberty Broadcasting of Maryland Incorporated
(incorporated by reference to Exhibit 2.5 to Form 8-K (Commission
File No. 0-22486) filed with the Commission on October 3, 1996).
10.46 Asset Purchase Agreement between Secret Communications Limited
Partnership and the Company (incorporated by reference to Exhibit
10.2 to Form 8-K (Commission File No. 0-22486) filed with the
Commission on October 30, 1996).
10.47 Purchase and Sale Agreement among WWYZ, Inc., Great American
Music Fest & Production Co. (collectively the "Companies"), each
of the shareholders of the Companies and SFX Broadcasting, Inc.
(incorporated by reference to Exhibit 10.4 to Form 8-K
(Commission File No. 0-22486) filed with the Commission on
October 30, 1996).
10.48 Amendment to Asset Purchase Agreement between Texas Coast
Broadcasters, Inc. and Multi-Market Radio, Inc. (incorporated by
reference to Exhibit 10.5 to Form 8-K (Commission File No.
0-22486) filed with the Commission on October 30, 1996).
39
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.49 Stock Purchase Agreement between Delsener/Slater Enterprises,
Ltd., Beach Concerts, Inc., Connecticut Concerts, Incorporated,
Broadway Concerts, Inc., Ardee Productions, Ltd., Ardee Festivals
NJ, Inc., In-House Tickets, Inc., Exit 116 Revisited, Inc., Dumb
Deal, Inc., Ron Delsener, Mitch Slater and SFX Broadcasting, Inc.
(incorporated by reference to Exhibit 10.3 to Form 8-K
(Commission File No. 0-22486) filed with the Commission on
October 30, 1996).
10.50 Second Amended and Restated Credit Agreement among the Company,
its subsidiaries and the Bank of New York, as agent for the
lenders (incorporated by reference to Exhibit 10.1 to Form 8-K
(Commission File No. 0-22486) filed with the Commission on
November 27, 1996).
10.51* Agreement of Merger, dated February 12, 1997, among the Company,
NOC-Acquisition Corp., CADCO Acquisition Corp., QN-Acquisition
Corp., Nederlander of Connecticut, Inc., Connecticut Amphitheater
Development Corporation, QN Corp., Connecticut Performing Arts
Partners and certain stockholders.
10.52* Amendment No. 1 to Asset Purchase Agreement, dated January 21,
1997, between Secret Communications Limited Partnership and the
Company.
10.53* Letter of Intent, dated March 4, 1997, between the Company and
Sunshine Promotions, Inc.
10.54* Employment Agreement between the Company and Michael G. Ferrel.
10.55* Fourth Supplemental Indenture, dated January 29, 1997, among
Delsener/Slater Enterprises, Ltd., Delsener/Slater Enterprises,
Inc., In House Tickets, Inc., Connecticut Concerts Incorporated,
Ardee Festivals N.J., Inc., Ardee Productions, Ltd., Exit 116
Revisited, Inc., Dumb Deal, Inc., Broadway Concerts, Inc. and The
Chase Manhattan Bank.
10.56* Form of Consent and Amendment to the Second Amendment and
Restated Credit Agreement, dated March 24, 1997, between the
Company and the Lenders.
10.57* Form of Amendment No. 2 to Asset Purchase Agreement, dated
between Secret Communications, Inc. Limited Partnership and the
Company.
10.58* Master Richmond Station Group Agreement, dated as of December 17,
1996, among the Company, ABS Communications Incorporated, Kenneth
Brown, EBF Partners, ABS Communications, L.L.C., ABS Richmond
Partners, L.P, ABS Richmond Partners II, L.P., ABS Richmond
Towers, L.P. and J. Edwin Conrad.
10.59* Convertible Note Agreement, dated as of December 17, 1996,
between ABS Communications, L.L.C., as borrower and the Company,
as lender.
10.60* SFX Contribution Agreement, dated as of December 17, 1996, among
Liberty Acquisition Subsidiary Corporation, Liberty Broadcasting
of Maryland II, the Company and ABS Communications, L.L.C.
11.1* Statement regarding computation of per share earnings.
21.1* Subsidiaries of the Company
23.1* Consent of Ernst & Young LLP.
23.2* Consent of Fisher Wayland Cooper Leader & Zaragoza LLP.
23.3* Consent of BIA Publications, Inc.
27.1* Financial Data Schedule
- --------------
* filed herewith
(b) The following reports on Form 8-K were filed during the fiscal quarter
ended December 31, 1996.
40
<PAGE>
On October 3, 1996, the Company filed a report on Form 8-K in connection
with (i) the amendment of its merger agreement with MMR, (ii) the entering into
of a memorandum of understanding with respect to certain litigation, (iii) the
entering into of a loan agreement with MMR, (iv) the entering into of
agreements with respect to: the Jackson Acquisitions, the Louisville
Dispositions, the Albany Acquisition, the exchange of certain stations
operating in Charlotte, North Carolina, the Richmond Acquisition and the Dallas
Acquisition.
On October 30, 1996, the Company filed a report on Form 8-K in connection
with Supplement No. 1 to the Company's Joint Proxy Statement/Prospectus.
On November 1, 1996, the Company filed a report on Form 8-K containing
certain financial statements of radio stations WRFX-FM, WEDJ-FM and WKSS-FM.
On November 27, 1996 the Company filed a report on Form 8-K in connection
with (i) the consummation of the MMR Merger, (ii) the termination of a letter
of intent with respect to the exchange of certain radio stations, (iii) the
approval of an amendment to the Company's Certificate of Incorporation to
increase the authorized shares of Class A Common Stock and (iv) certain pro
forma financial information.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SFX BROADCASTING, INC.
By: /s/ Robert F.X. Sillerman
-------------------------------
Name: Robert F.X. Sillerman
Title: Executive Chairman
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Robert F.X. Sillerman Executive Chairman and Director March 31, 1997
- -------------------------- (principal executive officer)
Robert F.X. Sillerman
/s/ Michael G. Ferrel Chief Executive Officer and Director March 31, 1997
- --------------------------
Michael G. Ferrel
/s/ D. Geoffrey Armstrong Chief Operating Officer, Executive March 31, 1997
- -------------------------- Vice President and Director
D. Geoffrey Armstrong
/s/ Thomas P. Benson Chief Financial Officer, Treasurer March 31, 1997
- -------------------------- and Director (principal financial and
Thomas P. Benson accounting officer)
/s/ Howard J. Tytel Executive Vice President, Secretary March 31, 1997
- -------------------------- and Director
Howard J. Tytel
/s/ James F. O'Grady Director March 28, 1997
- --------------------------
James F. O'Grady
/s/ Paul Kramer Director March 31, 1997
- --------------------------
Paul Kramer
/s/ Richard A. Liese Director March 31, 1997
- --------------------------
Richard A. Liese
/s/ Edward F. Dugan Director March 28, 1997
- --------------------------
Edward F. Dugan
</TABLE>
42
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
The following consolidated financial statements are included in Item 8:
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for each of the
Three Years in the Period Ended December 31, 1996 F-5
Consolidated Statements of Shareholders' Equity for each of the
Three Years in the Period Ended December 31, 1996 F-6
Consolidated Statements of Cash Flows for each of the
Three Years in the Period Ended December 31, 1996 F-7
Notes to Consolidated Financial Statements F-8
The following consolidated financial statement schedule is included in Item 14(a):
Schedule II--Valuation and Qualifying Accounts F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SFX Broadcasting, Inc.
We have audited the accompanying consolidated balance sheets of SFX
Broadcasting, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of SFX Broadcasting, Inc. and Subsidiaries at December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 20, 1997,
except for Note 13, as to which the date
is March 27, 1997
F-2
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................. $ 10,601 $ 11,893
Cash pledged for letters of credit (Note 13) .............. 20,000 --
Accounts receivable less allowance for doubtful accounts
of $1,620 in 1996 and $922 in 1995 including related
party receivable of $250 in 1996 (Note 9) ................ 47,275 18,034
Assets under contract for sale (Note 2) ................... 8,352 --
Prepaid broadcast rights and other current assets ........ 2,461 1,022
---------- ----------
Total current assets .................................... 88,689 30,949
---------- ----------
Property and equipment:
Land ...................................................... 6,791 3,179
Buildings and improvements ................................ 11,485 6,265
Equipment and furniture ................................... 54,736 14,093
---------- ----------
73,012 23,537
Less accumulated depreciation and amortization ........... (10,192) (6,770)
---------- ----------
Net property and equipment .............................. 62,820 16,767
Intangible Assets:
Broadcast licenses ........................................ 558,640 118,724
Goodwill .................................................. 98,165 11,209
Deferred financing costs .................................. 19,504 8,391
Other ..................................................... 4,727 4,719
---------- ----------
681,036 143,043
Less accumulated amortization ............................. (16,933) (13,500)
---------- ----------
Net intangible assets ................................... 664,103 129,543
Deposits and other payments for pending acquisitions ..... 31,692 4,556
Notes receivable from related parties (Note 9) ........... -- 4,439
Other assets .............................................. 12,023 1,083
---------- ----------
TOTAL ASSETS ............................................ $859,327 $187,337
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................ $ 10,921 $ 4,005
Accrued expenses ............................................ 21,913 4,736
Accrued interest and dividends .............................. 7,111 2,303
Current portion of long-term debt (Note 5) .................. 231 260
Current portion of capital lease obligations (Note 11) ..... 150 311
---------- ----------
Total current liabilities ................................. 40,326 11,615
Long-term debt, less current portion (Note 5) ............... 480,875 80,609
Capital lease obligations, less current portion (Note 11) .. 204 670
Other liabilities ........................................... -- 682
Deferred income taxes (Note 8) .............................. 91,352 7,415
---------- ----------
Total liabilities ......................................... 612,757 100,991
Redeemable preferred stock (Note 6) ......................... 152,053 3,285
Commitments and contingencies (Note 11)
Shareholders' Equity (Note 7):
Class A Voting common stock, $.01 par value; 100,000,000
shares authorized; 8,089,367 issued and 8,063,348
outstanding at December 31, 1996 and 6,458,215 outstanding
at December 31, 1995 ....................................... 81 64
Class B Voting convertible common stock, $.01 par value;
10,000,000 shares authorized; 1,208,810 issued and
1,064,936 outstanding at December 31, 1996 and 1,000,000
outstanding at December 31, 1995 ........................... 12 10
Additional paid-in capital .................................. 183,866 115,184
Treasury Stock; 170,192 shares at December 31, 1996 ........ (6,393) --
Accumulated deficit ......................................... (83,049) (32,197)
---------- ----------
Total shareholders' equity ................................ 94,517 83,061
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................. $859,327 $187,337
========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Gross revenues ................................................ $ 162,011 $ 87,140 $ 63,116
Less agency commissions ....................................... (18,950) (10,310) (7,560)
----------- ----------- ----------
Net revenues ................................................ 143,061 76,830 55,556
Station operating expenses .................................... 92,816 51,039 33,956
Depreciation, amortization, duopoly integration costs and
acquisition related costs (Notes 2 and 3) .................... 17,311 9,137 5,873
Corporate expenses, including related party expenses of $151
in 1996, $330 in 1995 and $178 in 1994, net of related party
advisory fees of $802 in 1996 (Note 9) ....................... 6,313 3,797 2,964
Non-recurring and unusual charges, including adjustments to
broadcast rights agreement (Note 10) ......................... 28,994 5,000 --
----------- ----------- ----------
Total operating expenses .................................... 145,434 68,973 42,793
----------- ----------- ----------
Operating (loss) income ....................................... (2,373) 7,857 12,763
Investment income (loss), net of equity in loss of
unconsolidated subsidiary .................................... 4,017 650 (121)
Interest expense .............................................. (34,897) (12,903) (9,332)
Loss on sale of radio station ................................. (1,900) -- --
----------- ----------- ----------
(Loss) income before income taxes and extraordinary item ..... (35,153) (4,396) 3,310
Income tax expense (Note 8) ................................... 480 -- 1,474
----------- ----------- ----------
(Loss) income before extraordinary item ....................... (35,633) (4,396) 1,836
Extraordinary loss on debt retirement (Note 5) ................ 15,219 -- --
----------- ----------- ----------
Net (loss) income ........................................... (50,852) (4,396) 1,836
Redeemable preferred stock dividends and accretion ........... 6,061 291 348
----------- ----------- ----------
Net (loss) income applicable to common stock ................ $ (56,913) $ (4,687) $ 1,488
=========== =========== ==========
(Loss) income applicable to common stock per share before
extraordinary item ........................................... $ (5.51) $ (0.71) $ 0.26
Extraordinary loss on debt retirement per common share ....... (2.01) -- --
----------- ----------- ----------
Net (loss) income per common share .......................... $ (7.52) $ (0.71) $ 0.26
=========== =========== ==========
Weighted average common shares outstanding .................... 7,563,600 6,595,728 5,792,385
=========== =========== ==========
</TABLE>
See accompanying notes
F-5
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1994, 1995, and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
LOSS ON
CLASS A CLASS B CLASS C PAID-IN TREASURY SHORT TERM ACCUMULATED
COMMON COMMON COMMON CAPITAL STOCK INVESTMENTS DEFICIT TOTAL
------- ------- ------- --------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 ......... $37 $ 9 $ 11 $ 78,178 $ -- $ -- $(29,637) $ 48,598
Accretion and dividends on
redeemable preferred stock ........ (348) (348)
Conversion of Class C Common
including fees and expenses
(Note 7) ......................... 11 (11) (1,150) (1,150)
Reduction of equity issuance costs 105 105
Unrealized holding losses on short
term investments .................. (185) (185)
Net income ......................... 1,836 1,836
------- ------- ------- --------- -------- ----------- ----------- ---------
Balance, December 31, 1994 ......... $48 $ 9 $ -- $ 76,785 $ (185) $ (27,801) $ 48,856
======= ======= ======= ========= ======== =========== =========== =========
Public offering, net of expenses .. 17 39,149 39,166
Redemption of Class C Common
(Note 7) .......................... (459) (459)
Accretion and dividends on
redeemable preferred stock ........ (291) (291)
Conversion of Class A Common to
Class B Common (Note 7) ........... (1) 1 --
Decrease in unrealized holding
losses ............................ 185 185
Net loss ........................... (4,396) (4,396)
------- ------- ------- --------- -------- ----------- ----------- ---------
Balance, December 31, 1995 ......... $64 $10 $ -- $115,184 $ -- $ -- (32,197) $ 83,061
======= ======= ======= ========= ======== =========== =========== =========
Issuance costs of Class D
Redeemable Preferred Stock ........ (6,054) (6,054)
Accretion and dividends on
redeemable preferred stock ........ (6,061) (6,061)
Issuance of stock options .......... 370 370
Issuance of warrants to SCMC
(Notes 9 and 10) .................. 8,905 8,905
Issuance of equity securities for
MMR Merger (Note 7) ............... 17 2 71,522 71,541
Repurchase of common stock
(Note 10) ......................... (6,393) (6,393)
Net loss ........................... (50,852) (50,852)
------- ------- ------- --------- -------- ----------- ----------- ---------
Balance, December 31, 1996 ......... $81 $12 $ -- $183,866 $(6,393) $ -- $(83,049) $ 94,517
======= ======= ======= ========= ======== =========== =========== =========
</TABLE>
See accompanying notes
F-6
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
----------- ---------- ---------
<S> <C> <C> <C>
Operating activities:
Net (loss) income .............................................. $ (50,852) $ (4,396) $ 1,836
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization ................................. 16,174 7,757 5,873
Extraordinary loss on debt repayment .......................... 15,219 -- --
Noncash portion of non-recurring and unusual charge .......... 9,878 -- --
Loss on sale of radio station and other noncash items ........ 1,900 (207) 826
Deferred taxes ................................................ (710) -- 1,309
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable ........................................... (13,839) (5,164) (1,362)
Prepaid broadcasting rights and other assets .................. (1,704) 2,052 (4,476)
Accrued interest and dividends ................................ 3,841 6 (47)
Accounts payable, accrued expenses and other liabilities ..... 6,646 451 (2,785)
----------- ---------- ---------
Net cash (used in) provided by operating activities ......... (13,447) 499 1,174
Investing activities:
Purchase of stations and related business, net of cash
acquired...................................................... (493,433) (26,057) (4,604)
Proceeds from sales of stations and other assets .............. 56,943 703 --
Deposits and other payments for pending acquisitions ......... (30,799) (3,000) --
Purchase of property and equipment ............................ (3,224) (3,261) (1,951)
Purchase of short-term investments ............................ -- -- (3,019)
Sale of short-term investments ................................ -- 7,918 3,390
Loans and advances to related parties ......................... -- (2,000) --
----------- ---------- ---------
Net cash used in investing activities ........................ (470,513) (25,697) (6,184)
Financing activities:
Payments on long-term debt, including prepayment premiums ..... (110,396) (22,521) (333)
Additions to debt issuance costs .............................. (19,505) (2,139) --
Proceeds from issuance of senior and subordinated debt ....... 501,500 22,000 --
Net proceeds from sale of preferred stock ..................... 143,445 -- --
Dividends paid on preferred stock ............................. (4,983) -- --
Proceeds from issuance of common stock ........................ -- 39,166 --
Purchase of treasury stock .................................... (6,393) -- --
Redemption of preferred stock ................................. (1,000) (1,000) (1,750)
Retirement of Class C Common Stock ............................ -- (459) --
Decrease in accrued stock acquisition costs ................... -- (1,150) --
----------- ---------- ---------
Net cash provided by (used in) financing activities ......... 502,668 33,897 (2,083)
Net increase in cash and cash equivalents ...................... 18,708 8,699 7,093
Cash and cash equivalents at beginning of period ............... 11,893 3,194 10,287
----------- ---------- ---------
Cash and cash equivalents at end of period ..................... $ 30,601 $ 11,893 $ 3,194
=========== ========== =========
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest ...................................................... $ 30,898 $ 12,903 $ 9,464
Income taxes .................................................. $ 81 -- $ 300
</TABLE>
Supplemental schedule of noncash financing activities: Issuance of equity
securities for MMR Merger (Note 2)
Issuance of warrants in connection with SCMC termination agreement (Note 10)
See accompanying notes
F-7
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
SFX Broadcasting, Inc. (the "Company"), a Delaware corporation, is one of
the largest radio station groups in the United States. At December 31, 1996,
the Company owned and operated, provided programming to or sold advertising on
behalf of fifty-one FM stations and seventeen AM stations serving the following
twenty-three markets: Washington, D.C./Baltimore, Maryland; Houston, Texas;
Nassau-Suffolk, New York; San Diego, California; Providence, Rhode Island;
Charlotte, North Carolina; Hartford, Connecticut; Greensboro, North Carolina.;
Nashville, Tennessee; Raleigh-Durham, North Carolina; Jacksonville, Florida;
Richmond, Virginia; Albany, New York; Greenville-Spartanburg, South Carolina;
Tucson, Arizona; Springfield/Northampton, Massachusetts; Little Rock, Arkansas;
Wichita, Kansas; Daytona Beach, Florida; New Haven, Connecticut; Jackson,
Mississippi; Biloxi, Mississippi and Myrtle Beach, South Carolina.
NOTE 2 -- ACQUISITIONS AND DISPOSITIONS
In December 1996, the Company acquired substantially all of the assets of
WHSL-FM, operating in Greensboro, North Carolina, for a purchase price of $6.0
million (the "Greensboro Acquisition") and exchanged radio station KRLD-AM,
Dallas, Texas, and the Texas State Networks for radio station KKRW-FM, Houston,
Texas (the "Houston Exchange"). The Houston Exchange was structured as a
substantially tax free exchange of like kind assets. No gain or loss was
recorded on the Houston Exchange as the book values of KRLD-AM and the Texas
State Networks approximated the fair value of the assets of KKRW-FM.
In November 1996, the Company consummated its merger with MMR (the "MMR
Merger"), pursuant to which it acquired Multi-Market Radio, Inc. ("MMR") in
exchange for 1,631,450 shares of Class A Common Stock, 208,810 shares of Class
B Common Stock and other equity securities with a total market value for all
securities issued of approximately $71.5 million (Note 7). Concurrently with
the consummation of the MMR Merger, the Company paid approximately $43.0
million to satisfy outstanding indebtedness of MMR. MMR was organized in 1992
by the Company's executive chairman and another officer and director of the
Company. The Company's executive chairman owned a substantial equity interest
in MMR which was exchanged for Class B Common Stock of the Company upon the
consummation of the MMR Merger. MMR owned and operated, provided programming to
or sold advertising on behalf of 13 FM stations and one AM station located in
eight markets: New Haven, Connecticut; Hartford, Connecticut;
Springfield/Northampton, Massachusetts; Daytona Beach, Florida; Augusta,
Georgia; Biloxi, Mississippi; Myrtle Beach, South Carolina and Little Rock,
Arkansas. MMR had entered into agreements to sell two stations operating in
Myrtle Beach, South Carolina (Note 13) and one station operating in Little
Rock, Arkansas (the "MMR Dispositions"). The Little Rock station will be sold
to Triathlon Broadcasting, Inc. ("Triathlon"), a related party. The MMR
Dispositions are classified as assets under contract for sale in the
accompanying balance sheet. The Company also terminated a Joint Sales Agreement
("JSA") with one station operating in Augusta, Georgia and its Local Marketing
Agreement ("LMA") with one station operating in Myrtle Beach, South Carolina in
December 1996.
In October 1996, the Company sold radio station KTCK-AM, Dallas, Texas for
approximately $13.4 million, net of certain sale expenses (the "Dallas
Disposition"). The Company acquired the assets of KTCK-AM in Dallas, Texas (the
"Dallas Acquisition") in September 1995 from a third party for $8,633,000 in
cash (including $133,000 in transaction costs) and $2,000,000 of 6% current
coupon Series C Redeemable Preferred Stock (Note 6). The purchase agreement
contains a provision for a contingent payment not to exceed $7,500,000 payable
in 1998 if the Company's Dallas properties achieve certain ratings and
financial goals. The prior owner has commenced litigation against the Company
as a result of the parties' inability to agree on the amount of the contingent
payment due to the prior owner in connection with the Dallas Disposition and
the Houston Exchange. The Company recorded a loss of $1.9
F-8
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 2 -- ACQUISITIONS AND DISPOSITIONS (Continued)
million on the Dallas Disposition, based on its estimate of the ultimate
resolution of the contingency. The Company had provided programming to KTCK-AM
pursuant to an LMA since March 1, 1995.
In July 1996, the Company acquired Liberty Broadcasting Inc. ("Liberty
Broadcasting") for a purchase price of approximately $239.7 million, including
$10.4 million for working capital (the "Liberty Acquisition"). Liberty
Broadcasting was a privately-held radio broadcasting company which owned and
operated, provided programming to or sold advertising on behalf of 14 FM and
six AM radio stations (the "Liberty Stations") located in six markets:
Washington, DC/Baltimore, Maryland; Nassau-Suffolk, New York; Providence, Rhode
Island; Hartford, Connecticut; Albany, New York and Richmond, Virginia.
In July 1996, the Company sold three of the Liberty Stations operating in
the Washington, DC/Baltimore, Maryland market (the "Washington Dispositions")
for $25.0 million. No gain or loss was recognized on the Washington
Dispositions.
In July 1996, the Company acquired from Prism Radio Partners L.P. ("Prism"),
substantially all of the assets used in the operation of eight FM and five AM
radio stations located in four markets: Jacksonville, Florida; Raleigh, North
Carolina; Tucson, Arizona and Wichita, Kansas. In September 1996, the Company
also acquired from Prism substantially all of the assets of three radio
stations operating in Louisville, Kentucky (the "Louisville Stations"), upon
renewal of the Federal Communications Commission ("FCC") licenses of such
stations (the "Louisville Acquisition") (collectively the "Prism Acquisition").
The total purchase price for the Prism Acquisition was approximately $105.3
million. In October 1996, the Company sold the Louisville Stations (the
"Louisville Disposition") for $18.5 million. The Company recognized no gain or
loss on the Louisville Disposition.
In July 1996, the Company acquired substantially all of the assets of
WJDX-FM, Jackson, Mississippi for a purchase price of approximately $3.2
million. In addition, in August 1996, the Company acquired substantially all of
the assets of WSTZ-FM and WZRX-AM, each operating in Jackson, Mississippi, for
approximately $3.5 million (collectively, the "Jackson Acquisitions").
In June 1996, the Company acquired substantially all of the assets of
WROQ-FM, Greenville, South Carolina, for approximately $14.0 million (the
"Greenville Acquisition") and WTRG-FM and WRDU-FM, both operating in Raleigh,
North Carolina, and WMFR-AM, WMAG-FM and WTCK-AM (formerly WWWB-AM), each
operating in Greensboro, North Carolina for approximately $36.8 million (the
"Raleigh-Greensboro Acquisition").
In February 1996, the Company acquired radio stations WTDR-FM and WLYT-FM
(formerly WEZC-FM), both operating in Charlotte, North Carolina (the "Charlotte
Acquisition"), for an aggregate purchase price of $24.3 million. Costs of
$785,000 related to the integration and reformatting of the Charlotte stations
were included in depreciation, amortization, duopoly integration costs and
acquisition related costs in 1996.
In April 1995, the Company acquired all of the outstanding stock of Parker
Broadcasting Company ("Parker"), the owner and licensee of radio station
KYXY-FM in San Diego, California (the "San Diego Acquisition"), for
approximately $17,424,000 (including transaction costs of $831,000 of which
$175,000 was paid to SCMC for providing or paying for legal services necessary
in negotiating and documenting the transaction), including a $650,000 three
year covenant not to compete with the former owners. In addition, costs of
$1,380,000 related to the integration of KYXY-FM and reformatting of its
duopoly partner, KPLN-FM, were included in depreciation, amortization, duopoly
integration costs and acquisition related costs in 1995. The Company had
provided programming to and sold advertising on behalf of KYXY-FM pursuant to
an LMA since January 18, 1995.
F-9
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 2 -- ACQUISITIONS AND DISPOSITIONS (Continued)
For financial statement purposes, all of the acquisitions described above
were accounted for using the purchase method, with the aggregate purchase price
allocated to the tangible and identifiable intangible assets based upon current
estimated fair market values. The allocation resulted in an excess of costs
over estimated fair value of identifiable net assets acquired of approximately
$23,437,000, $27,747,000, $13,299,000, $4,669,000, $74,579,000, $185,420,000,
$114,674,000 and $6,710,000 for the Charlotte Acquisition, Raleigh-Greensboro
Acquisition, Greenville Acquisition, Jackson Acquisition, Prism Acquisition,
Liberty Acquisition, MMR Merger and the Greensboro Acquisition, respectively,
in 1996 and $21,136,000, and $9,250,000 for KYXY-FM, and KTCK-AM, respectively,
in 1995. The assets and liabilities of these acquisitions and the results of
their operations for the period from the date of acquisition have been included
in the accompanying consolidated financial statements.
The following unaudited pro forma summary presents the consolidated results
of operations for the years ended December 31, 1996, 1995 and 1994 as if the
acquisitions for any given year and the subsequent year had occurred at the
beginning of such year after giving effect to certain adjustments, including
amortization of goodwill and interest expense on the acquisition debt. These
pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisition been
made as of that date or of results which may occur in the future.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31
IN THOUSANDS EXCEPT PER SHARE DATA
(UNAUDITED)
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues........................................ $ 199,650 $ 189,595 $ 62,323
=========== =========== ===========
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principal.......................................... $ (37,027) $ (16,978) $ 2,332
=========== =========== ===========
Net income (loss)................................... $ (52,246) $ (32,197) $ 1,283
=========== =========== ===========
Net income (loss) applicable to common stock ....... $ (61,964) $ (42,153) $ 707
=========== =========== ===========
Net income (loss) per common share.................. $ (6.79) $ (4.62) $ 0.12
=========== =========== ===========
Weighted average common shares outstanding ......... 9,128,284 9,128,284 5,792,385
=========== =========== ===========
</TABLE>
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company accounts for
investments in which it has a 50% or less ownership interest under the equity
method.
Cash and Cash Equivalents
All highly liquid investments with an original maturity of less than three
months are classified as cash equivalents. The carrying amounts of cash and
cash equivalents reported in the balance sheet approximate their fair values.
F-10
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Short-term investments
Available-for-sale securities were investments in mutual funds and were
carried at fair value, with the unrealized gains and losses reported in a
separate component of shareholders' equity. Realized gains and losses and
declines in value judged to be other than temporary on available-for-sale
securities are included in investment income or loss. The cost of securities
sold is based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in investment income.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is
provided on the straight-line method over the estimated useful lives of the
assets a follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements .... 7-20 years
Equipment and furniture ........ 5-7 years
</TABLE>
Leasehold improvements are amortized over the shorter of the lease term or
estimated useful lives of the assets. Amortization of assets recorded under
capital leases is included in depreciation expense.
Amortization of Intangible Assets
Broadcast licenses and goodwill are amortized using the straight-line method
over 40 years. Other intangible assets are being amortized using the
straight-line method over their estimated remaining useful lives from 3 to 36
years. Debt issuance costs and discounts are being amortized by the
straight-line method, which closely approximates the interest method, over the
life of the respective debt.
In 1996 the Company adopted FAS No. 121 "Accounting for the Impairment of
Long-Lived Assets". Under FAS No. 121, the carrying values of intangible assets
are reviewed if the facts and circumstances suggest that they may be impaired.
If this review indicates the intangible assets will not be recoverable as
determined based on the undiscounted cash flows of the Company over the
remaining amortization period, the Company's carrying value of the intangible
assets will be reduced to their estimated fair values, if lower than the
carrying value. The impact of this adoption had no effect on the consolidated
financial statements.
Barter Transactions
The Company barters unsold advertising time for products and services. Such
transactions are recorded at the estimated fair value of the products or
services received. Barter revenue is recorded when commercials are broadcast
and related expenses are recorded when the bartered product or service is used.
For the years ended December 31, 1996, 1995 and 1994, the Company recorded
barter revenue of $8,029,000, $4,961,000 and $2,905,000 respectively, and
expenses of $7,476,000, $4,811,000 and $2,738,000 respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-11
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Local Marketing Agreements / Joint Sales Agreements
From time to time, the Company enters into LMAs and JSAs, with respect to
radio stations owned by third parties including radio stations which it intends
to acquire. Terms of the agreements generally require the Company to pay a
monthly fee in exchange for the right to provide station programming and sell
related advertising time in the case of an LMA or sell advertising in the case
of a JSA. The agreements terminate upon the acquisition of the property. The
fees are expensed as incurred. The Company classifies the LMA fees as interest
expense to the extent interest is imputed based on the purchase price of the
broadcast property. The Company accounts for payments received pursuant to LMAs
of owned stations as net revenue to the extent that the payment received
represents a reimbursement of the Company's ownership costs.
Advertising Costs
Advertising costs are expensed as incurred and approximated $5,068,000,
$3,336,000, and $1,828,000 in 1996, 1995 and 1994, respectively.
Per Share Data
Income (loss) per common share is based on income (loss) applicable to
common shareholders for the period divided by the weighted average number of
shares of common stock outstanding plus common share equivalents (in periods in
which they have a dilutive effect) determined using the treasury stock method.
Federal Income Taxes
The Company and its subsidiaries report Federal income taxes using the
liability method in accordance with Statement of Financial Accounting Standards
No. 109.
Concentration of Credit Risk
The Company's revenue and accounts receivable primarily relates to the sale
of advertising within the radio stations' broadcast areas. Credit is extended
based on an evaluation of the customers financial condition, and generally
collateral is not required. Credit losses are provided for in the financial
statements and consistently have been within management's expectations.
Reclassification
Certain amounts in 1994 and 1995 have been reclassified to conform to the
1996 presentation.
NOTE 4 -- CASH AND CASH EQUIVALENTS
The Company invests excess funds in highly liquid short-term interest
bearing obligations. The Company considers short-term investments held for
ninety days or less as cash equivalents. Due to the short maturity of these
instruments, the carrying amounts approximate the fair values.
The Company recognized investment income (loss) of $4,017,000, $650,000 and
($121,000) for the years ended 1996, 1995 and 1994, respectively. The
investment loss for 1994 includes a charge of $491,000 in the fourth quarter
related to the permanent decline of certain short-term investments available
- -for -sale at December 31, 1994.
F-12
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 5 -- DEBT AND SUBORDINATED NOTES
Debt consists of the following at December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Promissory notes; interest at 10% payable in monthly
installments, maturing in 1998, collateralized by certain assets
with a book value of $1,157 at December 31, 1996 ................ $ 540 $ 869
Senior subordinated notes ........................................ 450,566 80,000
Senior credit facility ........................................... 30,000 --
----------- ---------
481,106 80,869
Less current portion ............................................. (231) (260)
----------- ---------
$480,875 $80,609
=========== =========
</TABLE>
The aggregate contractual maturities of long-term debt for the years ending
December 31, excluding the senior credit facility which was repaid in 1997, are
as follows: 1997--$231,000; 1998--$309,000; 1999--$0; 2000--$566,000; 2001--$0;
thereafter--$450,000,000.
Included in 1996 interest expense is $385,000, $333,600 and $538,000 related
to the LMA fees associated with the Greenville, Charlotte and Jackson
Acquisitions, respectively. Interest expense in 1995 included $2,542,000 and
$323,000 related to the LMA fees associated with the Charlotte and Dallas
Acquisitions, respectively.
In May 1996, the Company completed a private placement of $450.0 million in
aggregate principal amount of its 10.75% Senior Subordinated Notes due 2006
(the "Note Offering"). Interest is payable semi-annually on May 15 and November
15. The notes are unsecured obligations of the Company and are subordinate to
all senior debt of the Company. The Company incurred issuance costs totaling
$15.3 million related to the Note Offering which were recorded as deferred
financing costs. Pursuant to its contractual obligations with the original
purchasers of these securities, the Company subsequently registered these
securities with the Securities and Exchange Commission.
Concurrently with the closings of the Note Offering and the Preferred Stock
Offering (Note 6), the Company completed a tender offer (the "Tender Offer")
and related consent solicitation with respect to its 11.375% Senior
Subordinated Notes due 2000 (the "Old Notes"). SFX repurchased approximately
$79.4 million in principal amount of the $80.0 million in principal amount of
the Old Notes outstanding in the Tender Offer. The Company also entered into a
supplemental indenture amending the terms of the indenture pursuant to which
the remaining Old Notes were issued.
In March 1995, the Company entered into a $50.0 million senior credit
facility (the "Old Credit Facility") pursuant to which the Company made
borrowings to finance the Charlotte Acquisition (Note 2) and certain working
capital needs. On May 31, 1996 all amounts outstanding under the Old Credit
Facility were repaid with a portion of the proceeds of the Note Offering and
the Preferred Stock Offering.
In connection with the repurchase of the Old Notes and the repayment of the
Old Credit Facility, the Company recorded an extraordinary loss on debt
retirement of approximately $15.2 million to reflect the cost of prepayment
premiums and the write-off debt of issuance costs.
On November 22, 1996, the Company entered into a new credit facility (the
"New Credit Agreement"), a senior revolving credit facility providing for
borrowings of up to $225.0 million. Borrowings under the New Credit Agreement
may be used to finance permitted acquisitions, for working capital and general
corporate purposes, and for letters of credit up to $20.0 million. The facility
converts
F-13
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 5 -- DEBT AND SUBORDINATED NOTES (Continued)
into a five-year term loan on September 30, 1998, with repayment due in
quarterly installments commencing December 31, 1998, and with the final payment
due September 30, 2003. The principal will be amortized by 5% in 1998, 15% in
1999, 20% in 2000, 20% in 2001, 22% in 2002 and 18% in 2003. Interest on the
funds borrowed under the New Credit Agreement is based on a floating rate
selected by the Company of either (i) the higher of (a) the Bank of New York's
prime rate and (b) the federal funds rate plus 0.5%, plus a margin which varies
from 0.25% to 1.5%, based on the Company's then-current leverage ratio, or (ii)
the LIBOR rate plus a margin which varies from 1.5% to 2.75%, based on the
Company's then-current leverage ratio. The Company must prepay certain
outstanding borrowings in advance of their scheduled due dates in certain
circumstances, including but not limited to achieving certain cash flow levels
or receiving certain proceeds from asset disposition as defined. The Company
must also pay annual commitment fees of 0.5% of the unutilized total
commitments under the New Credit Agreement. The Company's obligations under the
New Credit Agreement are secured by substantially all of its assets, including
property, stock of subsidiaries and accounts receivable, and are guaranteed by
the Company's subsidiaries. At December 31, 1996, the weighted average interest
rate was 8.36%. The outstanding balance at December 31, 1996 was repaid with
the proceeds of the Series E Preferred Stock Offering (Note 13).
The New Credit Agreement and the indentures related to the Company's
subordinated notes contain covenants that impose certain restrictions on the
Company.
The fair value of the Company's senior subordinated notes was $475,350,000
at December 31, 1996 based upon the quoted market price. The book value of the
Company's promissory notes and senior credit facility approximates fair value,
which was estimated using discounted cash flow analysis based on the Company's
incremental borrowing rate for similar types of borrowing arangements.
NOTE 6--REDEEMABLE PREFERRED STOCK
Preferred stock consists of the following at December 31, 1996 and 1995
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Preferred Stock of the Company, $.01 par value, 10,012,000 shares
authorized:
Series B Redeemable, 1,000 and 2,000 shares issued and outstanding
in 1996 and 1995, respectively, includes accreted dividends of
$182 in 1996 and $269 in 1995..................................... $ 917 $1,735
Series C Redeemable, 2,000 shares issued and outstanding in 1996
and 1995, includes accreted dividends of $108 in 1996 and $22 in
1995.............................................................. 1,636 1,550
Series D Cumulative Convertible Exchangeable Preferred Stock,
2,990,000 shares issued and outstanding........................... 149,500 --
-------- --------
$152,053 $3,285
======== ========
</TABLE>
The Series B Redeemable Preferred Stock is non-voting, not entitled to
receive dividends and is required to be redeemed in October 1997 at the
liquidation value of $1,000 per share. In January 1994, the Company repurchased
1,000 shares of Series B Redeemable Preferred Stock due October 1998 for
$750,000. The Series B Redeemable Preferred Stock ranks senior to the Company's
common stock as to dividends and liquidation rights.
F-14
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 6--REDEEMABLE PREFERRED STOCK (Continued)
The shares of Series C Redeemable Preferred Stock receive cumulative
dividends equal to 6% per annum paid by the Company in arrears on a quarterly
basis. The shares are non-voting and are redeemable by the Company after
September 15, 1998 or by the holder after September 15, 2000, at the
liquidation value of $1,000 per share. The Series C Redeemable Preferred Stock
ranks senior to other preferred stock and to the Company's common stock as to
dividends and liquidation rights.
The shares of Series D Cumulative Convertible Exchangeable Preferred Stock
(the "Series D Preferred Stock") receive cumulative dividends equal to 6 1/2%
per annum ($0.8125 per share) which are paid by the Company on a quarterly
basis. The shares of Series D Preferred Stock are redeemable at the option of
the Company on or after June 1, 1999, in whole or in part, at the redemption
prices ranging from 104.5% in 1999 to 100.0% in 2006, plus accrued and unpaid
dividends to the redemption date. The Series D Preferred Stock is not subject
to any scheduled mandatory redemption prior to its maturity. The Series D
Preferred Stock will mature on May 31, 2007.
The Series D Preferred Stock is convertible at the option of the holder into
shares of Class A Common Stock of the Company at any time prior to maturity at
a conversion price of $45.51 per share (equivalent to a conversion rate of
1.0987 shares per $50 in Liquidation Preference of Series D Preferred Stock),
subject to adjustment in certain events. The Series D Preferred Stock is
exchangeable in full but not in part, at the Company's option on any dividend
payment date, for the Company's 6 1/2% Convertible Subordinated Exchange Notes
due 2007.
In the event of a change of control, each holder of Series D Preferred Stock
may require the Company to repurchase its Series D Preferred Stock, in whole or
in part, at a repurchase price of 101% of the Liquidation Preference of the
Series D Preferred Stock to be repurchased, plus accrued dividends to the
repurchase date in cash. The Company may satisfy its repurchase obligation upon
a change of control through the issuance of shares of Class A Common Stock
(valued at 95% of the current market price.)
The Series D Preferred Stock ranks senior to the Company's common stock as
to dividends and liquidation rights.
NOTE 7 -- SHAREHOLDERS' EQUITY
COMMON STOCK
The holders of Class A Common Stock are entitled to one vote per share and
the holders of Class B Common Stock are entitled to ten votes per share on all
matters to be voted on by stockholders, except (i) for the election of
directors, (ii) with respect to any "going private" transaction between the
Company and its Chairman, or any of his affiliates, and (iii) as otherwise
provided by law. In November 1994, the Board of Directors approved the
conversion of 73,266 shares of Class A Common Stock held by the Chairman and
the President of the Company to Class B Common Stock. The conversion occurred
on May 5, 1995. The holders of Class A and Class B Common Stock share ratably
in all dividends and other distributions. At December 31, 1996, 1,064,936
shares of Class A Common Stock, authorized but unissued, are reserved for
conversion of the Class B Common Stock. Shares of the Company's Class B Common
Stock convert on a share per share basis into the same number of Class A Common
Stock under certain circumstances.
In December 1994, pursuant to a transfer, 1,071,429 shares of Class C Common
Stock held by an affiliate of the Company were converted into Class A Common
Stock. In connection with this conversion, the Company agreed to pay Sillerman
Communications Management Corporation ("SCMC"), a
F-15
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 7 -- SHAREHOLDERS' EQUITY (Continued)
corporation controlled by the Company's Chairman, a $1,000,000 fee based upon:
(i) SCMC's negotiation of the transfer on behalf of the Company; (ii) SCMC's
surrender of certain contractual rights and economic interests with respect to
the transferred stock, which would otherwise block the stock transfer; (iii)
the restatement, including significant favorable adjustments, of the
registration rights agreement pursuant to which the transferred stock were
originally issued; (iv) the obtaining the rights of first refusal with respect
to subsequent transfers of the stock; (v) the Company's belief that the
transfer will have a favorable effect on the market of the Company's Class A
Common Stock and (vi) SCMC's assumption of certain legal costs of the
transaction. The Company's Board of Directors may consider additional fees in
the event that actual benefits to the Company from this transaction warrant
additional compensation. This transaction was the subject of a Fairness Opinion
from an independent investment banking firm. The Company charged paid-in
capital for the $1,000,000 fee and for legal, accounting, and valuation
services of $150,000 related to this transaction.
In December 1995, 16,784 shares of non-voting Class C Common Stock were
repurchased and retired by the Company for $459,000. In May 1996, 26,318 shares
of Class A Common Stock and 143,874 shares of Class B Common Stock were
repurchased from the Company's former President (Note 10).
In July 1995, the Company completed an offering of 1,725,000 shares of its
Class A Common Stock for $24.50 per share. The net proceeds of the offering
were $39,166,000 after underwriting discounts, commissions and other costs of
the offering. The net proceeds were utilized to repay senior indebtedness of
$21,500,000 and to fund the Dallas Acquisition and a portion of the Charlotte
Acquisition (Note 2).
SECURITIES ISSUED IN MMR MERGER
The following MMR warrants and options issued and outstanding at the date of
the merger were assumed by the Company and are now convertible into SFX shares:
<TABLE>
<CAPTION>
SECURITIES # MMR SFX
OF MMR EXERCISE # OF SFX EXERCISE
SECURITIES SHARES PRICE SECURITIES PRICE
- ---------- -------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Underwriters warrants exercisable
through July 22, 1998............... 125,000 $ 9.10 37,288 $30.51
Class B warrants exercisable through
March 22, 1999...................... 749,460 11.50 217,162 $38.55
Unit Purchase Options exercisable
through March 22, 1999 (entitle the
holder to purchase one share of MMR
Common Stock, one MMR Class A
Warrant and one MMR
Class B Warrant).................... 160,000 $7.75-$11.50 47,728 $25.98-$38.55
Stock options exercisable at various
dates through November 22, 2006 .... 305,000 $5.00-$10.50 90,982 $16.76-$35.20
Warrants issued to Huff Alternative
Income Fund, L.P. exercisable
through March 31, 2005.............. 728,000 $ 7.75 223,564 $25.98
</TABLE>
Each MMR warrant and option is exercisable for that number of shares of the
Company's Class A Common Stock equal to the product of the number of MMR shares
covered by the security times 0.2983 and the per share exercise price for the
share of the Company's Class A Common Stock issuable upon the exercise of each
warrant and option is equal the quotient determined by dividing the exercise
price per share of the MMR shares specified for such security by 0.2983.
F-16
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 7 -- SHAREHOLDERS' EQUITY (Continued)
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options, as opposed to the
fair value accounting provided for under FAS Statement No. 123, "Accounting for
Stock-Based Compensation" ("Statement 123".)
Under stock option plans adopted annually since 1993, stock options to
acquire Class A Common Stock have been granted to certain officers, key
employees and other key individuals who perform services for the Company.
Options granted under these plans are generally granted at option prices equal
to the fair market value of the Class A Common Stock on the date of grant.
Terms of the options, determined by the Company, provided that the maximum term
of each option shall not exceed ten years and the options become fully
exercisable within five years of continued employment with the exception of
certain options granted to executives which were fully vested upon issuance.
At December 31, 1996, options outstanding had an average exercise price of
$20.95 and expiration dates ranging from December 1, 2003 to December 17, 2006.
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Options outstanding at beginning of year. 748,000 500,000 350,000
Option price............................. $13.00-$21.25 $13.00-$13.50 $ 13.50
Options granted.......................... 349,000 248,000 150,000
Option price............................. $27.25-$33.75 $ 21.25 $ 13.00
Options repurchased...................... 187,000 -- --
Option price............................. $13.00-$21.25 -- --
Options expired or canceled.............. -- -- --
Options outstanding at end of year ...... 910,000 748,000 500,000
Option price............................. $13.00-$33.75 $13.00-$21.25 $13.00-$13.50
Options exercisable at end of year ...... 461,200 153,000 110,000
</TABLE>
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value for options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1996
and 1995: risk-free interest rate of 6.43% and 5.58%, respectively; no dividend
yield; volatility factor of the expected market price of the Company's common
stock of 0.372; and a weighted-average expected life of the option of 7 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
F-17
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 7 -- SHAREHOLDERS' EQUITY (Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Therefore,
the impact on the pro forma results of operations in 1996 and 1995 may not be
representative of the impact in future periods should additional options be
granted. The Company's pro forma information follows (in thousands except for
loss per share information):
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Pro forma net loss applicable to common
stockholders .......................... $ (59,792) $ (4,899)
Pro forma loss per common share: ...... $ (7.91) $ (0.74)
</TABLE>
NOTE 8 -- INCOME TAXES
The provision for income taxes for the years ended December 31, 1996, 1995
and 1994 is summarized in thousands as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ --------
<S> <C> <C> <C>
Current
Federal .. $ -- $ -- $ 65
State..... 1,190 -- 100
------- ------ --------
1,190 -- 165
------- ------ --------
Deferred
Federal . -- -- 1,170
State .... (710) -- 139
------- ------ --------
(710) -- 1,309
------- ------ --------
$ 480 $ -- $1,474
======= ====== ========
</TABLE>
The Company files a consolidated tax return for federal income tax purposes.
As a result of current losses, no federal tax provision was recorded for the
year ended December 31, 1996. The current income tax expense recorded during
1996 is a result of current state and local income taxes in certain states
where subsidiaries file separate tax returns. Deferred state tax benefit was
recognized in 1996 attributable to the disposition of stations acquired in
transactions in which associated deferred tax liabilities were recorded in
purchase accounting. As a result of current losses and the deferred benefit
associated with the losses, no current or deferred expense or benefit was
recorded for the year ended December 31, 1995. The income tax expense recorded
during 1994 reflects increases in the excess of the financial statement basis
over tax basis in assets resulting from differences in amortization periods
offset, in part, by the projected reversal of temporary differences within the
carryforward period of available net operating losses.
At December 31, 1996, the company had total net operating loss carryforwards
of approximately $34,432,000 that will expire from 2003 through 2011, including
net operating losses of acquired subsidiaries. Due to ownership changes related
to the acquisition of subsidiaries, the utilization of approximately
$10,603,000 of these losses is subject to various limitations.
F-18
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 8 -- INCOME TAXES (Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities as of December
31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Deferred Tax Assets:
Accounts receivable .................... $ 563 $ 350
Net operating loss carryforwards ...... 12,044 4,292
Management Service Contract ............ 2,128 --
Writedown of broadcast rights agreement -- 484
Other reserves ......................... 646 --
Capital loss/AMT carryforwards ........ 85 435
Accrued bonuses and other compensation 912 57
------------ ----------
Total deferred tax assets .............. 16,378 5,618
Valuation allowance..................... (5,623) (2,883)
------------ ----------
Net deferred tax assets ............... 10,755 2,735
Deferred Tax Liabilities:
Property, plant and equipment ........... (372) (354)
Intangible assets ...................... (101,658) (9,719)
Other................................... (77) (77)
------------ ----------
Total deferred tax liabilities ........ (102,107) (10,150)
------------ ----------
Net deferred tax liabilities .......... $ (91,352) $ (7,415)
============ ==========
</TABLE>
The acquisition of Liberty Broadcasting and MMR resulted in the recognition
of deferred tax liabilities of approximately $47,503,000 and $34,895,000,
respectively, under the purchase method of accounting. These amounts were based
upon the excess of the financial statement basis over the tax basis in assets,
principally intangible assets. Liberty Broadcasting and MMR had pre-acquisition
net operating losses of approximately $3,591,000 and $5,062,000, respectively.
Due to the Washington Disposition, the full amount of Liberty Broadcasting,
Inc.'s net operating losses were utilized in 1996. Of the $5,062,000,
Multi-Market Radio, Inc's losses, a valuation allowance of approximately
$643,000 has been recorded, as the ultimate utilization may be limited.
The 1996, 1995 and 1994 effective tax rate varied from the statutory Federal
income tax rate as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- --------
<S> <C> <C> <C>
Income taxes at the statutory rate ................ $(16,924) $(1,495) $1,125
Effect of non-recurring and unusual charges ....... 6,875 -- --
Capital loss limitation .......................... -- -- 332
Valuation allowance .............................. 9,859 1,434 (207)
Effect of nondeductible amortization of
intangibles ...................................... 264 198 179
Reversal of 1993 provision ....................... -- -- (412)
State and local income taxes (net of Federal
benefit) ......................................... 317 (145) 273
Other ............................................ 89 8 184
------------ ----------- --------
Total .......................................... $ 480 $ -- $1,474
============ =========== ========
</TABLE>
F-19
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 9 -- RELATED PARTY TRANSACTIONS
Prior to April 1996, SCMC had been engaged by the Company from time to time
for advisory services with respect to specific transactions. In April 1996, the
Company and SCMC entered into the SCMC Termination Agreement, pursuant to which
SCMC assigned to the Company its rights to receive fees payable by each of MMR
and Triathlon to SCMC in respect of consulting and marketing services to be
performed on behalf of such companies by SCMC, except for fees related to
certain transactions pending at the date of such agreement, and the Company and
SCMC terminated the arrangement pursuant to which SCMC performed financial
consulting services for the Company. Upon consummation of the MMR Merger,
SCMC's agreement with MMR was terminated. Prior to consummation of the MMR
Merger, MMR paid an annual fee of $500,000 to SCMC and Triathlon paid SCMC an
annual fee of $300,000 (which increased to $500,000 effective January 1, 1997).
In addition, Triathlon has agreed to advance to SCMC an amount of $500,000 per
year in connection with transaction-related services to be rendered by SCMC.
However, if the agreement between SCMC and Triathlon is terminated or if an
unaffiliated person acquires a majority of the capital stock of Triathlon the
unearned fees must be repaid. Pursuant to the SCMC Termination Agreement, the
Company has agreed to continue to provide consulting and marketing services to
Triathlon until the expiration of their agreement on June 1, 2005, and not to
perform any consulting or investment banking services for any person or entity
other than Triathlon in the radio broadcasting industry or in any business
which uses technology for the audio transmission of information or
entertainment. In consideration of the foregoing agreements, the Company issued
to SCMC warrants to purchase up to 600,000 shares of Class A Common Stock at an
exercise price, subject to adjustment, of $33.75 (the market price at the time
the financial consulting arrangement was terminated). The Company also forgave
a $2.0 million loan made by the Company to SCMC, plus accrued and unpaid
interest thereon. Pursuant to such agreement, the Chairman has agreed with the
Company that he will supervise, subject to the direction of the Board of
Directors, the performance of the financial consulting and other services
previously performed by SCMC for the Company. During 1996, the Company received
fees of $292,000 from MMR and $511,000 from Triathlon. In connection with this
agreement, the Company had a $250,000 receivable from Triathlon at December 31,
1996.
In 1996, the Company paid to SCMC advisory fees of $4.0 million in
connection with the Liberty Acquisition, the Prism Acquisition, the Greenville
Acquisition, the Jackson Acquisitions, the Greensboro Acquisition and the
Raleigh-Greensboro Acquisition. In addition, the Company paid SCMC, on behalf
of MMR, a non-refundable fee of $2.0 million for investment banking services
provided to MMR in connection with the MMR Merger.
None of the Pending Acquisitions or Pending Dispositions predate the SCMC
Termination Agreement, and therefore no fees are payable to SCMC in respect of
any Pending Acquisitions or Pending Dispositions.
Prior to June 1996, the Company held a non-recourse note receivable from the
Company's former President in the amount of $2,000,000 which was secured by
133,333 shares of Class B Common Stock. The note bore interest at 6% per annum.
Interest income of $60,000 and $120,000 was accrued in 1996 and 1995 on the
loan, respectively. The loan and interest accrued were forgiven in June 1996
pursuant to an agreement with the former President and are included in
non-recurring and unusual charges (Note 10).
Through June 1996, the Company sublet office space in Austin, Texas on a
month to month basis for certain management and accounting operations from
Capstar, Inc, a related party, prior to the termination of the former president
of the Company. The Company recorded rent expense related to this sublease of
$40,000, $67,000 and $94,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
In January 1995, the Company paid a $1,000,000 fee to SCMC in connection
with the transfer of shares of the Company's Class C Common Stock.
F-20
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 9 -- RELATED PARTY TRANSACTIONS (Continued)
During the last quarter of 1996, the Company consolidated all of its
corporate office functions in New York. Prior to such time, the Company had an
agreement with the Chairman related to the maintenance of the Company's New
York Office whereby the Company reimbursed SCMC for certain office expenses and
salaries for certain employees of SCMC who provided services on behalf of the
Company. In addition certain of the Company's employees performed certain
services for other entities affiliated with SCMC. In connection with SCMC
Termination Agreement and the consolidation of the Company's Corporate Office
in New York, SCMC employees who provided services on behalf of the Company
became employees of the Company. Total reimbursements paid to SCMC for office
expenses and salaries totaled approximately $1,082,000, $530,000 and $480,000
for the years ended December 31, 1996, 1995 and 1994. The reimbursements paid
to SCMC in 1996 included $292,000 and $261,000 of fees paid by MMR and
Triathlon, respectively, directly to SCMC following the effective date of the
SCMC Termination Agreement. The timing of these payments during the year were
such that the Company had advanced amounts to SCMC of up to $230,000 during the
period. As of December 31, 1996, there are no amounts due to or from SCMC.
The transactions above were not negotiated on an arms-length basis.
Accordingly, each transaction was approved by the Company's Board of Directors,
including the Company's independent directors, in accordance with the
provisions relating to affiliate transactions in the Company's by-laws, bank
agreements and Indenture, which provisions require a determination as to the
fairness of the transactions to the Company.
The Company's Executive Vice President, General Counsel and Director is Of
Counsel to the law firm of Baker & McKenzie. Baker & McKenzie serves as counsel
to the Company in certain matters. Baker & McKenzie compensates the executive
based, in part, on the fees it receives from providing legal services to the
Company and other clients originated by the executive. The Company paid Baker &
McKenzie $4,886,000, $793,000 and $95,000 for legal services during 1996, 1995
and 1994, respectively.
Also, see Notes 2, 7, and 10.
NOTE 10 -- NON-RECURRING AND UNUSUAL CHARGES, INCLUDING ADJUSTMENTS TO
BROADCAST RIGHTS AGREEMENT
The Company recorded non-recurring and unusual charges of $28,994,000 in
1996 which consisted primarily of payments in excess of the fair value of stock
repurchased totaling $12,461,000 to the company's former President and the
reserve by the Company of $2,330,000 relating to the loan and accrued interest
to the Company's former President, $5,586,000 related to the SCMC Termination
Agreement (Note 9), $4,575,000 for the repurchase of options and rights to
receive options held by the Chief Operating Officer, and a charge of $1,600,000
related to the termination of the Company's contractual four-year broadcast
rights of Texas Rangers baseball and an adjustment in the value of the contract
for the 1996 season. In 1995, the Company recorded a $5 million charge related
to the write down in value of the Company'sTexas Rangers Rangers broadcast
rights.
F-21
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating leases, broadcast rights
agreements and employment agreements. Total rent expense was $1,160,000,
$1,506,000 and $2,903,000 for the years ending December 31, 1994, 1995 and
1996, respectively. The Company has entered into employment agreements with
certain officers and other key employees. Expenses under the contracts
approximated $9,523,000 for the year ended December 31, 1996. Future minimum
payments in the aggregate for all noncancelable operating leases including
broadcast rights agreements and employment agreements with initial terms of one
year or more consist of the following at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
OPERATING EMPLOYMENT
LEASE AGREEMENTS
----------- ------------
<S> <C> <C>
1997 ................ $ 6,567 $12,777
1998 ................ 4,908 9,448
1999 ................ 4,341 6,854
2000 ................ 2,300 2,926
2001 ................ 1,769 967
2002 and thereafter 4,153 --
----------- ------------
$24,038 $32,972
=========== ============
</TABLE>
Future minimum payments in the aggregate for all noncancelable capital
leases with initial terms of one year or more consist of the following at
December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
CAPITAL
LEASES
---------
<S> <C>
1997 ............................................ $ 179
1998 ............................................ 141
1999 ............................................ 63
2000 ............................................ 17
2001............................................. 4
2002 and thereafter ............................. --
---------
Total minimum lease payments ................... $ 404
Less: amount representing interest ............. (50)
---------
Present value of future minimum lease payments 354
Less: current portion .......................... (150)
---------
Long-term capital lease obligations ........... $ 204
=========
</TABLE>
Pursuant to an agreement between the Company and the Company's Chief
Operating Officer, the Executive's employment may be terminated by either party
during the one-month period commencing on November 22, 1997 upon 30 days'
written notice. If his employment agreement is terminated, the Executive will
receive a payment of $1,250,000 pursuant to the provisions of his employment
agreement which are currently deferred, of which $800,000 has been accrued at
December 31, 1996, and the Company will purchase all of his outstanding options
under the Company's stock option plans for an amount equal to the difference
between (x) the number of such options multiplied by the respective exercise
price of such options and (y) the number of such options multiplied by the
greater of $40.00 and the average trading price of a share of Class A Common
Stock during the 20 days prior to five days before the effective date of the
termination of the employment agreement. In the event that the Company is
F-22
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 11 -- COMMITMENTS AND CONTINGENCIES (Continued)
required to purchase the Executive's options, based upon a repurchase price of
$40.00 per share, the Company would make a payment to the Executive of
approximately $3,250,000. If the employment contract is terminated and the
stock options repurchased, the Company would record a charge to earnings equal
to the amount paid for the options.
The Company is the subject of various claims and litigation principally in
the normal course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse impact on the
consolidated financial statements (Note 2).
NOTE 12 -- DEFINED CONTRIBUTION PLAN
The Company sponsors a 401(k) defined contribution plan in which most of its
employees were eligible to participate. The Plan presently provides for
discretionary employer contributions. The Company contributed $17,000 in 1994
but made no contributions in 1995 or 1996.
NOTE 13 -- SUBSEQUENT EVENTS
1997 Preferred Stock Offering. In February 1997, the Company sold 2,250,000
shares of 12 5/8% Series E Cumulative Exchangeable Preferred Stock. The Company
raised approximately $215.0 million, net of expenses. The Company used a
portion of the proceeds to repay the outstanding balance under the New Credit
Agreement and will use the remaining balance to finance current and future
acquisitions.
1997 Acquisitions and Dispositions. In January 1997, the Company purchased
Delsener/Slater Enterprises, a concert promotion company based in New York
City, for aggregate consideration of approximately $24.0 million. Of this
amount, $3.0 million is to be paid, without interest, over five years, and $1.0
million is to be paid, without interest, over ten years. The deferred payments
are subject to acceleration in certain circumstances. The primary source of
funds for this acquisition was borrowings under the New Credit Agreement.
Also in January 1997, the Company consummated the Albany Acquisition,
pursuant to which it purchased one radio station operating in Albany, New York,
for a purchase price of $1.0 million. The primary source of funds for this
acquisition was borrowings under the New Credit Agreement.
In February 1997, the Company consummated the acquisition of radio station
WWYZ-FM in Hartford, Connecticut, for a purchase price of $25.5 million. The
primary source of funds for this acquisition was proceeds from the Series E
Preferred Stock Offering.
In February 1997, the Company consummated the acquisition of radio stations
KQUE-FM and KNUZ-AM in Houston, Texas, for a purchase price of approximately
$43 million. The primary source of funds for this acquisition was proceeds from
the Series E Preferred Stock Offering.
In March 1997, the Company completed the sale of two radio stations
operating in the Myrtle Beach, South Carolina market for $5.1 million
receivable in installments over a five year period (present value approximately
$4.3 million). As these stations were acquired in November 1996 pursuant to the
MMR Merger, no gain or loss will be recognized on the transaction.
Also in March 1997, the Company consummated the acquisition of certain
companies which collectively own and operate the Meadows Music Theater in
Hartford, Connecticut for $1 million in cash, shares of SFX Class A Common
Stock with a value of approximately $9 million, which is callable by the
Company under certain circumstances, and the assumption of approximately $14
million of debt.
Pending Acquisitions and Dispositions. In October 1996, the Company
entered into an agreement, as amended, with Secret Communications Limited
Partnership ("Secret Communications"), pursuant to
F-23
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 13 -- SUBSEQUENT EVENTS (Continued)
which the Company agreed to acquire substantially all of the assets used in the
operation by Secret Communications of seven radio stations located in
Indianapolis, Indiana and Pittsburgh, Pennsylvania (the "Secret Acquisition").
Two of the radio stations operating in Pittsburgh are not yet owned by Secret
Communications but are anticipated to be acquired prior to the consummation of
the Secret Communications Acquisition, and Secret Communications currently
provides programming and sells advertising on these stations pursuant to an
LMA. The purchase price of the acquisition is $255.0 million, of which the
Company has paid a $10.0 million deposit and segregated $5.0 million pursuant
to a letter of credit to secure its obligations under the purchase agreement.
The agreement provides the Company the right to acquire the Indianapolis
stations, prior to the acquisition of the Pittsburgh stations, for $127.5
million
In addition, pursuant to separate agreements, the Company has also agreed
to: (i) acquire substantially all of the assets of four radio stations
operating in Richmond, Virginia, where the Company currently owns one station
(the "Richmond Acquisition"); (ii) exchange one radio station operating in
Washington, D.C./Baltimore, Maryland, for two radio stations operating in
Dallas, Texas (the "CBS Exchange"); (iii) exchange four radio stations owned by
the Company and located on Long Island, New York, for two radio stations
operating in Jacksonville, Florida, where the Company currently owns four
stations, and a cash payment (the "Chancellor Exchange"); (iv) exchange one
radio station in Pittsburgh, Pennsylvania, which the Company is acquiring from
Secret Communications, and $20 million in cash for one radio station in
Charlotte, North Carolina where the Company currently owns two stations (the
"Charlotte Exchange"); (v) pursuant to a letter of consent, acquire Sunshine
Promotions, Inc ("Sunshine"), a concert promotion company based in
Indianapolis, Indiana, and certain related companies, for approximately $59
million, consisting of $50 million in cash at closing, $2 million in cash
payable over 5 years, shares of Class A Common Stock issuable over a two year
period with a maximum value of approximately $4 million and the assumption of
approximately $3 million of debt (the "Sunshine Acquisition"); and (vi) acquire
two radio stations operating in Pittsburgh, Pennsylvania and two in Milwaukee,
Wisconsin for $35.0 million (the "Hearst Acquisition"); and (vii) sell one
radio station operating in Little Rock, Arkansas (the "Little Rock
Disposition"). The Company intends to finance the Secret Acquisition, the
Richmond Acquisition; the Charlotte Exchange, the Sunshine Acquisition and the
Hearst Acquisition from cash on hand (approximately $105.0 million as of March
28, 1997), proceeds from the Chancellor Exchange, and the Little Rock
Disposition, borrowings under the Credit Agreement and other financing sources
which the Company is currently evaluating. Based on discussions with its
commercial and investment bankers, the Company believes that the financing to
complete such acquisitions will be available on acceptable terms. If the
Company is unable to consummate such acquisitions because of its failure to
obtain financing or for any other reason, it may forfeit deposits up to an
aggregate amount of approximately $22 million.
F-24
<PAGE>
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 13 -- SUBSEQUENT EVENTS (Continued)
SFX BROADCASTING, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
CHARGED
BALANCE AT TO COSTS BALANCE AT
BEGINNING AND END OF
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS ACQUISITIONS YEAR
- ----------- ------------ ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
1994............................ $631 $405 $375 $ -- 661
1995............................ 661 658 519 122 922
1996............................ 922 922 528 304 1,620
</TABLE>
F-25
<PAGE>
SFX BROADCASTING, INC.
- ------------------------
150 East 58th Street
New York, New York 10155
212.407.9191
