1
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): JANUARY 10, 2000
-----------------------
CUMULUS MEDIA INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its character)
ILLINOIS 000-24525 36-4159663
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
111 EAST KILBOURN AVENUE, SUITE 2700 MILWAUKEE, WI 53202
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (414) 615-2800
---------------------
NONE
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
2
Item 5. Other Events
On November 29, 1999, Cumulus Broadcasting, Inc. ("Cumulus Broadcasting"),
a wholly owned subsidiary of Cumulus Media Inc. (the "Company"), entered into an
Asset Purchase Agreement (the "Connoisseur Asset Purchase Agreement") with
Connoisseur Communications Partners, L.P., Continuity Partners, L.P.,
Connoisseur Communications of Flint, L.P., Connoisseur Communications of Mercer
County, L.P., Connoisseur Communications of Muskegon, L.P., Connoisseur
Communications of Quad Cities, L.P., Connoisseur Communications of Rockford,
L.P., Connoisseur Communications of Evansville, L.P., Connoisseur Communications
of Canton, L.P., Connoisseur Communications of Saginaw, L.P., Connoisseur
Communications of Waterloo, L.P., Connoisseur Communications of Youngstown, L.P.
and Abry Broadcast Partners III, L.P. (collectively, the "Connoisseur Sellers").
Pursuant to the terms of the Connoisseur Asset Purchase Agreement, Cumulus
Broadcasting will acquire 37 radio stations in nine Midwestern markets for a
purchase price of $242.0 million in cash.
On December 17, 1999, Cumulus Broadcasting, Cumulus Licensing Corp.
("Cumulus Licensing") and Cumulus Wireless Services Inc. ("Cumulus Wireless")
entered into two asset purchase agreements (the "McDonald Asset Purchase
Agreements") with McDonald Media Group, Inc. ("McDonald"), pursuant to which
Cumulus Broadcasting will acquire five radio stations in California (the
"California Stations") and three stations in Oregon (the "Oregon Stations") for
an aggregate purchase price of $41.0 million in cash. The asset purchase
agreement for the California Stations will become effective upon the exercise
of an option held by Cumulus Broadcasting, Cumulus Licensing and Cumulus
Wireless. The option expires March 31, 2000.
The execution of the Connoisseur Asset Purchase Agreements and the McDonald
Asset Purchase Agreements described herein requires the inclusion, under Article
11 of Regulation S-X, of the pro forma financial statements included herein and,
under Section 3-05 of Regulation S-X, of the historical financial statements
included herein, in a registration statement filed by the Company under the
Securities Act of 1933, as amended. Accordingly, the historical financial
statements included herein are incorporated by reference in the Registration
Statement on Form S-3 (Registration No. 333-94323) filed by the Company with the
SEC on January 10, 2000.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements.
Index to Financial Statements attached hereto:
(1) Connoisseur Communications Partners, L.P.
Report of Independent Accountants
Financial Statements:
Consolidated Balance Sheets as of September 30, 1999 (unaudited)
and December 31, 1998
Consolidated Statements of Operations for nine months ended
September 30, 1999 and 1998 (unaudited) and for the year ended
December 31, 1998
2
3
Consolidated Statement of Partners' Capital for the year ended
December 31, 1998 and September 30, 1999 (unaudited)
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 (unaudited) and for the year ended
December 31, 1998
Notes to Consolidated Financial Statements
(2) Radio Stations KHAY-FM, KVEN-FM, KBBY-FM, KKSB-FM and KMGQ-FM (A
Division of McDonald Media Group, Inc.)
Report of Independent Accountants
Financial Statements:
Balance Sheets as of September 30, 1999 (unaudited) and December
31, 1998
Statements of Operations for nine months ended September 30,
1999 and 1998 (unaudited) and for the year ended December 31,
1998
Statement of Divisional Control Account for the year ended
December 31, 1998
Statements of Cash Flows for the nine months ended September 30,
1999 and 1998 (unaudited) and for the year ended December 31,
1998
Notes to Financial Statements
(3) KZEL-FM Radio and KNRQ-AM/FM Radio (A Division of McDonald Media
Group, Inc.)
Report of Independent Accountants
Financial Statements:
Balance Sheets as of September 30, 1999 (unaudited) and December
31, 1998
Statements of Operations for nine months ended September 30,
1999 and 1998 (unaudited) and for the year ended December 31,
1998
Statement of Divisional Control Account for the year ended
December 31, 1998
Statements of Cash Flows for the nine months ended September 30,
1999 and 1998 (unaudited) and for the year ended December 31,
1998
Notes to Financial Statements
(b) Pro Forma Financial Information.
Cumulus Media Inc. Unaudited Pro Forma Statement of Operations for
the Year Ended December 31, 1998.
3
4
Cumulus Media Inc. Unaudited Pro Forma Statement of Operations for the Nine
Months Ended September 30, 1999.
Cumulus Media Inc. Unaudited Pro Forma Balance Sheet as of September 30,
1999.
(c) Exhibits:
2.1 Asset Purchase Agreement, dated as of November 29, 1999, by and among
Cumulus Broadcasting and the Connoisseur Sellers.**
2.2 Asset Purchase Agreement, dated as of , 2000 by and among
Cumulus Broadcasting, Cumulus Licensing, Cumulus Wireless and
McDonald, with respect to the California Stations.*
2.3 Asset Purchase Agreement, dated as of December 17, 1999 by and among
Cumulus Broadcasting, Cumulus Licensing, Cumulus Wireless and
McDonald, with respect to the Oregon Stations.*
2.4 Option Agreement, dated as of December 17, 1999, by and among Cumulus
Broadcasting, Cumulus Licensing and Cumulus Wireless, with respect to
the California Stations.*
23.1 Consent of PricewaterhouseCoopers LLP.*
23.2 Consent of Ernst & Young LLP.*
* Filed herewith.
** Incorporated by reference to the Current Report on Form 8-K Filed by the
Company on December 2, 1999.
4
5
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be singed on its behalf by the
undersigned hereunto duly authorized.
CUMULUS MEDIA
By: /s/ Richard W. Weening
----------------------
Richard W. Weening
Executive Chairman
and Treasurer
Date: January 18, 2000
S-1
6
EXHIBIT INDEX
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ------------
2.1 Asset Purchase Agreement, dated as of November 29,
1999, by and among Cumulus Broadcasting and the
Connoisseur Sellers.**
2.2 Asset Purchase Agreement, dated as of ,
2000 by and among Cumulus Broadcasting, Cumulus
Licensing, Cumulus Wireless and McDonald, with respect
to the California Stations.*
2.3 Asset Purchase Agreement, dated as of December 17,
1999 by and among Cumulus Broadcasting, Cumulus
Licensing, Cumulus Wireless and McDonald, with respect
to the Oregon Stations.*
2.4 Option Agreement, dated as of December 17, 1999, by and among
Cumulus Broadcasting, Cumulus Licensing and Cumulus Wireless,
with respect to the California Stations.*
23.1 Consent of PricewaterhouseCoopers LLP.*
23.2 Consent of Ernst & Young LLP.*
* Filed herewith.
** Incorporated by reference to the Current Report on Form 8-K Filed by the
Company on December 2, 1999.
S-2
7
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements reflect the
results of operations for the year ended December 31, 1998 and the nine months
ended September 30, 1999 and the balance sheet as of September 30, 1999 after
giving effect to the transactions described below. The information set forth
under the heading "Cumulus Historical" in the pro forma statements of operations
includes results relating to LMAs. The information set forth under the heading
"Pending Acquisitions" in the pro forma statements of operations excludes
results relating to LMAs to the extent that such activity is included in our
historical financial information.
The pro forma statements of operations for the year ended December 31,
1998 and the nine months ended September 30, 1999 give effect to:
- - the offering(s) of our Class A common stock described in the
Registration Statement on Form S-3 (333-94325) filed with the SEC on
January 10, 2000.
- - the November 1999 offering of our Class A common stock
- - the July 1999 offering of our Class A common stock
- - the completion of our 1998 and 1999 acquisitions and our pending
acquisitions,
- - our initial public offerings of our Class A common stock, our senior
subordinated notes and our Series A preferred stock,
- - the redemption of a portion of our Series A preferred stock,
- - borrowings under and the repayment of all indebtedness outstanding
under our old credit facility, and
- - borrowings under our credit facility,
in each case as if such transactions had occurred on January 1, 1998.
The information set forth under the heading "Pro Forma Adjustments for
Cumulus Historical and the 1999 Completed Acquisitions" in the pro forma
statement of operations for the year ended December 31, 1998 includes the
effects of our initial public offerings. The information set forth under the
heading "1999 Subsequent Acquisitions" in the pro forma statement of operations
for the nine months ended September 30, 1999 includes the effect of our
acquisitions completed after September 30, 1999.
The pro forma balance sheet as of September 30, 1999 gives effect to:
- - the offering(s) of our Class A common stock described in the
Registration Statement on Form S-3 (333-94325) filed with the SEC on
January 10, 2000.
- - the November 1999 offering of our Class A common stock
- - The conversion of 1,102,000 shares of Class B common stock owned by
selling shareholders to shares of Class A common stock in connection
with our November offering,
- - the redemption of a portion of our Series A preferred stock,
- - the completion of our pending acquisitions and acquisitions completed
after September 30, 1999,
in each case as if such transactions had occurred on September 30, 1999.
The information set forth under the heading "Pro Forma Adjustments for
the 1999 Subsequent Acquisitions" includes the effect of our acquisitions
completed after September 30, 1999.
The pro forma financial statements are based on our historical
consolidated financial statements and the financial statements of those entities
acquired, or from which assets were acquired, in conjunction with our completed
and pending acquisitions. The unaudited pro forma financial information reflects
the use of the purchase method of accounting for all acquisitions. For purposes
of the unaudited pro forma financial statements, the purchase prices of the
stations acquired and to be acquired in our completed acquisitions and pending
acquisitions have been allocated based primarily on information furnished by
management of the acquired stations. The final allocation of the relative
purchase prices of the stations acquired and to be acquired to our completed
acquisitions and pending acquisitions is determined a reasonable time after
consummation of such transactions and are based on complete evaluations of the
assets acquired and liabilities assumed. Accordingly the information presented
herein may differ from the final purchase price allocation; however, in the
opinion of our management, the final purchase price allocation will not differ
significantly from the information presented herein. In the opinion of our
management, all adjustments have been made that are necessary to present fairly
the pro forma data.
The unaudited pro forma information is presented for illustrative
purposes only and is not indicative of the operating results or financial
position that would have occurred if the transactions referred to above had been
consummated on the dates indicated, nor is it indicative of future operating
results or financial positions. The failure of the aforementioned transactions
to be completed would significantly alter the unaudited pro forma information.
All pro forma financial information should be read in conjunction with
our consolidated financial statements which have been incorporated by reference
in the prospectus included in our Registration Statement (No. 333-94323) filed
with the SEC on January 10, 2000. See also "Risk Factors -- Substantial
Leverage" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in such prospectus or any supplement thereto.
8
CUMULUS MEDIA INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
(Dollars in thousands, except per share data)
(D)
Pro Forma
(B) Adjustments for the
Pro Forma Cumulus Historical
(A) Adjustments for (C) and the 1999
The Company Cumulus 1999 Completed Completed
Historical Historical(1)(2) Acquisitions(3) Acquisitions
----------- ---------------- --------------- -------------------
Statement of Operation Data:
Revenues $ 108,172 $ 29,250 $ 35,236 $ -
Less agency commissions (9,385) (1,934) (2,133) -
------------ ---------- ------------ ------------
Net revenues 98,787 27,316 33,103 -
Station operating expenses
excluding depreciation and
amortization 72,154 20,973 24,192 -
Depreciation and amortization 19,584 3,772 4,923 8,338 (4)
Corporate general and
administrative expenses 5,607 1,395 1,116 -
Non-cash stock compensation
expense - - - -
------------ ---------- ------------ ------------
Operating income (loss) 1,442 1,176 2,872 (8,338)
------------ ---------- ------------ ------------
Interest expense (15,551) (2,950) (3,502) (5,380) (5)
Interest income 2,373 - - (2,173) (6)
Gain (loss) on sale of asset - 21,249 (72) (21,177) (7)
Other income (expense) (2) (182) (129) -
------------ ---------- ------------ ------------
Income (loss) before income (11,738) 19,293 (831) (37,068)
taxes
Income tax (expense) benefit (126) (86) 13 -
------------ ---------- ------------ ------------
Net income (loss) before
extraordinary loss (11,864) 19,207 (818) (37,068)
Preferred stock dividends (13,591) - - (4,503) (8)
------------ ---------- ------------ ------------
Net income (loss) before
extraordinary loss
attributable to common
stockholders $ (25,455) $ 19,207 $ (818) $ (41,571)
============ ========== ============ ============
(E) + (F) = (G)
(A) + (B) + (C)+ (F) Pro Forma as
(D) = (E) Pro Forma Adjusted for the
Pro Forma as Adjustments for the Completed Offering
Adjusted for the Completed Offering the Credit Facility, and
1999 Completed and the Credit the 1999 Completed
Acquisitions Facility Acquisitions
---------------- -------------------- ------------------------
Statement of Operation Data:
Revenues $ 172,658 $ - $ 172,658
Less agency commissions (13,452) - (13,452)
----------- --------- -----------
Net revenues 159,206 - 159,206
Station operating expenses
excluding depreciation and
amortization 117,319 - 117,319
Depreciation and amortization 36,617 - 36,617
Corporate general and
administrative expenses 8,118 - 8,118
Non-cash stock compensation
expense - - -
----------- --------- -----------
Operating income (loss) (2,848) - (2,848)
----------- --------- -----------
Interest expense (27,383) (1,397) (9) (28,780)
Interest income 200 - 200
Gain (loss) on sale of asset - - -
Other income (expense) (313) - (313)
----------- --------- -----------
Income (loss) before income
taxes (30,344) (1,397) (31,741)
Income tax (expense) benefit (199) - (199)
----------- --------- -----------
Net income (loss) before
extraordinary loss (30,543) (1,397) (31,940)
Preferred stock dividends (18,094) 6,333 (10) (11,761)
----------- --------- -----------
Net income (loss) before
extraordinary loss
attributable to common
stockholders $ (48,637) $ 4,936 $ (43,701)
=========== ========= ===========
(I)
Pro Forma
Adjustments
for the Pending (G) + (H) + (I)
(H) Acquisitions and = (J)
Pending the Current Pro Forma
Acquisitions Offering Combined (1)
------------ ----------------- ------------
Statement of Operation Data:
Revenues $ 82,388 $ - $ 255,046
Less agency commissions (7,610) - (21,062)
---------- ---------- ------------
Net revenues 74,778 - 233,984
Station operating expenses
excluding depreciation and
amortization 57,057 - 174,376
Depreciation and amortization 10,434 14,118 (4) 61,169
Corporate general and
administrative expenses 6,478 - 14,596
Non-cash stock compensation
expense - - -
---------- ---------- -------------
Operating income (loss) 809 (14,118) (16,157)
---------- ---------- -------------
Interest expense (5,396) 5,396 (11) (28,780)
Interest income 492 (492)(6) 200
Gain (loss) on sale of asset 554 (554)(12) -
Other income (expense) 270 (43)
---------- ---------- -------------
Income (loss) before income
taxes (3,271) (9,768) (44,780)
Income tax (expense) benefit 259 - 60
---------- ---------- -------------
Net income (loss) before
extraordinary loss (3,012) (9,768) (44,720)
Preferred stock dividends - - (11,761)
---------- ---------- -------------
Net income (loss) before
extraordinary loss
attributable to common
stockholders $ (3,012) $ (9,768) $ (56,481)
========== =========== =============
Basic and diluted loss $(1.26)
per common share =============
Pro Forma weighted average
shares outstanding 44.729
-------------
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
9
Support for Column(H)
Pending Acquisitions
December 31, 1998
RADIO STATIONS
KHAY-FM, KNEN-
CAPE FEAR CONNOISSEUR FM, KBBY-FM, KZEL-FM RADIO PENDING
BROADCASTING C.F. RADIO, COMMUNICATIONS KKSB-FM, KMGQ- AND KNRQ-AM/FM OTHER PENDING ACQUISITIONS
COMPANY INC. PARTNERS, L.P. FM RADIO ACQUISITIONS COLUMN(H)
----------------------------------------------------------------------------------------- -----------
STATEMENT OF OPERATIONS DATA:
Revenues $ 5,847 $ 2,040 $ 38,449 $ 5,963 $ 2,151 $ 27,938 $ 82,388
Less: agency commissions (573) (234) (3,992) (668) (232) (1,911) (7,610)
---------------------------------------------------------------------------------------- ---------
Net revenues 5,274 1,806 34,457 5,295 1,919 26,027 74,778
Station operating expenses
excluding depreciation and
amortization 3,711 1,096 23,874 3,906 1,714 22,756 57,057
Depreciation and amortization 142 355 5,340 1,542 477 2,578 10,434
Corporate General and
administrative expenses -- -- 3,488 420 75 2,495 6,478
Non-cash stock compensation
expense -- -- -- -- -- -- --
---------------------------------------------------------------------------------------- ---------
-- -- -- -- -- -- --
Operating income (loss) 1,421 355 1,755 (573) (347) (1,802) 809
---------------------------------------------------------------------------------------- ---------
Interest expense (28) (350) (4,148) -- -- (870) (5,396)
Interest Income -- -- 492 -- -- -- 492
Gain (loss) on sale of asset -- -- (527) -- -- 1,081 554
Other income (expense) 180 12 (175) -- -- 253 270
---------------------------------------------------------------------------------------- ---------
Income (loss) before income
taxes 1,573 17 (2,603) (573) (347) (1,338) (3,271)
Income tax (expense) benefit -- -- -- 175 109 (25) 259
---------------------------------------------------------------------------------------- ---------
Net income (loss) before
extraordinary loss $ 1,573 $ 17 $ (2,603) $ (398) $ (238) $ (1,363) $ (3,012)
======================================================================================== =========
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NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
(1) The pro forma financial results exclude the effects of estimated cost
savings which management believes will result from the integration of
our completed and pending acquisitions.
(2) Reflects historical revenues and expenses of stations acquired by us in
1998 for the period from January 1, 1998 through the date the stations
were acquired by us.
(3) Reflects the historical revenues and expenses of stations acquired by
us in 1999 for the period from January 1, 1998 through December 31,
1998.
(4) Adjustments reflect (i) the change in depreciation and amortization
expense resulting from conforming the estimated useful lives of our
completed and pending acquisitions' assets to our policies and (ii) the
additional depreciation and amortization expense resulting from the
allocation of the purchase price to the estimated fair market value of
the assets acquired. On a pro forma basis, depreciation expense is
$15,146 and amortization expense is $46,023 after giving effect to the
completed and pending acquisitions. Depreciation expense has been
calculated on a straight line basis using a weighted average life of
seven years for property and equipment. Goodwill and other intangible
assets' amortization has been calculated on a straight line basis over
25 years. Non-compete agreements are being amortized over the lives of
the agreements which range from one to three years.
We allocate the purchase prices of the acquired stations based on
evaluations of the assets acquired and the liabilities assumed. We
believe that the excess of cost over the fair value of tangible net
assets of an acquired radio station almost exclusively relates to the
value of the FCC broadcasting license and goodwill. We believe that the
purchase price allocation method described above is consistent with
general practice in the radio broadcasting industry.
(5) Adjustment to reflect increased interest expense resulting from:
Interest on the $114,450 indebtedness under the old credit
facility at 8.5%.................................................. $ 9,728
Interest on our senior subordinated notes at 10.375%................. 16,600
Annual amortization of $3,102 in transaction costs associated
with the old credit facility over eight years..................... 387
Annual amortization of $6,689 in debt issue costs associated with
our senior subordinated notes over ten years...................... 668
----------
Total interest expense............................................... 27,383
Less: historical interest recorded by us and the businesses
acquired in connection with our completed acquisitions............ (22,003)
----------
Net adjustment....................................................... $ 5,380
==========
(6) Adjustment to reduce historical interest income to reflect the effects
of our completed and pending acquisitions as of January 1, 1998.
11
(7) Adjustment to eliminate non-recurring gains (losses) on the sale of
assets recorded by Crystal Radio Group, Inc., Midland Broadcasting,
Inc. and Savannah Communications, L.P., combined with an adjustment
recorded to eliminate the net non-recurring loss recognized by Calendar
Broadcasting, Inc. and subsidiaries. The non-recurring gain was
recognized by Crystal Radio Group, Inc., Midland Broadcasting, Inc.,
and Savannah Communications L.P. upon sale of assets to us.
(8) Adjustment to reflect additional accretion related to Series A
preferred stock dividend as if the Series A preferred stock were
outstanding for the full period from January 1, 1998 to December 31,
1998.
Accretion of Series A preferred stock dividend (compounded $ 18,094
quarterly at 13.75%)..............................................
Less: historical dividends recorded by us........................... (13,591)
---------
Net adjustment....................................................... $ 4,503
=========
(9) Adjustment to reflect increased interest expense resulting from:
Sources of funds from completed November offering and current
credit facility:
Amount financed by the current credit facility ($125,000 to Cumulus
net of fees of $4,000)............................................ $ 121,000
Class A common stock offered ($148,278 to Cumulus net of fees of
$8,663)........................................................... 139,615
-----------
Total........................................................ $ 260,615
===========
Uses of funds:
Repayment of the old credit facility................................. $ 62,500
Redemption of Series A preferred stock:
Redemption of original liquidation preference (35% of
$125,000)..................................................... $ 43,750
Redemption premium (13.75% of redeemed amount)................... 6,016
-----------
Total payment to Series A preferred stockholders................. 49,766
Cash on hand..................................................... 148,349
-----------
Total........................................................ $ 260,615
===========
Interest on the $125,000 indebtedness under the current credit
facility at 8.50%................................................. $ 10,625
Interest on our senior subordinated notes at 10.375%................. 16,600
Annual amortization of $7,102 in deferred transaction costs
associated with the old and current credit facilities over eight
years............................................................. 888
Annual amortization of $6,689 in debt issue costs associated with
our senior subordinated notes over ten years...................... 667
-----------
Total interest expense....................................... 28,780
Less: interest expense recorded pro forma as adjusted
for the 1999 completed acquisitions........................ (27,383)
-----------
Net adjustment............................................... $ 1,397
===========
12
(10) Adjustment to reflect the reduction in the dividend on the Series A
preferred stock, on a pro forma basis, as if the redemption had
occurred as of January 1, 1998:
Annual dividend on $81,250 Series A preferred stock at 13.75%........ $ 11,761
Less: pro forma dividend as adjusted for the 1999 completed
acquisitions...................................................... (18,094)
---------
Net adjustment....................................................... $ 6,333
=========
(11) Adjustment to reflect the elimination of $ 5,396 of interest expense
recorded by sellers pursuant to our pending acquisitions.
(12) Adjustment recorded to eliminate the net non-recurring gains (losses)
on the sale of assets recorded by Anderson Broadcasting Company,
combined with an adjustment recorded to eliminate the net non-recurring
gain recognized by Savannah Valley Broadcasting Radio Properties. The
non-recurring gain was recognized by Savannah Valley Broadcasting Radio
Properties upon the sale of assets not acquired by us.
Sources of funds from the completed November offering and the current offering:
Class A common stock in November offering ($148,728 to Cumulus
net of fees of $8,663)........................................... $ 139,615
Class A common stock in current Offering ($473,750 to Cumulus
net of fees of $24,937).......................................... $ 448,813
Escrow funds..................................................... 14,063
-----------
Total........................................................ $ 602,491
===========
Uses of funds:
Purchase price of our pending acquisitions........................ $ 456,655
Increase in cash on hand.......................................... 145,836
-----------
Total........................................................ $ 602,491
===========
The floating interest rate used to calculate pro forma interest expense
on the current credit facility is eight and one half percent (8.50%).
The rate on the current credit facility is based on our estimates,
considering current market conditions for similar securities. A
one-eighth of one percent (0.125%) change in the interest rate on the
current credit facility results in a $156 increase or decrease in the
pro forma interest expense for the twelve months ended December 31,
1998.
Upon the consummation of the Series A preferred stock redemption on
October 1, 1999, we have recorded a redemption premium of $6,016 on the
redemption of $43,750 Series A preferred stock.
13
CUMULUS MEDIA INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Dollars in thousands, except per share data)
(D)
Pro Forma (A)+(B)+(C)+
(B) Adjustments for the (D)=(E)
Pro Forma Company Historical Pro Forma as
(A) Adjustments for (C) and the 1999 Adjusted for the
The Company the Company 1999 Completed Completed 1999 Completed
Historical (1) Historical (2) Acquisitions (3) Acquisitions Acquisitions
-------------- --------------- ---------------- -------------- -------------
Statement of Operations Data:
Revenue $ 136,341 $ 4,672 $ 8,651 $ - $ 149,664
Less, agency commissions (10,609) (351) (934) - (11,894)
-------------- --------------- --------------- -------------- -------------
Net revenues 125,732 4,321 7,717 - 137,770
Station operating expenses
excluding depreciation and
amortization 90,049 3,524 5,150 - 98,723
Depreciation and amortization 26,270 371 1,196 (3,400)(4) 24,437
Corporate general and
administrative expenses 5,150 352 733 - 6,235
Non-cash stock compensation expenses - - - - -
-------------- --------------- ---------------- -------------- -------------
Operating Income (loss) 4,263 74 638 3,400 8,375
-------------- --------------- ---------------- -------------- -------------
Interest expenses (19,362) (933) (1,091) 1,289 (5) (20,097)
Interest income 2,054 - - (1,904)(6) 150
Gain (loss) on sale of asset - 29,585 - (29,585)(7) -
Other income (expense) 759 (51) - - 708
-------------- --------------- ----------------- -------------- -------------
Income (loss) before income (12,286) 28,675 (453) (26,800) (10,864)
taxes
Income tax (expense) benefit (160) - - - (160)
-------------- --------------- ----------------- -------------- -------------
Net income (loss) before extraordinary
loss (12,446) 28,675 (453) (26,800) (11,024)
Preferred stock dividends (14,245) - - - (8) (14,245)
-------------- --------------- ----------------- -------------- -------------
Net income (loss) before extraordinary
loss attributable in common stockholders (26,691) 28,675 (453) (26,800) (25,269)
============== ================ ================= ============== =============
(E)+(F)=(G) (I)
(F) Pro Forma as Pro Forma
Pro Forms Adjusted for the Adjustments
Adjustments 1999 Completed for the Pending (G)+(H)+(I)
for the Completed Acquisitions, the (H) Acquisitions =(J)
Offering and the Completed Offering, Pending and the Current Pro Forma
Credit Facility and the Credit Facility Acquisitions Offering Combined (4)
--------------- ----------------------- -------------- ------------ ------------
Statement of Operations Data:
Revenue $ - $ 149,664 $ 58,698 $ $ 208,362
Less: agency commissions - (11,894) (5,643) - (17,537)
--------------- ----------------------- -------------- ------------ ------------
Net revenues - 137,770 53,055 - 190,825
Station operating expenses
excluding depreciation and
amortization - 98,723 38,787 137,510
Depreciation and amortization - 24,437 7,047 11,369 (4) 42,853
Corporate general and
administrative expenses - 6,235 5,378 - 11,613
Non-cash stock compensation expense - - - - -
--------------- ----------------------- -------------- ------------- ------------
Operating income (loss) - 8,375 1,843 (11,369) (1,151)
--------------- ----------------------- -------------- ------------- ------------
Interest expense (1,489)(9) (21,586) (4,139) 4,139 (11) (21,586)
Interest income - 150 270 (270)(6) 150
Gain (loss) on sale of asset - - 34 (34)(12) -
Other income (expense) - 708 (193) 515
--------------- ----------------------- -------------- ------------- ------------
Income (loss) before income (1,489) (12,353) (2,185) (7,534) (22,072)
taxes
Income tax (expense) benefit - (160) 522 - 362
--------------- ----------------------- -------------- ------------- ------------
Net income (loss) extraordinary loss (1,489) (12,513) (1,663) (7,534) (21,710)
Preferred stock dividends 4,320 (10) (9,925) - - (9,925)
--------------- ----------------------- -------------- ------------- ------------
Net income (loss) before extraordinary
loss attributable in common
stockholders 2,831 (22,438) (1,663) (7,534) (31,635)
=============== ======================= ============== ============= ============
Basic and diluted loss
per common share $ (.71)
============
Pro forma weighted average
share outstanding 44,729
============
See accompanying notes to unaudited pro forma combined statement of operations
14
SUPPORT FOR COLUMN(H)
PENDING ACQUISITIONS
SEPTEMBER 30, 1999
RADIO STATIONS
KHAY-FM, KNEN-
CAPE FEAR CONNOISSEUR FM, KBBY-FM, KZEL-FM RADIO PENDING
BROADCASTING C.F. COMMUNICATIONS KKSB-FM, KMGQ- AND KNRQ-AM/FM OTHER PENDING ACQUISITIONS
COMPANY RADIO, INC. PARTNERS, L.P. FM RADIO ACQUISITIONS COLUMN (H)
------------------------------------------------------------------------------------ -----------
STATEMENT OF OPERATIONS DATA:
Revenues $ 4,012 $ 1,717 $ 32,483 $ 4,146 $ 1,718 $ 14,622 $ 58,698
Less: agency commissions (467) (218) (3,473) (463) (195) (827) (5,643)
------------------------------------------------------------------------------- --------
Net revenues 3,545 1,499 29,010 3,683 1,523 13,795 53,055
Station operating expenses
excluding depreciation and
amortization 2,510 1,056 19,317 3,301 1,214 11,389 38,787
Depreciation and amortization (100) 421 4,213 1,101 297 1,115 7,047
Corporate General and
administrative expenses - - 3,300 386 42 1,650 5,378
Non-cash stock compensation expense - - - - - - -
------------------------------------------------------------------------------- --------
Operating income (loss) 1,135 22 2,180 (1,105) (30) (359) 1,843
------------------------------------------------------------------------------- --------
Interest expense 18 (357) (3,220) - - (580) (4,139)
Interest income - - 270 - - - 270
Gain (loss) on sale of asset - - (6) - - 40 34
Other income (expense) - - (71) - - (122) (193)
------------------------------------------------------------------------------- --------
Income (loss) before income 1,153 (335) (847) (1,105) (30) (1,021) (2,185)
taxes
Income tax (expense) benefit - - - 487 35 - 522
------------------------------------------------------------------------------- --------
Net income (loss) before
extraordinary loss $ 1,153 $ (335) $ (847) $ (618) $ 5 $ (1,021) $ (1,663)
------------------------------------------------------------------------------- --------
15
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
(1) The pro forma financial results exclude the effects of estimated cost
savings which management believes will result from the integration of
our completed and pending acquisitions.
(2) Reflects historical revenues and expenses of stations acquired by
us in the first nine months of 1999 for the period from January 1, 1999
through the date the stations were acquired by us.
(3) Reflects the historical revenues and expenses of stations acquired
by us after September 30, 1999 for the period from January 1, 1999
through September 30, 1999.
(4) Adjustments reflect (i) the change in depreciation and amortization
expense resulting from conforming the estimated useful lives of our
completed and pending acquisitions' assets to our policies and (ii) the
additional depreciation and amortization expense resulting from the
allocation of the purchase price to the estimated fair market value of
the assets acquired. On a pro forma basis, depreciation expense is
$10,564 and amortization expense is $32,289 after giving effect to the
completed and pending acquisitions. Depreciation expense has been
calculated on a straight-line basis using a weighted average life of
seven years for property and equipment. Goodwill and other intangible
assets' amortization has been calculated on a straight-line basis over
25 years. Non-compete agreements are being amortized over the lives of
the agreements which range from one to three years.
We allocate the purchase prices of the acquired stations based on
evaluations of the assets acquired and the liabilities assumed. We
believe that the excess of cost over the fair value of tangible net
assets of an acquired radio station almost exclusively relates to the
value of the FCC broadcasting license and goodwill. We believe that the
purchase price allocation method described above is consistent with
general practice in the radio broadcasting industry.
(5) Adjustment to reflect decreased interest expense resulting from:
Nine months of interest on the $107,537 indebtedness under
the old credit facility at 8.5%................................... $ 6,854
Nine months of interest on our senior subordinated notes at
10.375%........................................................... 12,450
Nine months of amortization of $3,102 in transaction costs
associated with the old credit facility over eight years.......... 291
Nine months of amortization of $6,689 in debt issue costs
associated with our senior subordinated notes over ten years...... 502
--------
Total interest expense........................................... 20,097
Less: historical interest recorded by us and the businesses
acquired in connection with our completed acquisitions........ (21,386)
--------
Net adjustment................................................... $ (1,289)
========
(6) Adjustments to reduce historical interest income to reflect the effects
of our completed and pending acquisitions as of January 1, 1999.
(7) Adjustment recorded to eliminate the non-recurring gain on sale of
assets recorded by HMH Broadcasting Inc. on the 1999 sales of radio
stations to us.
16
(8) Adjustment to reflect additional accretion related to Series A
preferred stock dividend as if the Series A preferred stock were
outstanding for the full period from January 1, 1998 to September 30,
1999.
Accretion of Series A preferred stock dividend (compounded
quarterly at 13.75%).............................................. $ 14,245
Less: historical dividends recorded by us........................... (14,245)
--------
Net adjustment....................................................... $ 0
========
(9) Adjustment to reflect increased interest expense resulting from:
Sources of funds from completed November offering and current
credit facility:
Amount financed by the current credit facility ($125,000 to
Cumulus net of fees of $4,000).................................... $ 121,000
Class A common stock offered ($148,278 to Cumulus net of
fees of $8,663)................................................... 139,615
-----------
Total........................................................ $ 260,615
===========
Uses of funds:
Repayment of the old credit facility................................. $ 107,537
Redemption of Series A preferred stock:
Redemption of original liquidation preference (35% of
$125,000)..................................................... $ 43,750
Redemption premium (13.75% of redeemed amount)................... 6,016
----------
Total payment to Series A preferred stockholders................. 49,766
Cash on hand..................................................... $ 103,312
-----------
Total........................................................ $ 260,615
===========
Nine months interest on the $125,000 indebtedness under the
current credit facility at 8.50%................................. 7,968
Nine months interest on our senior subordinated notes at
10.375%.......................................................... 12,450
Nine months amortization of $7,102 in deferred transaction
costs associated with the old and current credit facilities over
eight years...................................................... 666
Nine months amortization of $6,689 in debt issue costs
associated with our senior subordinated notes over ten years..... 502
-----------
Total interest expense....................................... 21,586
Less: interest expense recorded pro forma as adjusted
for our completed acquisitions............................ (20,097)
-----------
Net adjustment............................................... $ 1,489
===========
17
(10) Adjustment to reflect the redemption of Series A preferred stock,
on a pro forma basis, as if the redemption had occurred as of January
1, 1998:
Original Series A preferred stock................................ $ 125,000
Less: redemption of original liquidation preference............. (43,750)
----------
Pro forma Series A preferred stock balance as of January 1,
1998.......................................................... 81,250
Annual dividend on Series A preferred stock at 13.75%
compounded quarterly.......................................... 11,761
----------
Pro forma Series A preferred stock balance as of
December 31, 1998.......................................... 93,011
Nine months dividend on $93,011 Series A preferred
stock at 13.75%............................................ (9,925)
Less: pro forma dividend as adjusted for the 1999
subsequent acquisitions.................................... (14,245)
----------
Net adjustment............................................... $ 4,320
==========
(11) Adjustment to reflect the elimination of $4,139 of interest expense
recorded by sellers pursuant to the Pending Acquisitions.
(12) Adjustment recorded to eliminate the non-recurring gain on the sale of
assets recorded by Centroplex Communications Inc.
Sources of funds from the completed November offering and the current
offering:
Class A common stock offered in November offering ($148,278 to
Cumulus net of fees of $8,663).................................. $ 139,615
Class A common stock offered in current offering ($473,750 to
Cumulus net of fees of $24,937)................................. $ 448,813
Escrow funds.................................................... 14,063
-----------
Total........................................................ $ 602,491
===========
Uses of funds:
Purchase price of the pending acquisitions........................ $ 456,655
Increase in cash on hand.......................................... 145,836
-----------
Total........................................................ $602,491
===========
18
The floating interest rate used to calculate pro forma interest expense
on the current credit facility is eight and one half percent (8.50%).
The rate on the current credit facility is based on our estimates,
considering current market conditions for similar securities. A
one-eighth of one percent (0.125%) change in the interest rate on our
current credit facility results in a $117 increase or decrease in the
pro forma interest expense for the nine months ended September 30,
1999.
Upon the consummation of the Series A Preferred Stock redemption on
October 1, 1999, we recorded a redemption premium of $6,016 on the
redemption of $43,750 Series A preferred stock.
19
CUMULUS MEDIA INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
(A) + (B) +(C)=(D)
(B) PRO FORMA AS
PRO FORMA (C) ADJUSTED FOR THE
ADJUSTMENTS PRO FORMA COMPLETED OFFERINGS,
(A) FOR THE ADJUSTMENTS FOR CREDIT FACILITY AND
THE COMPANY PREFERRED STOCK THE SUBSEQUENT THE SUBSEQUENT
HISTORICAL REDEMPTION (1) ACQUISITIONS (2) ACQUISITIONS
----------- --------------- ---------------- --------------------
ASSETS:
Current assets:
Cash and cash equivalents $ 202,149 $ (51,270) $ (46,386) $ 104,493
Accounts receivable 48,265 -- -- 48,265
Prepaid expenses and other current
assets 8,221 -- -- 8,221
--------- --------- --------- ----------
Total current assets 258,635 (51,270) (46,386) 160,979
Property and equipment, net 57,985 -- 4,639 62,624
Intangible assets, net 486,217 -- 48,227 534,444
Other assets 20,178 -- -- 20,178
--------- --------- --------- ----------
TOTAL ASSETS $ 823,015 $ (51,270) $ 6,480 $ 778,225
========= ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and other liabilities $ 15,472 $ -- $ -- 15,472
Current portion of long-term debt 20 -- -- 20
--------- --------- --------- ----------
Total current liabilities 15,492 -- -- 15,492
Long-term debt:
Credit facility - Old -- --
Credit facility - New 125,232 -- 125,232
Notes 160,000 -- -- 160,000
Other -- -- -- --
Other long-term liabilities:
Deferred tax liability 15,074 -- 6,480 21,554
Other long-term liabilities 1,934 -- -- 1,934
--------- --------- --------- ----------
Total liabilities 317,732 -- 6,480 324,212
Preferred stock subject to mandatory
redemption 147,986 $ (45,254) -- 102,732
--------- --------- --------- ----------
Stockholders' equity:
Class A Common Stock 210 -- -- 210
Class B Common Stock 79 -- -- 79
Class C Common Stock 22 -- -- 22
Additional paid in capital 386,706 -- -- 386,706
-- --
(6,016) (6,016)
Accumulated other comprehensive income 5 -- -- 5
Retained earnings (deficit) (29,725) -- -- (29,725)
--------- --------- --------- ----------
Total stockholders' equity 357,297 (6,016) -- 351,281
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 823,015 $ (51,270) $ 6,480 $ 778,225
========= ========= ========= ==========
(E) (F)
PRO FORMA PRO FORMA (G)
ADJUSTMENTS ADJUSTMENTS PRO FORMA
FOR THE FOR THE ADJUSTMENTS FOR (D) + (E) + (F) + (G) = H
COMPLETED CURRENT THE PENDING PRO FORMA
OFFERING (3) OFFERING (3) ACQUISITIONS (4) COMBINED
------------ ------------ ---------------- -------------------
ASSETS:
Current assets:
Cash and cash equivalents $ 139,615 $ 448,813 $ (442,592) $ 250,329
Accounts receivable -- 48,265
Prepaid expenses and other current
assets -- 8,221
--------- --------- ---------- ----------
Total current assets 139,615 448,813 (442,592) 306,815
Property and equipment, net 45,666 108,290
Intangible assets, net 416,646 951,090
Other assets (14,063) 6,115
--------- --------- ---------- ----------
TOTAL ASSETS $ 139,615 $ 448,813 $ 5,657 $1,372,310
========= ========= ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and other liabilities -- $ -- 15,472
Current portion of long-term debt -- -- 20
--------- --------- ---------- ----------
Total current liabilities -- -- -- 15,492
Long-term debt:
Credit facility - Old
Credit facility - New -- 125,232
Notes -- -- 160,000
Other -- -- -- --
Other long-term liabilities:
Deferred tax liability 5,657 27,211
Other long-term liabilities -- -- 1,934
--------- --------- ---------- ----------
Total liabilities -- -- 5,657 329,869
Preferred stock subject to mandatory
redemption -- -- 102,732
--------- --------- ---------- ----------
Stockholders' equity:
Class A Common Stock 48 100 -- 358
Class B Common Stock (10) -- -- 69
Class C Common Stock -- -- -- 22
Additional paid in capital 148,240 473,650 -- 968,980
(8,663) (24,937)
Accumulated other comprehensive income -- -- -- 5
Retained earnings (deficit) -- -- -- (29,725)
--------- --------- ---------- ----------
Total stockholders' equity 139,615 448,813 -- 939,709
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 139,615 $ 448,813 $ 5,657 $1,372,310
========= ========= ========== ==========
See accompanying notes to the unaudited combined pro forma balance sheet.
20
Support for Column (G)
Pending Acquisitions
September 30, 1999
RADIO STATIONS
KHAY-FM, KNEN-
CONNOISSEUR FM, KBBY-FM, KZEL-FM RADIO
CAPE FEAR COMMUNICATIONS KKSB-FM, AND KNRQ-AM/FM
BROADCASTING,INC. C/F RADIO, INC. PARTNERS, LP. KMGQ-FM RADIO
------------------------------------------------------------------------------
Assets:
Current assets:
Cash and cash equivalents $ 1,520 $ 742 $ 1,086 $ 138 $ 60
Accounts receivable 806 327 6,862 1,793 371
Prepaid expenses and other current assets 66 38 862 1,758 -
-----------------------------------------------------------------------------
Total current assets 2,392 1,107 8,810 3,689 431
Property and equipment, net 681 1,634 18,536 753 592
Intangible assets, net 3 3,898 73,728 15,135 3,147
Other assets 3,686 567 6,372 265 39
-----------------------------------------------------------------------------
TOTAL ASSETS $ 6,762 $ 7,206 $ 107,446 $ 19,842 $ 4,209
=============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and other liabilities 459 241 3,586 500 148
Current portion of long-term debt 55 471 4,715 - -
-----------------------------------------------------------------------------
Total current liabilities 514 712 8,301 500 148
Credit Facility - - - - -
Notes - - - - -
Deferred Tax Liability - - - - -
Other long-term liabilities 300 6,720 49,723 - 17
Preferred Stock subject to long term redemption - - - - -
-----------------------------------------------------------------------------
Total liabilities 814 7,432 58,024 500 165
STOCKHOLDERS' EQUITY:
Series A Common 42 7 - - -
Series B Common - - - - -
Series C Common - - - - -
Additional paid in capital - - - - -
Accumulated other comprehensive income 347 - - - -
Retained earnings (deficit) 5,559 (233) 49,422 19,342 4,044
Cost of treasury shares - - - - -
-----------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 5,948 (226) 49,422 19,342 4,044
-----------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 6,762 $ 7,206 $ 107,446 $ 19,842 $ 4,209
=============================================================================
TOTAL PENDING
OTHER PENDING TOTAL PENDING PRO FORMA ACQUISITIONS AS
ACQUISITIONS ACQUISITIONS ADJUSTMENTS ADJUSTED COLUMN(G)
------------ -------------- ----------- -------------------
Assets:
Current assets:
Cash and cash equivalents $ 2,344 $ 5,890 $ (448,482) $ (442,592)
Accounts receivable 4,197 14,356 (14,356) -
Prepaid expenses and other current assets 407 3,131 (3,131) -
-------- ---------- ----------- ------------
Total current assets 6,948 23,377 (465,969) (442,592)
Property and equipment, net 5,535 27,731 17,935 45,666
Intangible assets, net 12,977 108,888 307,758 416,646
Other assets 1,604 12,533 (26,596) (14,063)
-------- --------- ----------- ----------
TOTAL ASSETS $ 27,064 $ 172,529 $ (166,872) $ 5,657
======== ========= =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and other liabilities 3,370 8,304 (8,304) -
Current portion of long-term debt 5,216 10,457 (10,457) -
-------- --------- ---------- ----------
Total current liabilities 8,586 18,761 (18,761) -
Credit Facility - - - -
Notes - - - -
Deferred Tax Liability - - 5,657 5,657
Other long-term liabilities 13,567 70,327 (70,327) -
Preferred Stock subject to long term redemption - - - -
-------- --------- ---------- ----------
Total liabilities 22,153 89,088 (83,431) 5,657
STOCKHOLDERS' EQUITY:
Series A Common 791 840 (840) -
Series B Common - - - -
Series C Common - - - -
Additional paid in capital 4,440 4,440 (4,440) -
Accumulated other comprehensive income - 347 (347) -
Retained earnings (deficit) (320) 77,814 (77,814) -
Cost of treasury shares - - - -
-------- --------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 4,911 83,441 (83,441) -
-------- --------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 27,064 $ 172,529 $ (166,872) $ 5,657
======== ========= ========== ==========
21
NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(IN THOUSANDS)
(1) To reflect: (i) the redemption of 35% of the original liquidation
preference of the Series A preferred stock in the amount of $43,750
plus a 13.75% redemption premium on the redeemed preferred stock in the
amount of $6,016;
Redemption of Series A preferred stock:
Redemption of original liquidation preference (35% of
$125,000)................................................. $ 43,750
Accrued and unpaid dividend on redeemed original 1,504
liquidation preference.......................................
Redemption premium (13.75% of redeemed amount)................. 6,016
--------
Total payment to Series A preferred stockholders............... 51,270
(2) To record the allocation of the $46,386 purchase price paid for
transactions consummated subsequent to September 30, 1999. The pro
forma allocation of the purchase price of the 1999 subsequent
acquisitions is as follows:
Property and equipment............................................. $ 4,639
Intangible assets, principally broadcast licenses.................. 48,227
Deferred tax liability............................................. (6,480)
--------
$ 46,386
========
(3) To reflect: (i) the net proceeds of the November offering to Cumulus of
$148,728, net of $8,663 in issuance costs (ii) the net proceeds of the
current offering of $473,750, net of $24,937 in issuance costs.
Class A common stock offered in November offering ($148,728 to $ 139,615
Cumulus net of fees of $8,663)................................
Class A common stock offered in current offering ($473,750 to 448,813
Cumulus net of fees of $24,937)...............................
Escrow funds.................................................. 14,063
---------
Total...................................................... $ 602,491
=========
Uses of funds:
Purchase price of the pending acquisitions...................... $ 456,655
Increase in cash on hand........................................ 145,836
---------
Total...................................................... $ 602,491
=========
(4) To record the allocation of the $456,655 in purchase price to be
paid for the pending acquisitions and the recording of the related deferred
income taxes of $5,657. To record the use of cash of $442,592, and escrow
funds of $14,063 to complete the pending acquisitions. The pro forma
allocation of the purchase price of the pending acquisitions is as follows:
Property and equipment............................................. $ 45,666
Intangible assets, principally broadcast licenses.................. 416,646
Deferred taxes..................................................... (5,657)
----------
$ 456,655
==========
22
INDEX TO FINANCIAL STATEMENTS
Connoisseur Communications Partners L.P.
Report of Independent Auditors .............................................................................. F-1
Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998 ................................... F-2
Consolidated Statements of Operations for the nine months ended September 30, 1999 and 1998 (unaudited)
and for the year ended December 31, 1998 .................................................................. F-3
Consolidated Statements of Partners' capital as of December 31, 1998 and September 30, 1999 (unaudited) ..... F-4
Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 (unaudited)
and for the year ended December 31, 1998 .................................................................. F-5
Notes to Financial Statements ............................................................................... F-6
Radio stations KHAY-FM, KVEN-FM, KBBY-FM, KKSB-FM and KM6Q-FM
Report of Independent Accountants ........................................................................... F-18
Consolidated Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1999 ...................... F-19
Statements of Operations for the nine months ended September 30, 1999 and
1998 (unaudited) and for the year December 31, 1998 ....................................................... F-20
Statement of Divisional Control Account for the year ended December 31, 1998 ................................ F-21
Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 (unaudited) and for the year
ended December 31, 1998 ................................................................................... F-22
KZEL RADIO AND KNRQ-AM/FM RADIO
Notes to Consolidated Financial Statements .................................................................. F-23
Independent Auditor's Report ................................................................................ F-27
Balance sheets as of September 30, 1999 (unaudited) and December 31, 1998 ................................... F-28
Statements of Operations for the nine months ended September 30, 1999 and 1998 (unaudited) and for the year
ended December 31, 1998 ................................................................................... F-29
Statement of Divisional Control Accounts for the year ended December 31, 1998 ............................... F-30
Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 (unaudited) and
for the year ended December 31, 1998 ...................................................................... F-31
Notes to Consolidated Financial Statements .................................................................. F-32
23
Report of Independent Auditors
Partners
Connoisseur Communications Partners, L.P.
We have audited the accompanying consolidated balance sheet of Connoisseur
Communications Partners, L.P. at December 31, 1998, and the related consolidated
statement of operations, partners' capital, and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Connoisseur Communications
Partners, L.P. at December 31, 1998, and the results of its operations and its
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
March 10, 1999
F-1
24
Connoisseur Communications Partners, L.P.
Consolidated Balance Sheets
SEPTEMBER DECEMBER
30,1999 31, 1998
-------------------------------
ASSETS (Unaudited)
Current assets:
Cash $ 1,085,672 $ 661,578
Accounts receivable (net of allowance for doubtful accounts of
$503,797 (unaudited) and $484,968, respectively) 6,862,175 6,827,644
Interest receivable--related parties 179,545 94,724
Assets held for sale -- 110,000
Prepaid expenses 494,878 399,498
Other current assets 187,549 253,209
------------------------------
Total current assets 8,809,819 8,346,653
Property, building and equipment (net of accumulated
depreciation of $4,910,326 (unaudited) and $3,586,376,
respectively) 18,535,861 16,903,026
Intangible assets (net of accumulated amortization of
$8,419,617 (unaudited) and $5,933,165, respectively) 73,727,864 73,388,909
Notes receivable--related parties 5,620,413 5,620,413
Other assets 751,555 348,258
------------------------------
Total assets $ 107,445,512 $ 104,607,259
==============================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current portion of long-term debt $ 4,715,353 $ 2,650,925
Accounts payable 991,167 1,284,088
Accrued expenses 2,020,662 1,536,892
Accrued interest 494,739 763,398
Due to related parties -- 40,625
Due to general partner 77,685 134,785
------------------------------
Total current liabilities 8,299,606 6,410,713
Long-term debt 48,431,154 47,098,469
Deferred compensation 826,678 461,273
Other liabilities 11,221 25,543
Minority interest 454,423 456,215
Partners' capital:
Partners' investment 58,381,986 58,267,058
Accumulated deficit (8,959,556) (8,112,012)
------------------------------
Total partners' capital 49,422,430 50,155,046
------------------------------
Total liabilities and partners' capital $ 107,445,512 $ 104,607,259
==============================
See accompanying notes.
F-2
25
Connoisseur Communications Partners, L.P.
Consolidated Statements of Operations
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30 DECEMBER 31
1999 1998 1998
-----------------------------------------------------
(Unaudited)
Broadcast revenues:
Broadcasting $30,238,160 $ 25,782,132 $ 35,583,390
Barter 1,701,994 1,537,111 2,107,517
Less agency commissions and adjustments (3,473,263) (2,864,275) (3,992,399)
--------------------------------------------------
Net broadcast revenues 28,466,891 24,454,968 33,698,508
Rental income and other 542,655 581,802 758,067
--------------------------------------------------
Net revenue 29,009,546 25,036,770 34,456,575
Station operating expenses:
Selling 5,742,785 5,032,902 6,702,739
Programming 5,230,639 4,697,845 6,387,113
Promotions 974,203 1,221,089 1,724,153
Technical 822,184 786,353 1,040,199
General and administrative 4,835,364 4,352,124 6,000,814
Barter 1,711,997 982,875 2,018,631
Depreciation 1,324,802 1,104,447 1,568,373
Amortization 2,565,789 2,525,607 3,431,982
TBA and SRA expense 322,405 262,057 340,221
--------------------------------------------------
Total station operating expenses 23,530,168 20,965,299 29,214,225
--------------------------------------------------
Other operating expenses:
Corporate and other expenses 2,426,471 1,893,826 2,572,920
Partners' fees and expenses 42,906 124,701 158,109
General partner management fee 112,994 164,673 202,893
Consulting expense 11,250 79,734 105,881
Noncash compensation 706,625 315,960 447,771
Write-down on assets held for sale and loss
on sale of stations - - 526,569
-------------------------------------------------
Total other operating expenses 3,300,246 2,578,894 4,014,143
--------------------------------------------------
Total operating expenses 26,830,414 23,544,193 33,228,368
Operating income 2,179,132 1,492,577 1,228,207
Interest expense 3,219,594 3,068,808 4,147,961
Loss on sale of assets 5,916 158,677 -
Other expenses 70,549 118,245 175,223
Interest income from related party loans (269,369) (375,279) (466,040)
Interest income (14) (6,273) (25,565)
==================================================
Net loss $ (847,544) $ (1,471,601) $ (2,603,372)
==================================================
See accompanying notes.
F-3
26
Connoisseur Communications Partners, L.P.
Consolidated Statements of Partners' Capital
GENERAL LIMITED
PARTNER PARTNERS TOTAL
-------------------------------------------------------
Balance at December 31, 1997 $ 687,748 $46,842,572 $47,530,320
Contributions, net of cost 102,958 5,304,052 5,407,010
Noncash compensation - 324,058 324,058
Distributions (9,886) (493,084) (502,970)
Net loss (26,034) (2,577,338) (2,603,372)
-----------------------------------------------------
Balance at December 31, 1998 754,786 49,400,260 50,155,046
Noncash compensation (unaudited) - 341,220 341,220
Distributions (unaudited) (4,305) (221,987) (226,292)
Net loss (unaudited) (8,476) (839,068) (847,544)
=====================================================
Balance at September 30, 1999 (unaudited) $ 742,005 $48,680,425 $49,422,430
=====================================================
See accompanying notes.
F-4
27
Connoisseur Communications Partners, L.P.
Consolidated Statements of Cash Flows
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30 DECEMBER 31
1999 1998 1998
---------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited)
Net loss $ (847,544) $ (1,471,601) $ (2,603,372)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 1,324,802 1,104,447 1,568,373
Amortization 2,565,789 2,525,607 3,431,982
Bad debt expense 368,409 276,550 530,319
Noncash compensation expense 706,624 315,960 447,771
Unrealized loss on assets held for sale -- -- 332,944
Other 26,532 14,785 (13,687)
Changes in assets and liabilities, net of amounts acquired:
Increase in accounts receivable (402,940) (2,088,878) (2,048,591)
Increase in prepaid expenses and other current assets (29,720) (368,925) (177,185)
Decrease (increase) in interest receivable (84,821) 534,825 661,845
(Decrease) increase in accounts payable (292,921) 17,540 4,594
Increase (decrease) in accrued expenses 185,111 (14,761) 484,294
Decrease in fees due to related parties (40,625) (78,294) (79,375)
Decrease in due to general partner (57,100) (242,442) (204,564)
---------------------------------------------------
Net cash provided by operating activities 3,421,596 524,813 2,335,348
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of radio stations (4,665,407) (11,548,412) (12,870,638)
Capital expenditures (1,520,437) (1,756,405) (2,030,162)
Proceeds from sale of assets 140,000 2,000,000 2,000,000
Repayment of loans to related parties - 4,983,490 4,983,490
Other assets (108,158) (87,237) (81,659)
---------------------------------------------------
Net cash used in investing activities (6,154,002) (6,408,564) (7,998,969)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loan 4,925,000 4,600,000 4,817,259
Payments on loans (1,527,887) (4,453,647) (4,672,144)
Deferred financed costs - - (31,851)
Other liabilities (14,322) (12,682) (18,835)
Capital contributions - 5,407,010 5,407,010
Increase in minority interest - 104,000 104,000
Distributions paid (226,291) (502,972) (502,970)
---------------------------------------------------
Net cash provided by financing activities 3,156,500 5,141,709 5,102,469
---------------------------------------------------
Net (decrease) in cash 424,094 (742,042) (561,152)
Cash at beginning of period 661,578 1,222,730 1,222,730
---------------------------------------------------
Cash at end of period $ 1,085,672 $ 480,688 $ 661,578
===================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 3,488,253 $ 2,894,912 $ 3,606,456
===================================================
See accompanying notes.
F-5
28
1. FORMATION AND BUSINESS ACTIVITY
Connoisseur Communications Partners, L.P. (the "Partnership"), a Delaware
limited partnership, was organized in August 1993 for the purpose of acquiring,
owning and operating radio stations in small and medium-sized markets. The
Partnership owns a 99% limited partnership interest in nine limited
partnerships: Connoisseur Communications of Flint, L.P. ("Flint"); Connoisseur
Communications of Quad Cities, L.P. ("Quad Cities"), Connoisseur Communications
of Youngstown, L.P. ("Youngstown"), Connoisseur Communications of Rockford, L.P.
("Rockford"), Connoisseur Communications of Waterloo, L.P. ("Waterloo"),
Connoisseur Communications of Evansville, L.P. ("Evansville"), Connoisseur
Communications of Canton, L.P. ("Canton"), Connoisseur Communications of
Muskegon, L.P. ("Muskegon") and Connoisseur Communications of Mercer County,
L.P. ("Western PA"). Continuity Partners, L.P. ("Continuity") is the 1% general
partner in the Partnership. In addition, Continuity is the 1% general partner in
Flint, Quad Cities, Youngstown, Rockford, Waterloo, Evansville, Canton, Muskegon
and Western PA, which is shown as minority interest for financial statement
purposes.
Information with respect to the nine month periods ended September 30, 1999 and
1998 is unaudited. The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, the unaudited interim consolidated
financial statements contain all adjustments considered necessary for a fair
presentation. Operating results for the nine months ended September 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999, or for any other interim period.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of the Partnership and Flint, Quad Cities, Youngstown, Rockford,
Waterloo, Evansville, Canton, Muskegon and Western PA. All significant
intercompany accounts and transactions have been eliminated. In this report,
actions of the Partnership and its 99% owned subsidiary partnerships are
referred to collectively or individually as actions of the Partnership.
Barter Transactions: Barter transactions represent the exchange of commercial
airtime for programming, merchandise, or services. The transactions are recorded
at the fair market value of the asset or service received. Revenue is recognized
when the advertisements are broadcast; expenses are recorded when the asset or
service received is utilized.
F-6
29
Connoisseur Communications Partners, L.P.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangibles: Intangibles include goodwill, broadcast licenses, covenants
not-to-compete and deferred financing costs. Goodwill represents the excess of
cost over the fair values of the identifiable tangible net assets acquired.
Goodwill and broadcast licenses are amortized on a straight-line basis over 40
years. Covenants not-to-compete are amortized on a straight-line basis over the
term of the agreements. Deferred financing costs are amortized over the term of
the related debt agreement on a straight-line basis.
The carrying values of goodwill and broadcast licenses are reviewed periodically
to determine whether they may have become impaired. If this review indicates
that goodwill and broadcast licenses will not be recoverable, as determined
based on the undiscounted cash flows of the entity acquired over the remaining
amortization period, the Partnership's carrying value of the goodwill and
broadcast licenses would be reduced by the difference between the carrying
amount and the estimated fair value and would be recognized as a charge to
income.
Property, Building and Equipment: Property, building and equipment are stated at
cost. Depreciation of property, building and equipment is calculated using the
straight-line method over their estimated useful as follows:
Building and improvements 30 to 40 years
Transmitters, towers and antennas 7 to 15 years
Broadcast and related equipment 3 to 10 years
Furniture and office equipment 3 to 7 years
Income Taxes: The Partnership is not subject to federal, state, or local income
taxes and, accordingly, makes no provision for income taxes in its financial
statements. The partners are responsible for reporting their respective share of
the Partnership's taxable income or loss.
Revenue Recognition: The Partnership's primary source of revenue is the sale of
airtime to local, regional and national advertisers. Revenue is recorded when
advertisements are broadcast.
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-7
30
Connoisseur Communications Partners, L.P.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Time Brokerage Agreements ("TBAs")/Sales Representation Agreements ("SRAs"):
From time to time, the Partnership enters into TBAs and SRAs with respect to
radio stations owned by third parties, including radio stations which it intends
to acquire. Terms of the agreements generally require the Partnership to pay a
monthly fee in exchange for the right to provide station programming and sell
related advertising time in the case of a TBA or sell advertising on behalf of
the station in the case of a SRA. In instances in which the stations are
acquired, the agreements terminate upon the acquisition of the stations. The
fees are expensed as incurred and are classified as operating expense.
Interest Rate Swap Agreements: The Partnership entered into an interest rate
swap agreement to effectively convert a portion of its variable-rate borrowings
into a fixed-rate obligation. The differential to be paid or received as
interest rates change is accounted for on the accrual method of accounting. The
related amount payable to or receivable from counterparties is included as an
adjustment to accrued interest in accrued liabilities.
Advertising: Advertising costs are expensed as incurred. Advertising expense
totaled $779,806 in 1998.
3. ACQUISITIONS AND DISPOSITIONS
The following tables summarize the acquisition/disposition activity of the
Partnership for the year ended December 31, 1998:
ACQUISITIONS
- --------------------------------------------------------------------------------------------------
DATE MARKET STATION PURCHASE PRICE
- --------------------------------------------------------------------------------------------------
March 1998 Evansville, IN WYNG-FM $6,000,000
September 1998 Muskegon, MI WMUS-AM/FM 5,250,000
December 1998 Mercer County, PA WLLF-FM, WWIZ-FM 1,200,000
The acquisitions were financed by capital contributions and bank
debt.
F-8
31
Connoisseur Communications Partners, L.P.
Notes to Consolidated Financial Statements (continued)
3. 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. Certain of the recent transactions are based on
preliminary estimates of the fair value of the net assets acquired and subject
to final adjustment. 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 year ended December 31, 1998, as if the acquisitions for any
given year and the preceding year had occurred at the beginning of such
preceding year after giving effect to certain adjustments, including
amortization of goodwill and interest expense on the acquisition debt. These pro
forma results do not purport to be indicative of what would have occurred had
the acquisition been made as of that date or results which may occur in the
future.
PRO FORMA
YEAR ENDED
DECEMBER
31, 1998
---------------------
(Unaudited)
Net revenues $ 36,350,717
============
Loss before extraordinary item $ (3,006,540)
============
Net loss $ (3,006,540)
============
DISPOSITIONS
- ------------------------------------------------------------------------------------------------------
HOLDING
SALES GAIN OR PERIOD
DATE MARKET STATION PROCEEDS (LOSS) INCOME
- ------------------------------------------------------------------------------------------------------
February 1998 Youngstown, OH WRTK-AM, $2,000,000 $(2,882,088) $ -
WBBG-FM
Included in nonoperating expenses was a loss on the sale of stations of $193,625
in 1998.
F-9
32
Connoisseur Communications Partners, L.P.
Notes to Consolidated Financial Statements (continued)
4. PROPERTY, BUILDING AND EQUIPMENT
Property, building and equipment, at cost, consist of the following:
DECEMBER
31, 1998
--------------
Land $ 1,345,545
Building and improvements 4,263,142
Transmitters, towers and antennas 7,794,120
Broadcast and related equipment 4,302,793
Furniture and office equipment 2,783,802
Construction in progress -
--------------
20,489,402
Less accumulated depreciation (3,586,376)
--------------
$ 16,903,026
==============
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER
31, 1998
--------------
Broadcast licenses $ 41,213,916
Goodwill 32,154,401
Covenants not-to-compete 4,828,000
Deferred financing costs 1,125,757
--------------
79,322,074
Less accumulated amortization (5,933,165)
--------------
$ 73,388,909
==============
F-10
33
Connoisseur Communications Partners, L.P.
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER
31, 1998
--------------
Term loan $ 23,200,000
Revolving credit facility 26,510,000
Other debt 39,394
--------------
49,749,394
Less current portion (2,650,925)
--------------
$ 47,098,469
==============
In August 1997, the Partnership entered into a Credit Agreement (the "Credit
Agreement") consisting of a Term Loan of $25,000,000, borrowing under a
revolving credit facility (the "Revolving Credit Facility") of up to
$35,000,000, and additional revolving credit loans pursuant to one or more
acquisition facilities ("Acquisition Credit Facility") of up to $50,000,000.
Commencing September 30, 1999, the amount available under the Revolving Credit
Facility is reduced by $1,750,000 quarterly. Commencing January 1, 2001, the
amount available under the Acquisition Credit Facility is reduced by $10,000,000
annually.
Under the Credit Agreement, outstanding principal balances bear interest at a
floating rate based on an increment over either (a) the base rate or (b) the
Eurodollar rate (the "Eurodollar Rate"), at the choice of the Partnership. The
increment to the base rate is from 0.000% to 1.625% and the increment to the
Eurodollar Rate is from 1.000% to 2.625%. The increment is subject to change
based upon changes in the ratio of outstanding indebtedness to operating cash
flows, as defined in the Credit Agreement (the "Leverage Ratio"), on a quarterly
basis. The weighted average interest rate at December 31, 1998 was 7.88%.
The Partnership is required to pay fees based on the unused commitment under the
Revolving Credit Facility of 0.500% or 0.375% per year depending upon the
Leverage Ratio, on a quarterly basis. At December 31, 1998 the rate was 0.500%.
The Partnership will be required to pay a commitment fee on the unused portion
available under the Acquisition Credit Facility at such time that borrowings are
made, at a rate to be determined.
F-11
34
Connoisseur Communications Partners, L.P.
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
The Credit Agreement is collateralized by a security interest in substantially
all of the assets of the radio stations, in addition to the Partnership's
interest in the radio stations. The Credit Agreement requires the Partnership to
maintain compliance with certain financial ratios, principally with respect to
maintaining levels of operating cash flow and debt service ratios, along with
other covenants, including limitations on certain distributions to the partners.
The Partnership amended the Credit Agreement as of December 31, 1998 with
respect to an operating cash flow covenant. Management expects to maintain the
required levels in 1999. The fair value of the amounts outstanding approximates
its recorded value.
Principal payments on the currently outstanding long-term debt are due as
follows:
Years ending December 31:
1999 $ 2,650,925
2000 4,799,753
2001 10,774,316
2002 10,770,000
2003 11,593,600
Thereafter 9,160,800
--------------
$ 49,749,394
==============
7. INTEREST RATE SWAP
In 1998, the Partnership entered into an interest rate swap agreement that
expires in 2001 (extendible by the counterparty for another two years) to manage
its exposure to interest rate movements by effectively converting a portion of
its debt from variable to fixed rate. The swap agreement exchanges 5.6%
fixed-rate payments for LIBOR-based interest payments on a notional amount of
$50 million. The notional amount does not represent amounts exchanged with the
counterparty, and thus is not a measure of exposure of the Partnership. The
market risk associated with the agreement is mitigated because increased
interest payments under the agreement resulting from a decrease in LIBOR are
effectively offset by decreased payments under the debt obligations. The
Partnership is exposed to credit losses for the periodic settlements of amounts
due under the agreement. However, the Partnership does not anticipate
nonperformance by the counterparty, which is also a counterparty to the Credit
Agreement.
F-12
35
Connoisseur Communications Partners, L.P.
Notes to Consolidated Financial Statements (continued)
8. PARTNERS' CAPITAL
On March 26, 1997, the Partnership, Continuity, affiliates of Tinicum, Jeffrey
D. Warshaw and other partners entered into an agreement with affiliates of ABRY
Broadcast Partners III, L.P. ("ABRY") whereby ABRY made a $20,000,000 investment
in the Partnership. Costs related to this transaction of $618,644 reduce the
partner's investment. As a result of this investment and repurchases from
certain limited partners, the limited partners of the Partnership are ABRY
(43%), Tinicum (32%), Putnam L. Crafts, Jr. (10%), Jeffrey D. Warshaw (8%), and
other individuals (6%). Also, Continuity, the 1% general partner, is now owned
and controlled by ABRY (35%), Tinicum D.C.R., Inc. (35%), and Connoisseur, Inc.
(30%), which is wholly-owned by Jeffrey D. Warshaw.
9. RELATED PARTY TRANSACTIONS
The Partnership was charged certain costs by partners totaling $158,109 in 1998.
These charges primarily represent accounting and managerial services provided to
the Partnership by employees of these partners.
On March 26, 1997, the Partnership loaned $20,000,000 to the limited partners
(the "Partner Loans"), excluding Jeffrey D. Warshaw and ABRY. The loans mature
on March 26, 2005, but principal may be prepaid at any time. Interest, at the
rate of 6.32% per annum, is due semi-annually. For the year ended December 31,
1998, interest income on these loans was $466,040. At December 31, 1998, the
principal balance outstanding on the loans was $5,620,413 and interest
receivable was $94,724.
On March 26, 1997, the Partnership entered into a management agreement (the
"Management Agreement") with Continuity, whereby Continuity provides certain
services to the Partnership. As defined in the Management Agreement, the fee
(the "Management Fee") is payable semiannually. Included in other operating
expenses was the Management Fee of $202,893 for the year ended December 31,
1998. At December 31, 1998, the amount due to Continuity was $134,785.
F-13
36
Connoisseur Communications Partners, L.P.
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS
Future minimum lease payments under noncancellable operating leases are payable
as follows:
Years ending December 31:
1999 $ 460,581
2000 356,526
2001 286,399
2002 236,707
2003 141,834
Thereafter 826,458
--------------
$ 2,308,505
==============
The operating leases may be subject to Consumer Price Index adjustments.
The Partnership leases office space, antenna sites, vehicles and office
equipment. For the year ended December 31, 1998, rental expense amounted to
$483,940.
At December 31, 1998, the Partnership has outstanding under the Revolving Credit
Facility a letter of credit in the amount of $125,000. The letter of credit was
canceled on January 4, 1999 in conjunction with the purchase of WTLZ-FM in
Saginaw, MI.
The Partnership and certain investors have guaranteed, up to a maximum of
$7,000,000, debt of Jeffrey D. Warshaw for investments in the Partnership. The
amount of this debt outstanding at December 31, 1998 was $5,972,341.
11. 401(K) PLAN
The Partnership sponsors a savings plan for all eligible employees, which is a
qualified plan under Sections 401(a) and 401(k) of the Internal Revenue Code.
Pursuant to the plan, eligible participants may elect to contribute up to 15% of
their annual compensation up to the statutory maximum. Beginning in 1997, the
Partnership matches 25% of the participants' contribution up to a maximum of 3%
of the participants' compensation. For the year ended December 31, 1998, the
Partnership has recognized expense of $48,852, included in station operating
expenses.
F-14
37
Connoisseur Communications Partners, L.P.
Notes to Consolidated Financial Statements (continued)
12. NONCASH COMPENSATION
The Partnership has issued certain appreciation rights ("Appreciation Rights")
to the general managers of its radio stations to attract more talented
individuals and to further motivate these managers. The Appreciation Rights
allow the individuals to share in the increase in the value of an assumed
investment in the Partnership and are subject to vesting provisions. The
Partnership has included a charge for the Appreciation Rights over the vesting
period as noncash compensation in other operating expenses in 1998.
In 1997, as part of an amendment to the partnership agreement, a Class B limited
partnership interest was created to allow certain members of management,
including Jeffrey D. Warshaw, to share in future profits of the Partnership.
These interests were granted in fixed percentages to management subject to
certain repurchase rights of the Partnership which expire over time. The Class B
partnership interests entitle the holders to approximately 5% to 15% of future
profits depending on the level of profits achieved. The Partnership has recorded
a charge for these interests as noncash compensation in other operating expenses
in 1998.
Also in 1997, as part of an amendment to Continuity's partnership agreement,
certain limited partners of Continuity who were members of management had their
previously existing partnership interests converted into a fixed value of new
limited partnership interests.
Such value can be reduced by losses of Continuity, but may not be increased.
These interests are subject to a five year vesting period. The Partnership has
included a charge for the value of these limited partnership interests as
noncash compensation in other operating expenses in 1998.
The total amount charged as noncash compensation for the Appreciation Rights,
the Class B partnership interests and the Continuity interests was $447,771 in
1998.
F-15
38
Connoisseur Communications Partners, L.P.
Notes to Consolidated Financial Statements (continued)
13. SUBSEQUENT EVENTS (UNAUDITED)
In September 1998, the Partnership, through its 99% owned subsidiary
Connoisseur Communications of Saginaw, L.P., entered into a Purchase Agreement
to buy radio station WTLZ-FM in Saginaw, Michigan for $1,800,000. The
acquisition closed on January 4, 1999 and was financed through borrowings under
the Revolving Credit Facility. This acquisition was accounted for as a purchase
and, accordingly, the assets and liabilities acquired have been recorded at
their fair value, and the results of operations have been included in the
Partnership's consolidated financial statements from the date of purchase. The
acquisition was financed by cash on hand and borrowings under the Revolving
Credit Facility.
In March 1999, the Partnership sold radio station WOAP-AM in Flint, Michigan for
$140,000. Closing costs are estimated at $30,000. The net book value of the
assets of the station were written down to their net realizable value at
year-end. Included in nonoperating expenses for the year ended December 31, 1998
was a loss on the write-down of assets of stations held for sale of $332,944.
In May 1999, the Partnership entered into a Purchase Agreement to buy radio
station WLUV-FM in Rockford, Indiana for $4,700,000. This acquisition will be
financed by cash on hand and through borrowings under the Revolving Credit
Facility. This acquisition is pending FCC approval.
F-16
39
Connoisseur Communications Partners, L.P.
Notes to Consolidated Financial Statements (continued)
13. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
In May 1999, the Partnership entered into a Purchase Agreement to buy radio
stations WMRR-FM, WSHZ-FM and WMHG-AM in Muskegon, Michigan for $2,700,000. The
Partnership also entered into a TBA agreement at that time for a monthly fee of
$10,500. The acquisition closed on September 3, 1999 and was financed by cash
on hand and borrowings under the Revolving Credit Facility.
In October 1999, a judgment was entered against the Partnership in Flint
stemming from employment litigation which commenced in the first quarter of
1999. The Partnership intends to appeal this decision unless a settlement can
be reached. The Partnership has included $585,000 in Corporate and Other
Expenses for the nine months ended September 30, 1999 representing management's
best estimate of the ultimate liability under this litigation.
In November 1999, the Partnership entered into an agreement of sale to sell its
ownership interests in all of its radio stations to Cumulus Broadcasting, Inc.
("Cumulus"), a subsidiary of Cumulus Media, Inc., in an asset sale for
approximately $242,000,000. The expected closing date would be in the second
quarter of 2000, subject to various closing conditions, including FCC approval.
In connection with the Agreement of Sale, the Partnership has entered into a
Local Marketing Agreement ("LMA") with Cumulus. Commencing with December 1999,
for providing programming and management services the Partnership will pay
Cumulus the monthly station operating income, as adjusted per the terms of the
LMA. Cumulus will pay the Partnership a broker fee at the end of the LMA
period. The LMA expires upon closing of the agreement of sale.
F-17
40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder
McDonald Media Group, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, divisional control account, and cash flows present fairly, in all
material respects, the financial position of Radio Stations KHAY-FM, KVEN-AM,
KBBY-FM, KKSB-FM, and KMGQ-FM (a division of McDonald Media Group, Inc.) (the
Stations) at December 31, 1998, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Stations' management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
January 12, 2000
Birmingham, AL
F-18
41
RADIO STATIONS KHAY-FM, KVEN-AM, KBBY-FM, KKSB-FM AND KMGQ-FM
(A DIVISION OF MCDONALD MEDIA GROUP, INC.)
BALANCE SHEETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
ASSETS
Cash $ 137,722 $ 239,209
Trade accounts receivable, less allowance for doubtful accounts
of $60,267 (unaudited) at September 30, 1999 and of $43,759 at
December 31, 1998 999,637 1,133,961
Receivable from related party 793,496 701,660
Station option costs 1,758,211 1,553,705
Plant and equipment, net 752,952 853,737
Intangible assets, net 15,135,175 16,048,473
Deferred tax asset 170,010 17,435
Other assets 94,642 52,035
------------- ------------
Total assets $ 19,841,845 $ 20,600,215
============= ============
LIABILITIES AND DIVISIONAL CONTROL ACCOUNT
Accounts payable $ 82,987 $ 141,669
Accrued expenses and other liabilities 417,104 368,460
------------- ------------
Total liabilities 500,091 510,129
Divisional control account 19,341,754 20,090,086
------------- ------------
Total liabilities and divisional control account $ 19,841,845 $ 20,600,215
============= ============
The accompanying notes are an integral part of these financial statements.
F-19
42
RADIO STATIONS KHAY-FM, KVEN-AM, KBBY-FM, KKSB-FM AND
KMgQ-FM
(A DIVISION OF MCDONALD MEDIA GROUP, INC.)
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE YEAR
FOR THE NINE MONTHS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
1999 1998 1998
-------------- ----------- ------------
(UNAUDITED)
Gross broadcast revenues $ 3,966,482 $ 4,202,102 $ 5,715,816
Less agency commissions 463,021 490,090 668,024
------------- ----------- ------------
Net broadcast revenues 3,503,461 3,712,012 5,047,792
Net barter revenues - 25,213 10,138
Other revenues 179,837 160,172 237,307
------------- ----------- ------------
Total revenues 3,683,298 3,897,397 5,295,237
------------- ----------- ------------
Operating and general expenses:
Selling, general, and administrative 3,290,883 2,736,799 3,905,711
Corporate general and administrative 386,866 294,042 419,915
Barter expense 9,538 - -
Depreciation and amortization 1,101,424 1,210,760 1,542,488
------------- ----------- ------------
Total operating and general expenses 4,788,711 4,241,601 5,868,114
------------- ----------- ------------
Net operating loss (1,105,413) (344,204) (572,877)
Benefit from income taxes 487,320 104,578 175,351
------------- ----------- ------------
Net loss $ (618,093) $ (239,626) $ (397,526)
============= =========== ============
The accompanying notes are an integral part of these financial statements.
F-20
43
RADIO STATIONS KHAY-FM, KVEN-AM, KBBY-FM, KKSB-FM AND
KMGQ-FM
(A DIVISION OF MCDONALD MEDIA GROUP, INC.)
STATEMENT OF DIVISIONAL CONTROL ACCOUNT
- --------------------------------------------------------------------------------
Balance, December 31, 1997 $ 19,110,327
Deemed distribution to McDonald Media Group, Inc. - federal income tax (176,420)
Contribution for KKSB/KMGQ option costs 1,553,705
Net loss (397,526)
--------------
Balance, December 31, 1998 $ 20,090,086
==============
The accompanying notes are an integral part of these financial statements.
F-21
44
RADIO STATIONS KHAY-FM, KVEN-AM, KBBY-FM, KKSB-FM AND
KMGQ-FM
(A DIVISION OF MCDONALD MEDIA GROUP, INC.)
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE YEAR
FOR THE NINE MONTHS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
1999 1998 1998
------------ ------------ ------------
(UNAUDITED)
Cash flows from operating activities:
Net loss $ (618,093) $ (239,626) $ (397,526)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for depreciation and amortization 1,101,424 1,210,760 1,542,488
Deferred income tax expense (benefit) (152,575) 1,069 1,069
Deemed distribution to McDonald Media Group, Inc. (335,179) (105,959) (176,420)
Changes in:
Accounts receivable 134,324 (264,049) (53,353)
Other assets (42,607) (37,793) (36,693)
Accounts payable (58,682) 36,380 106,397
Accrued expenses 48,644 107,059 132,020
----------- ----------- -----------
Total adjustments 695,349 947,467 1,515,508
----------- ----------- -----------
Net cash provided by operating activities 77,256 707,841 1,117,982
----------- ----------- -----------
Cash flows from investing activities:
Station option costs (204,506) (1,485,090) (1,553,705)
Capital expenditures (86,907) (322,500) (514,741)
Advance to related party (91,836) - (489,809)
Payments received from related party 211,851
----------- ----------- -----------
Net cash used in investing activities (383,249) (1,595,739) (2,558,255)
----------- ----------- -----------
Cash flows from financing activities:
Divisional control account advances 204,506 1,485,090 1,553,705
Advances to management company (609,096)
----------- ----------- -----------
Net cash used in financing activities 204,506 875,994 1,553,705
----------- ----------- -----------
Increase in cash (101,487) (11,904) 113,432
Cash, beginning of period 239,209 125,777 125,777
----------- ----------- -----------
Cash, end of period $ 137,722 $ 113,873 $ 239,209
=========== =========== ===========
The accompany notes are an integral part of these financial statements.
F-22
45
RADIO STATIONS KHAY-FM, KVEN-AM, KBBY-FM, KKSB-FM AND
KMGQ-FM
(A DIVISION OF MCDONALD MEDIA GROUP, INC.)
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATION OF BUSINESS
McDonald Media Group, Inc. (MMG) owned the licenses of KHAY-FM Radio
(KHAY), KVEN-AM Radio (KVEN), and KBBY-FM Radio (KBBY) throughout 1998.
KHAY, KVEN, and KBBY are located in Ventura, California.
On June 3, 1998, MMG, the licensee of KHTY-FM Radio, (subsequently
renamed KKSB-FM Radio (KKSB)), and KMGQ-FM Radio (KMGQ) entered into an
asset purchase option agreement and a local marketing agreement (LMA). In
connection with the option agreement, MMG paid approximately $1.6 million
in certain option and legal costs during 1998. In exchange for a monthly
fee, MMG acquired from the licensee substantially all of the two
stations' broadcast air time. The results of operations since June 3,
1998 are included in the financial statements. KKSB and KMGQ are located
in Santa Barbara, California. The purchase price to be paid by MMG to the
licensee of KKSB and KMGQ as consideration for those stations' operating
assets is approximately $5.6 million.
KHAY, KVEN, KBBY, KKSB, and KMGQ are collectively referred to as "the
Stations."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Stations.
INCOME RECOGNITION - Advertising income is recognized as services are
provided. Barter transactions are reported at the estimated fair market
value of the product or service received. Barter revenue is reported when
commercials are broadcast, and merchandise or services received as
consideration are reported when used or received.
STATEMENT OF CASH FLOWS - The Stations consider all highly liquid debt
instruments purchased with an original maturity of three months or less
to be cash equivalents.
PLANT AND EQUIPMENT - Plant and equipment is stated at cost. Depreciation
is calculated using the straight-line and accelerated methods over
estimated lives of three to thirty-nine years. Expenditures for repairs
and maintenance are charged to expense as incurred; improvements which
materially prolong the lives of assets are capitalized. Any gain or loss
on disposal of plant and equipment is included in income.
F-23
46
RADIO STATIONS KHAY-FM, KVEN-AM, KBBY-FM, KKSB-FM AND
KMGQ-FM
(A DIVISION OF MCDONALD MEDIA GROUP, INC.)
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
INTANGIBLE ASSETS - Intangible assets consist of the FCC broadcast
licenses; these amounts have been capitalized and are being amortized on
a straight-line basis over a fifteen-year period. Accumulated
amortization of these intangible assets is $2,342,886 at December 31,
1998.
LONG-LIVED ASSETS - The Stations recognize impairment losses on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying values. There were no
such losses recognized during 1998.
INCOME TAXES - MMG uses an asset and liability approach for financial
accounting and reporting for income taxes. Deferred tax assets are
recognized only to the extent of their anticipated realization. MMG files
federal and state income tax returns that include the operations of the
Stations. MMG has elected to allocate income tax expense (benefit) to its
divisions on a divisional contribution basis under which each component
division of MMG calculates an independent tax provision (benefit) based
upon divisional financial performance. These financial statements reflect
such an income tax provision (benefit). The income tax benefit resulting
from the Stations' current federal taxable loss utilized by MMG in its
consolidated federal income tax return to reduce its tax liability is
recorded as a deemed divisional control account distribution to MMG in
the financial statements.
CONCENTRATION OF CREDIT RISK - The Stations' revenue and accounts
receivable primarily relate to the sale of advertising within the
Stations' broadcast areas. Credit is extended based on an evaluation of
the customer's financial condition and generally collateral is not
required.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the reported amounts of revenues and expenses. Actual
results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS - The financial statements as of September
30, 1999 and for the nine months ended September 30, 1999 and 1998, are
unaudited, but in the opinion of management, such financial statements
have been presented on the same basis as the audited financial statements
for the year ended December 31, 1998, and include all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation of the financial position and results of operations and cash
flows for these periods.
F-24
47
RADIO STATIONS KHAY-FM, KVEN-AM, KBBY-FM, KKSB-FM AND
KMGQ-FM
(A DIVISION OF MCDONALD MEDIA GROUP, INC.)
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
3. PLANT AND EQUIPMENT
Plant and equipment consists of the following at December 31,1998:
Buildings and equipment $ 190,625
Transmitters and other broadcasting equipment 1,139,615
Furniture and fixtures 148,460
Vehicles 45,260
-----------
1,523,960
Less accumulated depreciation 670,223
-----------
$ 853,737
===========
4. RELATED PARTY TRANSACTIONS
In connection with an affiliated entity working capital borrowing
arrangement, the station paid to McDonald Investment Company, an affiliate
of MMG, $489,809 during the year ended December 31, 1998.
5. MANAGEMENT AGREEMENT
The Stations have employed the services of a management company to manage
and monitor certain operations of the Stations. The Stations pay a
monthly fee for these services consisting of a percentage of net broadcast
revenues plus a percentage of broadcast cash flow, as defined in the
management agreement. In addition, the management company is entitled to
a portion of distributed profits which exceed certain prescribed levels.
6. INCOME TAXES
The benefits for income taxes for the year ended December 31, 1998 is as
follows:
FEDERAL STATE TOTAL
----------- ---------- -----------
Current benefit $ (176,420) $ - $ (176,420)
Deferred expense 832 237 1,069
----------- --------- -----------
Total benefit $ (175,588) $ 237 $ (175,351)
=========== ========= ===========
F-25
48
RADIO STATIONS KHAY-FM, KVEN-AM, KBBY-FM, KKSB-FM AND
KMGQ-FM
(A DIVISION OF MCDONALD MEDIA GROUP, INC.)
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Income tax benefit for the year ended December 31, 1998 differed from the
amount computed by applying the U.S. federal income tax rate of 34% to
pretax loss as a result of the following:
Computed tax benefit at 34% $ (194,778)
(Increased) decrease in income tax benefit
resulting from:
Meals and entertainment 2,133
State taxes (less FIT deduction) (33,112)
Valuation allowance 50,406
-----------
Income tax benefit $ (175,351)
===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1998 arise from the
allowance for doubtful accounts. The divisional federal taxable loss and
related federal income tax benefit is utilized by MMG to offset taxable
income in its consolidated federal income tax return. The Stations have
established a valuation allowance related to state net operating loss
carryforwards which reduces the net deferred tax asset to an amount which
management believes is, more likely than not, a recoverable asset.
7. SUBSEQUENT EVENT
On November 4, 1999, MMG entered into an agreement with Cumulus
Broadcasting, Inc. (Cumulus) under which Cumulus paid MMG an $8 million
deposit for an option to purchase the operating assets of the Stations and
related operating assets of an affiliated group of radio stations. In
connection with the agreement, Cumulus also receives a certain percentage
of the monthly operating cash flows of the Stations. This agreement is
conditioned on the closing of the asset purchase agreement between MMG and
the licensee of KKSB-FM and KMGQ-FM. The purchase price to be paid to MMG
as consideration for the Stations' operating assets is $33 million, which
includes the $8 million option deposit.
F-26
49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder
McDonald Media Group, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, divisional control account, and cash flows present fairly, in all
material respects, the financial position of KZEL-FM Radio and KNRQ-AM/FM Radio
(a division of McDonald Media Group, Inc.) (the Stations) at December 31, 1998,
and the results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Stations' management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
January 12, 2000
Birmingham, AL
F-27
50
KZEL-FM RADIO AND KNRQ-AM/FM RADIO
(A DIVISION OF MCDONALD MEDIA GROUP, INC.)
BALANCE SHEETS
- --------------------------------------------------------------------------------
September 30, December 31,
1999 1998
------------- -----------
(Unaudited)
ASSETS
Cash $ 60,363 $ 107,044
Trade accounts receivable, less allowance for doubtful accounts
of $9,226 (unaudited) at September 30, 1999 and $3,318 at
December 31, 1998 370,795 323,231
Plant and equipment, net 591,768 690,974
Intangible assets, net 3,146,532 3,341,208
Deferred tax asset 28,084 1,269
Other assets 10,719 11,090
------------- -----------
Total assets $ 4,208,261 $ 4,474,816
============= ===========
LIABILITIES AND DIVISIONAL CONTROL ACCOUNT
Accounts payable $ 16,567 $ 27,775
Accrued expenses and other liabilities 130,987 129,093
------------- -----------
Liabilities to unrelated parties 147,554 156,868
Payable to related party 16,509 270,770
------------- -----------
Total liabilities 164,063 427,638
Divisional control account 4,044,198 4,047,178
------------- -----------
Total liabilities and divisional control account $ 4,208,261 $ 4,474,816
============= ===========
The accompanying notes are an integral part of these financial statements.
F-28
51
KZEL-FM RADIO AND KNRQ-AM/FM RADIO
(A DIVISION OF MCDONALD MEDIA GROUP, INC.)
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the Year
For the Nine Months Ended
Ended September 30, December 31,
1999 1998 1998
----------- ----------- --------------
(Unaudited)
Gross broadcast revenues $ 1,612,085 $ 1,514,500 $ 2,008,423
Less agency commissions 195,086 175,023 231,586
----------- ----------- -----------
Net broadcast revenues 1,416,999 1,339,477 1,776,837
Barter revenues 105,624 88,092 134,666
Other revenues 831 8,279 8,391
----------- ----------- -----------
Total revenues 1,523,454 1,435,848 1,919,894
----------- ----------- -----------
Operating and general expenses,
Selling, general, and administrative 1,110,175 1,185,071 1,592,311
Corporate general and administrative 42,569 52,147 74,649
Barter expense 103,604 76,604 121,735
Depreciation and amortization 296,901 348,646 477,297
----------- ----------- -----------
Total operating and general expenses 1,553,249 1,662,468 2,265,992
----------- ----------- -----------
Net operating loss (29,795) (226,620) (346,098)
Benefit from income taxes 34,240 71,620 109,561
----------- ----------- -----------
Net income (loss) $ 4,445 $ (155,000) $ (236,537)
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-29
52
KZEL-FM RADIO AND KNRQ-AM/FM RADIO
(A DIVISION OF MCDONALD MEDIA GROUP, INC.)
STATEMENT OF DIVISIONAL CONTROL ACCOUNT
- --------------------------------------------------------------------------------
Balance, December 31, 1997 $ 4,394,345
Deemed distribution to McDonald Media Group, Inc. - federal income tax (110,630)
Net loss (236,537)
--------------
Balance, December 31, 1998 $ 4,047,178
==============
The accompanying notes are an integral part of these financial statements.
F-30
53
KZEL-FM RADIO AND KNRQ-AM/FM RADIO
(A DIVISION OF MCDONALD MEDIA GROUP, INC.)
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
For the Year
For the Nine Months Ended
Ended September 30, December 31,
1999 1998 1998
------------- ------------ ---------------
(Unaudited)
Cash flows from operating activities:
Net loss $ 4,445 $ (155,000) $ (236,537)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for depreciation and amortization 296,901 348,646 477,297
Deferred income tax expense (benefit) (26,815) 1,069 1,072
Deemed distribution to McDonald Media Group, Inc. (7,449) (72,689) (110,633)
Changes in:
Accounts receivable (47,564) (93,650) (35,740)
Other assets 371 10,141 9,763
Accounts payable (11,208) (1,321) 15,698
Accrued expenses 1,894 24,115 26,676
------------- ------------ --------------
Total adjustments 206,130 216,311 384,133
------------- ------------ --------------
Net cash provided by operating activities 210,575 61,311 147,596
------------- ------------ --------------
Cash flows from investing activities:
Additions to fixed assets (2,995) (24,447) (26,929)
------------- ------------ --------------
Net cash used in investing activities (2,995) (24,447) (26,929)
Cash flows from financing activities:
Cash overdraft (29,300) (29,300)
Repayments to related party (254,261) (32,048) (38,188)
------------- ------------ --------------
Net cash used in financing activities (254,261) (61,348) (67,488)
------------- ------------ --------------
Increase in cash (46,681) (24,484) 53,179
Cash, beginning of period 107,044 53,865 53,865
------------- ------------ --------------
Cash, end of period $ 60,363 $ 29,381 $ 107,044
============= ============ ==============
The accompanying notes are in integral part of these financial statements.
F-31
54
KZEL-FM RADIO AND KNRQ-AM/FM RADIO
(A DIVISION OF MCDONALD MEDIA GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATION OF BUSINESS
McDonald Media Group, Inc. (MMG) owns the licenses of KZEL-FM Radio and
KNRQ-AM/FM Radio (the Stations) which are located Eugene, Oregon.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Stations.
INCOME RECOGNITION - Advertising income is recognized as services are
provided. Barter transactions are reported at the estimated fair market
value of the product or service received. Barter revenue is reported when
commercials are broadcast, and merchandise or services received as
consideration are reported when used or received.
STATEMENT OF CASH FLOWS - The Stations consider all highly liquid debt
instruments purchased with an original maturity of three months or less
to be cash equivalents.
PLANT AND EQUIPMENT - Plant and equipment is stated at cost. Depreciation
is calculated using the straight-line and accelerated methods over
estimated lives of five to thirty-nine years. Expenditures for repairs
and maintenance are charged to expense as incurred; improvements which
materially prolong the lives of assets are capitalized. Any gain or loss
on disposal of plant and equipment is included in income.
INTANGIBLE ASSETS - Intangible assets consist primarily of the Federal
Communications Commission broadcast licenses; these amounts have been
capitalized and are being amortized over a fifteen-year period using the
straight-line method. Accumulated amortization of intangible assets is
$540,763 at December 31, 1998.
LONG-LIVED ASSETS - The Stations recognize impairment losses on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying values. There were no
such losses recognized during 1998.
F-32
55
KZEL-FM RADIO AND KNRQ-AM/FM RADIO
(A DIVISION OF MCDONALD MEDIA GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INCOME TAXES - MMG uses an asset and liability approach for financial accounting
and reporting for income taxes. Deferred tax assets are recognized only to the
extent of their anticipated realization. MMG files federal and state income tax
returns which include the operations of the Stations. MMG has elected to
allocate income tax expense (benefit) to its divisions on a divisional
contribution basis under which each component division of MMG calculates an
independent tax provision (benefit) based upon divisional financial performance.
These financial statements reflect such an income tax provision (benefit). The
income tax benefit resulting from the Stations' current federal taxable loss
utilized by MMG in its consolidated federal income tax return to reduce its tax
liability is recorded as a deemed divisional control account distribution to MMG
in these financial statements.
CONCENTRATION OF CREDIT RISK - The Stations' revenue and accounts receivable
primarily relate to the sale of advertising within the Stations' broadcast
areas. Credit is extended based on an evaluation of the customer's financial
condition and generally collateral is not required.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the reported amounts of revenues and expenses. Actual results could differ from
those estimates.
INTERIM FINANCIAL STATEMENTS - The financial statements as of September 30, 1999
and for the nine months ended September 30, 1999 and 1998, are unaudited, but in
the opinion of management, such financial statements have been presented on the
same basis as the audited financial statements for the year ended December 31,
1998, and include all adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation of a financial position and
results of operations and cash flows for these periods.
3. PLANT AND EQUIPMENT
Plant and equipment consists of the following at December 31, 1998:
Buildings and equipment $ 388,098
Transmitters and other broadcasting equipment 754,598
Furniture and fixtures 115,331
------------
1,258,027
Less accumulated depreciation 567,053
------------
$ 690,974
============
F-33
56
KZEL-FM RADIO AND KNRQ-AM/FM RADIO
(A DIVISION OF MCDONALD MEDIA GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. RELATED PARTY TRANSACTIONS
In connection with an affiliated entity working capital borrowing
arrangement, the stations paid to McDonald Investment Company, an
affiliate of MMG, $38,188 in 1998.
5. MANAGEMENT AGREEMENT
The Stations have employed the services of a management company to manage
and monitor certain operations of the Stations. The Stations pay a
monthly fee for these services consisting of a percentage of net
broadcast revenues plus a percentage of broadcast cash flow, as defined
in the management agreement. In addition, the management company is
entitled to a portion of distributed profits which exceed certain
prescribed levels.
6. INCOME TAXES
The benefit for income taxes for the year ended December 31, 1998 is as
follows:
FEDERAL STATE TOTAL
-------------- ------------ --------------
Current benefit $ (110,633) $ -- $ (110,633)
Deferred expense 888 184 1,072
-------------- ------------ --------------
Total benefit $ (109,745) $ 184 $ (109,561)
============== ============ ==============
Income tax benefit for the year ended December 31, 1998 differed from the
amount computed by applying the U.S. federal income tax rate of 34% to
pretax loss as a result of the following:
Computed tax benefit at 34% $ (117,673)
(Increase) decrease in income tax benefit
resulting from:
Meals and entertainment 172
State taxes (less FIT deduction) (15,057)
Valuation allowance 22,997
--------------
Income tax benefit $ (109,561)
==============
F-34
57
KZEL-FM RADIO AND KNRQ-AM/FM RADIO
(A DIVISION OF MCDONALD MEDIA GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1998 represent
allowance for doubtful accounts. The divisional federal taxable loss and
related federal income tax benefit is utilized by MMG to offset taxable
income in its consolidated federal income tax return. The Stations have
established a valuation allowance related to state net operating loss
carryforwards which reduces the net deferred tax asset to an amount which
management believes is, more likely than not, a recoverable asset.
7. SUBSEQUENT EVENT
On November 4, 1999, MMG entered into an agreement with Cumulus
Broadcasting, Inc. (Cumulus) under which Cumulus acquired an option to
purchase the operating assets of the Stations and related operating
assets of an affiliated group of radio stations. In connection with the
agreement, Cumulus also receives a certain percentage of the monthly
operating cash flows of the Stations. The purchase price to be paid to
MMG as consideration for the Stations' operating assets is $8 million.
F-35