FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-22486
SFX BROADCASTING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3649750
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 East 58th Street, 19th Floor
New York, New York 10155
(Address of principal executive offices)
(212)-407-9191
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of November 14, 1996, the
number of shares outstanding of the Registrant's Class A Common Stock, $.01 par
value, and Class B Common Stock, $.01 par value, was 6,431,897 and 856,126,
respectively.
SFX BROADCASTING, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 1996
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1996 (unaudited) and December 31, 1995.................3
Consolidated Statements of Operations for Three Months Ended
September 30, 1996 and 1995 (unaudited).............................................................5
Consolidated Statements of Operations for Nine Months Ended
September 30, 1996 and 1995 (unaudited).............................................................6
Consolidated Statements of Cash Flows for Nine Months Ended
September 30, 1996 and 1995 (unaudited).............................................................7
Notes to Consolidated Financial Statements..........................................................8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............13
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................19
Item 6. Exhibits and Reports on Form 8-K...................................................................20
SIGNATURES.......................................................................................................22
2
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, December 31,
1996 1995
---- ----
(Unaudited) (Note)
ASSETS
Current Assets:
Cash and cash equivalents ...................................... $ 40,139 $ 11,893
Accounts receivable, net ....................................... 42,264 18,034
Assets held for sale ........................................... 18,523 --
Prepaid broadcast rights and other current assets .............. 2,958 2,578
-------- --------
Total current assets .................................. 103,884 32,505
Property and equipment, at cost, less accumulated depreciation . 65,308 16,767
Broadcast licenses and other intangible assets, less accumulated
amortization ................................................ 516,402 129,543
Loan to Multi-Market Radio, Inc. ............................... 20,345 --
Receivables on station acquisitions ............................ -- 4,439
Deposits and other payments for pending acquisitions ........... 16,101 3,000
Other assets ................................................... 3,889 1,083
-------- --------
Total assets .......................................... $725,929 $187,337
======== ========
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes to consolidated financial statements
3
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, December 31,
1996 1995
---- ----
(Unaudited) (Notes)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses .................................... $ 22,049 $ 8,741
Accrued interest and dividends ........................................... 16,962 2,303
Current portion of capital lease obligations ............................. 157 311
Current portion of debt .................................................. 407 260
--------- ---------
Total current liabilities ....................................... 39,575 11,615
Deferred income taxes payable ............................................ 56,084 7,415
Capital lease obligations, less current portion .......................... 673 1,352
Debt, less current portion ............................................... 949 609
Subordinated notes ....................................................... 450,566 80,000
--------- ---------
Total liabilities ............................................... 547,847 100,991
Redeemable preferred stock ............................................... 153,003 3,285
Shareholders' Equity:
Class A voting common stock, $.01 par value; 10,000,000 shares authorized;
6,458,215 issued; 6,431,897 outstanding at September 30,
1996 and 6,458,215 outstanding at December 31, 1995 ................... 64 64
Class B voting convertible common stock, $.01 par value; 1,000,000 shares
authorized; 1,000,000 issued; 856,126 outstanding at September 30,
1996, and 1,000,000 outstanding at December 31, 1995 .................. 10 10
Additional paid-in-capital ............................................... 108,898 115,184
Treasury stock; 170,192 shares at September 30, 1996 ..................... (6,393) --
Accumulated deficit ...................................................... (77,500) (32,197)
--------- ---------
Total shareholders' equity ...................................... 25,079 83,061
--------- ---------
Total liabilities and shareholders' equity ...................... $ 725,929 $ 187,337
========= =========
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes to consolidated financial statements
4
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended September 30,
--------------------------------
1996 1995
---- ----
Revenue ............................................................. $ 51,174 $ 23,646
Less: agency commissions ............................................ 5,888 2,759
----------- -----------
Net revenue ......................................................... 45,286 20,887
Station operating expenses .......................................... 28,271 13,175
Depreciation, amortization, duopoly integration costs and acquisition
related costs .............................................. 6,015 1,988
Corporate expenses .................................................. 1,685 1,059
----------- -----------
Total operating expenses ............................................ 35,971 16,222
Operating income .................................................... 9,315 4,665
Interest income ..................................................... (1,022) (351)
Interest expense .................................................... 12,581 3,447
----------- -----------
Income (loss) before income taxes ................................... (2,244) 1,569
Income tax expense .................................................. -- 2,300
Net loss ............................................................ (2,244) (731)
Redeemable preferred stock dividends and accretion .................. 2,584 75
----------- -----------
Net loss applicable to common stock ................................. $ (4,828) $ (806)
=========== ===========
Net loss per common share ........................................... $ (0.66) $ (0.10)
=========== ===========
Weighted average common shares outstanding .......................... 7,288,023 7,684,556
See accompanying notes to consolidated financial statements
5
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
Revenue ............................................................. $ 105,153 $ 62,801
Less: agency commissions ............................................ 12,313 7,473
----------- -----------
Net revenue ......................................................... 92,840 55,328
Station operating expenses .......................................... 61,448 36,556
Depreciation, amortization, duopoly integration costs and acquisition
related costs .............................................. 10,663 5,672
Corporate expenses .................................................. 4,475 2,838
Non-recurring charges including adjustments to broadcast rights .....
agreement .................................................. 27,489 5,000
----------- -----------
Total operating expenses ............................................ 104,075 50,066
Operating (loss) income ............................................. (11,235) 5,262
Interest income ..................................................... (3,320) (451)
Interest expense .................................................... 22,169 9,515
----------- -----------
Loss before income taxes and extraordinary item ..................... (30,084) (3,802)
Income tax benefit .................................................. -- --
----------- -----------
Loss before extraordinary item ...................................... (30,084) (3,802)
Extraordinary loss on debt retirement ............................... 15,219 --
----------- -----------
Net loss ............................................................ (45,303) (3,802)
Redeemable preferred stock dividends and accretion .................. 3,551 219
----------- -----------
Net loss ............................................................ $ (48,854) $ (4,021)
=========== ===========
Net loss per common share before extraordinary item ................. $ (4.55) $ (0.62)
Extraordinary loss on debt retirement per common share .............. (2.06) --
----------- -----------
Net loss per common share ........................................... $ (6.61) $ (0.62)
=========== ===========
Weighted average common shares outstanding .......................... 7,394,238 6,531,661
See accompanying notes to consolidated financial statements
6
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
OPERATING ACTIVITIES:
Net loss .......................................................................... $ (45,303) $ (3,802)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .................................................. 10,386 5,672
Interest on receivables from related parties ................................... (232) (213)
Non-cash portion of non-recurring charge ....................................... 8,578 --
Loss on sale of investments .................................................... -- 84
Provision for loss on broadcast rights agreement ............................... -- 5,000
Write off of debt costs ........................................................ 5,593 --
Changes in assets and liabilities, net of amounts acquired:
Increase in accounts receivable ............................................... (11,015) (4,026)
(Increase) decrease in prepaid broadcast rights and other assets .............. (2,137) 950
Increase (decrease) in accrued interest and dividends ......................... 14,659 (2,286)
Increase (decrease) in accounts payable, accrued expenses and other liabilities 1,650 (3,485)
Decrease in deferred income tax payable ........................................ (952) --
--------- ---------
Net cash used in operating activities ............................................. (18,773) (2,106)
INVESTING ACTIVITIES:
Deposits and other payments for pending acquisitions .............................. (13,101) (3,000)
Purchase of stations and related business, net of cash acquired ................... (430,457) (22,642)
Proceeds from sale of stations .................................................... 25,000 --
Sale of short term investments .................................................... -- 7,918
Loans and advances to related parties ............................................. (20,415) (2,000)
Sale of property and equipment .................................................... -- 300
Purchase of property and equipment ................................................ (1,769) (6,056)
Increase in other intangibles ..................................................... (2,055) --
--------- ---------
Net cash used in investing activities ............................................. (442,797) (25,480)
FINANCING ACTIVITIES:
Additions to debt issuance costs .................................................. (14,910) (1,884)
Proceeds from senior and subordinated debt ........................................ 471,500 22,000
Payments on subordinated debt ..................................................... (79,434) (189)
Payments on senior loans and capital lease obligations ............................ (21,868) (22,252)
Decrease in accrued stock acquisition cost ........................................ -- (1,150)
Net proceeds from sale of preferred stock ......................................... 143,445 --
Purchase of treasury stock ........................................................ (6,393) --
Proceeds from sale of common stock ................................................ -- 39,167
Dividends paid on preferred stock ................................................. (2,524) --
--------- ---------
Net cash provided by financing activities ......................................... 489,816 35,692
Net increase in cash and cash equivalents ......................................... 28,246 8,106
Cash and cash equivalents at beginning of period .................................. 11,893 3,194
--------- ---------
Cash and cash equivalents at end of period ........................................ $ 40,139 $ 11,300
========= =========
See accompanying notes to consolidated financial statements
7
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
Information with respect to the three and nine months ended September
30, 1996 and 1995 is unaudited. The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with Rule 10-01 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the unaudited interim
financial statements contain all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the financial position, results
of operations and cash flows of SFX Broadcasting, Inc. (the "Company" or
"SFX"), for the periods presented.
The results of operations for the three and nine month period are not
necessarily indicative of the results of operations for the full year. For
further information refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
NOTE 2 - RECENTLY COMPLETED ACQUISITIONS AND DISPOSITIONS
In June 1996, SFX acquired substantially all of the assets of WROQ-FM,
Greenville, South Carolina, for approximately $14.0 million (the "Greenville
Acquisition") and WTRG-FM and WRDU-FM, both operating in Raleigh, North
Carolina, and WMFR-AM, WMAG-FM and WTCK-AM (formerly WWWB-AM), each operating
in Greensboro, North Carolina for approximately $36.8 million (the "HMW
Acquisition"). Multi-Market Radio, Inc. ("MMR"), a publicly held radio
broadcasting Company in which the Company's Chief Executive Officer is a
significant shareholder and votes a controlling interest, initially entered
into the acquisition agreements relating to these stations. SFX and MMR agreed
that SFX would finance the purchase of such stations and that MMR would
transfer the purchased assets to SFX simultaneously with the acquisition by
MMR.
In July 1996, SFX acquired substantially all of the assets of WJDX-FM,
Jackson, Mississippi for a purchase price of approximately $3.0 million. In
addition, in August 1996, SFX acquired substantially all of the assets of
WSTZ-FM and WZRX-AM, each operating in Jackson, Mississippi, for approximately
$3.5 million (collectively, the " Jackson Acquisitions").
In July 1996, SFX acquired from Prism Radio Partners L.P. ("Prism"),
substantially all of the assets used in the operation of eight FM and five AM
radio stations located in four markets: Jacksonville, Florida; Raleigh, North
Carolina; Tucson, Arizona and Wichita, Kansas. In September 1996, SFX also
acquired from Prism substantially all of the assets of three radio stations
operating in Louisville, Kentucky (the "Louisville Stations"), upon renewal of
the Federal Communications Commission ("FCC") licenses of such stations (the
"Louisville Acquisition") (collectively the "Prism Acquisition"). The total
purchase price for the Prism Acquisition was approximately $105.3 million. In
October 1996, SFX sold the Louisville stations (the "Louisville Dispositions")
for $18.5 million. SFX recognized no gain or loss on the Louisville
Dispositions. The Louisville Stations are classified as assets held for sale on
the accompanying September 30, 1996 balance sheet.
In July 1996, SFX acquired Liberty Broadcasting Inc. ("Liberty
Broadcasting") for a purchase price of approximately $229.2 million, plus
approximately $8.3 million for working capital (the "Liberty Acquisition").
Liberty Broadcasting was a privately-held radio broadcasting company which
owned and operated or provided programming to or sold advertising on behalf of
14 FM and six AM radio stations (the "Liberty Stations") located in six
markets; Washington, DC/Baltimore, Maryland; Nassau-Suffolk, New York;
Providence, Rhode Island; Hartford, Connecticut; Albany, New York and Richmond,
Virginia.
In July 1996, SFX sold three of the Liberty Stations operating in the
Washington, DC/Baltimore, Maryland market (the "Washington Dispositions"), for
$25.0 million. No gain or loss was recognized on the Washington Dispositions.
In October 1996, SFX sold radio station KTCK-AM, Dallas, Texas for
approximately $13.5 million, net of certain sale expenses (the "Dallas
Disposition"). SFX had a contractual obligation to make certain payments to
Cardinal Communications Partners LP ("Cardinal"), the prior owner of KTCK-AM.
8
Cardinal has commenced litigation against SFX due to the parties' inability to
agree on the amount of the contingent payment. In the event that the contingent
payment exceeds approximately $2.5 million, SFX will record a loss on the
transaction. See Part II. Item 1. Legal Proceedings.
The Greenville Acquisition, the HMW Acquisition, the Jackson
Acquisitions, the Prism Acquisition, the Louisville Acquisition, the Louisville
Dispositions, the Liberty Acquisition, the Washington Dispositions, and the
Dallas Disposition are collectively herein referred to as the "Completed
Acquisitions. " The Company has recorded the HMW Acquisition, the Greenville
Acquisition, Jackson Acquisitions, the Prism Acquisition and the Liberty
Acquisition using the purchase method of accounting based on preliminary
allocations of the purchase prices paid. The amounts recorded are subject to
change based on the final allocations of the purchase prices paid.
NOTE 3 - OTHER RECENT TRANSACTIONS
Agreement with SCMC. On April 15, 1996, SFX and Sillerman
Communications Management Corporation ("SCMC"), a corporation controlled by
Robert F. X. Sillerman, the Chief Executive Officer of the Company, entered
into the SCMC Termination Agreement pursuant to which SCMC assigned to SFX its
rights to receive fees for consulting and marketing services payable by each of
MMR and Triathlon Broadcasting Company ("Triathlon"), a publicly-traded radio
company operating in small and medium-sized markets in the Midwest and Western
United States, except for fees relating to certain transactions pending at the
date of such agreement, and SFX and SCMC terminated the arrangement pursuant to
which SCMC performed financial consulting services for SFX. In consideration
therefore, SFX agreed to cancel $2.0 million of indebtedness plus accrued
interest thereon owing from SCMC to the Company upon completion of the MMR
Merger (as hereinafter defined) and SCMC received warrants to purchase up to
600,000 shares of Class A Common Stock of SFX at an exercise price, subject to
adjustment, of $33.75 per share (the market price at the time the financial
consulting arrangement was terminated) of which a warrant to purchase up to
300,000 shares is immediately exercisable. The exercise of the remaining
warrants is subject to stockholder approval (In connection with such agreement,
the Company recognized a non-recurring, non-cash charge to earnings of
approximately $5.6 million during the three-month period ended June 30, 1996,
which is one half of the value of the warrants (fair value of approximately $9
million) and loan forgiveness). The remainder will be allocated to the
Triathlon agreement and amortized over the life of the agreement. SFX intends
to perform internally the functions performed by SCMC.
Repayment of Old Credit Agreement. On May 31, 1996, SFX repaid all
amounts outstanding under its $50.0 million senior credit facility (the "Old
Credit Agreement").
Preferred Stock Offering, Note Offering, and New Credit Agreement. In
May 1996, SFX completed a private placements of $450.0 million in aggregate
principal amount of its 10.75% Senior Subordinated Notes due 2006 (the "Note
Offering") and $149.5 million in aggregate liquidation preference of its Series
D Preferred Stock (the "Preferred Stock Offering"). In addition, SFX has
received an underwritten commitment from its lender for a senior credit
facility of $225.0 million and expects to enter into a definitive credit
agreement (the "New Credit Agreement") with respect to such facility. There can
be no assurance, however, that SFX will be able to enter into the New Credit
Agreement on a timely basis or at all.
Tender Offer. Concurrently with the closings of the Preferred Stock
Offering and the Note Offering (collectively, the "Financing"), SFX completed
the tender offer (the "Tender Offer") and a related consent solicitation (the
"Consent Solicitation") with respect to its 11.375% Senior Subordinated Notes
due 2000 (the "Old Notes"). SFX purchased approximately $79.4 million in
principal amount of the $80.0 million in principal amount of the Old Notes
outstanding in the Tender Offer. The Company recorded an extraordinary loss of
$15.2 million in connection with the repurchase of the Old Notes. SFX also
entered into a supplemental indenture amending the terms of the indenture
pursuant to which the Old Notes were issued.
Agreements with Messrs. Armstrong, Benson and Hicks. In April 1996,
SFX entered into an agreement (the "Armstrong Agreement") with D. Geoffrey
Armstrong, Chief Financial Officer of SFX, pursuant to which Mr. Armstrong
agreed to become the Chief Operating Officer of SFX concurrently with the
completion of the MMR Merger (as hereinafter defined) and defer certain
payments due to him under his employment agreement. SFX also agreed in the
Armstrong Agreement to repurchase certain securities owned by Mr. Armstrong. In
September 1996, Mr. Armstrong was designated by the Board of Directors to begin
serving as the Chief Operating Officer of SFX and to resign as Chief Financial
Officer of SFX upon the consummation of the MMR Merger. The $4.6 million paid
pursuant to the Armstrong Agreement was expensed as a non-recurring charge.
9
Concurrently with such agreement, SFX entered into an employment agreement with
Thomas P. Benson pursuant to which he agreed to serve as Vice President of
Financial Affairs of SFX and to serve as Chief Financial Officer of SFX upon the
consummation of the MMR Merger. In June 1996, SFX entered into an Agreement (the
"Hicks Agreement") with R. Steven Hicks, the former President, Chief Executive
Officer, Chief Operating Officer and a Director of SFX, pursuant to which Mr.
Hicks resigned from all positions held by him with SFX, sold to SFX all of the
securities of SFX then owned by him or which he had the right to obtain and
agreed to refrain from owning or operating for a period of one year from
completion of the MMR Merger any direct or indirect interest in radio stations
in certain markets in the United States in which SFX currently owns and
operates, or subsequent to the MMR Merger, will own and operate radio stations
in return for payments aggregating $18.6 million. The Company recorded a non-
recurring charge in the quarter ended June 30, 1996 of $19.8 million in
connection with the Armstrong Agreement and Hicks Agreement.
Agreement with Mr. Ferrel. SFX has granted Michael G. Ferrel five-year
options to purchase up to 50,000 shares of Class A Common Stock at an exercise
price of $33.75 per share. Such options are immediately exercisable. Such
options were granted to Mr. Ferrel in consideration for his serving as a
consultant to SFX and in connection with his anticipated employment by SFX as
its Chief Executive Officer. See Note 5--Pending MMR Merger. SFX recorded a
charge to earnings in the quarter ended September 30, 1996 in connection with
these options of $119,000.
Wichita JSA. In September 1996, the Company entered into a joint sales
agreement with Triathlon Broadcasting Company ("Triathlon") whereby Triathlon
has agreed to sell advertising time on the Company's three radio stations in
the Wichita, Kansas market in exchange for a monthly fee which ranges from
$75,000 per month to $100,000 per month, and an additional monthly payment of
approximately $175,000 which is subject to adjustment based on the actual
operating expenses of the stations (the "Wichita JSA"). The agreement has a
ten-year term with an option by Triathlon to extend the agreement for an
additional ten years upon payment of a $1.0 million fee to SFX prior to
September 1, 2003. The agreement is subject to termination upon a "change of
control" of Triathlon, as defined in the agreement. The Company has received a
request from the Department of Justice to provide information regarding the
Wichita JSA, and there can be no assurance that the Department of Justice will
allow Triathlon to continue to provide services under the Wichita JSA.
Investment in Music Technologies LLC. In August 1996, SFX invested
approximately $3.8 million for a 25% interest in a newly formed company, Music
Technologies LLC ("Music Technologies"). Music Technologies will provide music
research services to SFX and other radio broadcasting companies. In exchange
for SFX's investment, Music Technologies has agreed to provide certain music
testing services to SFX at cost. This investment will be accounted for using
the equity method of accounting.
NOTE 4 - TERMINATION OF BROADCAST RIGHTS AGREEMENT
In August 1994, the Company entered into an agreement to broadcast
Texas Rangers baseball games on KRLD-AM and to syndicate the games through
Texas State Networks, for a period of four years, commencing with the 1995
season. While the contract contemplated the possibility of a baseball work
stoppage, and contained certain provisions affording the Company partial relief
from the payment of rights fees under certain specified conditions related to
work stoppages, the nature of the major league baseball strike and consequently
the damage to the value of the Texas Rangers broadcast rights has been more
material than management had anticipated. The total rights fees under the
four-year agreement, subject to adjustment, were stated at $17,000,000. In the
second quarter of 1995, the Company recorded a charge of $5,000,000 with
respect to the estimated diminished value of the contract.
On April 11, 1996, in order to facilitate the Houston Exchange (as
hereinafter defined), the Company and the Texas Rangers amended the radio
broadcast rights agreement. The amended terms provide for the termination of
the agreement no later than November 30, 1996. The Company recorded a
$1,600,000 charge in the second quarter of 1996 related to the termination of
the agreement and to adjust the value of the contract for the 1996 season.
NOTE 5 - PENDING MMR MERGER
In April 1996, the Company entered into an agreement (the "Merger
Agreement") and plan of merger (the "MMR Merger"), which was amended in May,
July and September 1996, pursuant to which it has agreed to acquire MMR.
Following completion of the MMR Merger, MMR will become a wholly-owned
subsidiary of the Company. MMR is a radio broadcasting company which owns and
operates, provides programming to or sells advertising on behalf of 13 FM
stations and one AM station located in eight markets: New Haven, Connecticut;
Hartford, Connecticut; Springfield/Northampton, Massachusetts; Daytona Beach,
Florida; Augusta, Georgia; Biloxi, Mississippi; Myrtle Beach,
10
South Carolina and Little Rock, Arkansas. MMR has entered into agreements to
sell two stations operating in Myrtle Beach, South Carolina and one station
operating in Little Rock, Arkansas (the "MMR Dispositions"). MMR has also
decided not to renew its Joint Sales Agreement ("JSA") with one station
operating in Augusta, Georgia and its Local Marketing Agreement ("LMA") with
one station operating in Myrtle Beach, South Carolina.
Upon consummation of the MMR Merger and subject to certain conditions,
including approval of the shareholders of MMR and SFX, the outstanding
securities of MMR will be converted into shares of common stock of the Company
as follows: (i) the shares of Class A Common Stock of MMR and the shares of
Series B Convertible Preferred Stock of MMR will be converted into that number
of shares of Class A Common Stock of the Company determined on the basis of the
Exchange Ratio (as defined below) and (ii) the shares of Class B Common Stock
of MMR and shares of original preferred stock of MMR will be converted into the
number of shares of Class B Common Stock of the Company determined on the basis
of the Exchange Ratio.
The Exchange Ratio means the number of shares of Class A Common Stock
or Class B Common Stock of the Company, as the case may be, to be issued in the
MMR Merger equal to the quotient obtained by dividing $12.50 by the average of
the last bid and asked prices of the Company's Common Stock for the 20
consecutive trading days ending on the fifth trading day prior to the closing
(the "Class A Common Stock Price"); provided, however, that (1) in the event
that the Class A Common Stock Price exceeds $44.00, then the Exchange Ratio
shall be the quotient obtained by dividing (i) the sum of (A) $12.50, plus (B)
the product of (I) thirty percent (30%) multiplied by (II) the difference
between the Class A Common Stock Price and $44.00, or (2) in the event that the
Class A Common Stock Price is less than $32.00, then the Exchange Ratio shall
be .3750.
Upon the completion of the MMR Merger, each outstanding warrant,
option and stock appreciation right issued pursuant to MMR's stock option
plans, whether vested or unvested, will be assumed by the Company.
Additionally, each outstanding (i) Class B Warrant (the "MMR Class B
Warrants") of MMR issued in connection with MMR's public offering in March
1994, (ii) option issued pursuant to the unit purchase options issued to the
underwriters of MMR's public offering in March 1994, (iii) warrant issued to
the underwriters of MMR's initial public offering in July 1993, (iv) warrant
issued to The Huff Alternative Income Fund, L.P. and (v) options issued to
Robert F.X. Sillerman outside MMR's stock option plans (collectively, the "MMR
Warrants"), shall be assumed by the Company.
In September 1996, pursuant to the Merger Agreement, SFX entered into
an agreement to loan MMR up to $23.0 million (the "MMR Loan"). As of September
30, 1996, the Company had advanced MMR $18 million to finance its acquisition
of WKSS-FM, Hartford, Connecticut and approximately $2.4 million for working
capital, including $2 million which was paid to SCMC for investment banking
services provided to MMR in connection with the MMR Merger. The MMR Loan bears
interest on the principal amount at a rate of 12%. If the merger is terminated,
MMR is required to repay the loan according to the specific terms stated in the
MMR Loan. In addition, SFX and MMR agreed that Michael G. Ferrel, the Chief
Executive Officer, Chief Operating Officer and President of MMR, would become
the Chief Executive Officer of SFX upon the consummation of the Merger and MMR
agreed to make available to SFX, until the earlier of the termination of the
Merger Agreement or the consummation of the MMR Merger, the services of Mr.
Ferrel as a consultant to SFX to the extent that such services do not conflict
with Mr. Ferrel's obligations to MMR. Upon completion of the MMR Merger the
Company will be required to repay MMR's senior debt and senior subordinated
notes totaling approximately $39.6 million, plus certain prepayment penalties,
and to treat any amounts outstanding under the MMR Loan as contributed capital.
In the event that the Merger Agreement is terminated, except in
certain circumstances, MMR will have the right, subject to the receipt of prior
FCC approval, to acquire SFX's interests in the MMR Liberty Stations (as
defined in the Merger Agreement) for $100.0 million, or, in certain
circumstances, to acquire SFX's interests in the MMR Liberty Stations pursuant
to an exchange of stations intended to qualify as a like-kind exchange under
section 1031 of the Internal Revenue Code of 1986, as amended. The MMR Merger
is scheduled to close on November 22, 1996 and will be accounted for as a
purchase transaction.
NOTE 6 - PENDING ACQUISITIONS AND DISPOSITIONS
SFX has agreed to acquire substantially all of the assets of WHSL-FM,
operating in Greensboro, North Carolina, for a purchase price of $6.0 million
(the"Greensboro Acquisition"). The acquisition is currently scheduled to close
during the fourth quarter of 1996.
11
SFX has also (i) entered into an agreement pursuant to which SFX will
exchange radio station KRLD-AM, Dallas, Texas, and the Texas State Networks for
radio station KKRW-FM, Houston, Texas (the "Houston Exchange"), (ii) entered
into an agreement pursuant to which SFX will exchange three FM radio stations
and one AM radio station, each operating in the Long Island, New York market,
all of which were acquired in the Liberty Acquisition, for two FM radio
stations, WAPE-FM and WFYV-FM, both operating in the Jacksonville, Florida
market and both of which Chancellor Radio Broadcasting Company ("Chancellor")
has agreed to acquire, and a payment to SFX in the amount of $11.0 million from
Chancellor (the "Chancellor Exchange"), and (iii) entered into an agreement
with CBS Inc. pursuant to which SFX agreed to exchange WHFS-FM, serving the
Baltimore, Maryland and Washington, D.C. markets, for KTXQ-FM and KRRW-FM, both
serving the Dallas, Texas market (the "CBS Exchange"). The Company does not
expect to recognize a gain or loss on either the Houston Exchange, the
Chancellor Exchange or the CBS Exchange. The Houston Exchange is currently
scheduled to close during the fourth quarter of 1996 and the Chancellor
Exchange and CBS Exchange during the first quarter of 1997. Until the
consummation of the Chancellor Exchange, SFX and Chancellor are providing
programming and selling advertising pursuant to LMA's on the Jacksonville radio
stations and the Long Island radio stations, respectively.
In August 1996, SFX agreed, subject to execution of a definitive
agreement, to acquire a 96% in ABS Communications LP ("ABS") (the "Richmond
Acquisition"). In connection with this transactions, SFX will first loan ABS
the funds necessary to acquire radio stations WKHK-FM and WBZU-FM, both
operating in Richmond, Virginia secured by a first priority security position
in all of the assets of ABS. Thereafter, SFX will convert its debt position in
ABS into a 96% equity position. Lastly, ABS will acquire WVGO-FM and WLEE-FM,
both operating in Richmond, Virginia. The aggregate purchase price for the
fours stations is $38.8 million, inclusive of certain transaction costs. The
Richmond Acquisition is expected to close during the second quarter of 1997.
Also, In August 1996, SFX agreed to acquire substantially all of the assets
used in the operations of radio station WYSR-FM, operating in Albany, New York,
for a purchase price of approximately $1.0 million (the "Albany Acquisition").
The Albany Acquisition is expected to close during the first quarter of 1997.
In September 1996, SFX agreed to acquire three Charlotte, North
Carolina stations (WSSS-FM, WRFX-FM and WNKS-FM) from EZ Communications in
exchange for WTDR-FM, Charlotte, North Carolina, and $64.8 million ("Charlotte
Exchange"). EZ Communications is in the process of acquiring WRFX-FM and
WNKS-FM from Evergreen Media Corp. The Charlotte Exchange is conditioned on the
prior receipt of FCC approval and approval under the HSR Act. SFX has received
a civil investigative demand from the Department of Justice's Antitrust
Division relating to its investigation of a proposed acquisition of EZ
Communications by a third party and, in connection therewith, the exchange of
these stations, and there can be no assurance as to the impact of this
investigation or the proposed acquisition on the Charlotte Exchange. Edward F.
Dugan, who has been nominated to the Board of Directors of SFX, will receive a
payment from each of SFX and EZ Communications upon the consummation of the
Charlotte Exchange.
In October 1996, SFX entered into an agreement with Secret
Communications Limited Partnership ("Secret Communications Acquisition"),
pursuant to which SFX agreed to acquire substantially all of the assets used in
the operation of nine radio stations located in three markets: WTAM-AM and
WLTF-FM, both serving the Cleveland, Ohio market; WFBQ-FM, WRZX-FM and WNDE-AM,
each serving the Indianapolis, Indiana market; and WDVE-FM, WXDX-FM, WDSY-FM
and WJJJ-FM, each serving the Pittsburgh, Pennsylvania market. Two of the radio
stations, WDSY-FM and WJJJ-FM (collectively, the "Third Party Stations"), are
not yet owned by Secret Communications. Secret Communications currently
operates the Third Party Stations under an LMA. Secret Communications has
entered into an agreement to acquire these two stations from a third party and
it is anticipated that the acquisition of the Third Party Stations by Secret
Communications will occur prior to the consummation of the Secret
Communications Acquisition. The purchase price for the nine stations is $300.0
million, subject to certain downward adjustments based upon the cash flow of
the stations to be acquired, and SFX has deposited $15.0 million in escrow in
order to secure its obligations under the purchase agreement. It is anticipated
that the Secret Communications Acquisition will be consummated during the
second or third quarter of 1997.
In October 1996, SFX entered into an agreement to acquire
Delsener/Slater Enterprises, Ltd., a concert promotion company, for
approximately $24.0 million (the "Delsener/Slater Acquisition"). SFX has
deposited $2.0 million in escrow to secure its obligations under the purchase
agreement. The acquisition is currently scheduled to close in the first quarter
of 1997.
In October 1996, SFX entered into an agreement to acquire the
outstanding shares of WWYZ, Inc. ("WWYZ") and an affiliated entity for $25.5
million, subject to adjustment under certain circumstances (the "SFX Hartford
Acquisition"). WWYZ owns and operates radio station WWYZ-FM, serving the
Hartford, Connecticut market. SFX has deposited $2.5
12
million in escrow to secure its obligations under the purchase agreement. The
purchase is scheduled to close by February 1, 1997.
MMR has entered into a purchase agreement with Texas Coast
Broadcasters, Inc. pursuant to which MMR has agreed to acquire substantially
all of the assets (other than the real property upon which the radio tower is
located) of KQUE-FM and KNUZ-AM, both serving the Houston, Texas market, for an
aggregate purchase price of approximately $43.0 million, including payments in
connection with a non-competition agreement and certain matters related to the
lease on the real property containing the radio tower (the "Texas Coast
Acquisition"). SFX, on behalf of MMR, deposited in escrow $2.0 million to
secure MMR's obligation under the purchase agreement. It is anticipated that
the Texas Coast Acquisition will be consummated in the first quarter of 1997.
The Greensboro Acquisition, the MMR Merger, the Houston Exchange, the
Chancellor Exchange, the CBS Exchange, the Albany Acquisition, the Richmond
Acquisition, the Charlotte Exchange, the Secret Communications Acquisition, the
Delsener/Slater Acquisition, the SFX Hartford Acquisition and the Texas Coast
Acquisition are referred to herein collectively as the "Pending Acquisitions."
The Pending Acquisitions and the Completed Acquisitions are referred to herein
collectively as the "Acquisitions." The Louisville Dispositions, the Dallas
Disposition and the Washington Dispositions are referred to herein collectively
as the "Dispositions."
The timing and completion of the Pending Acquisitions are subject to a
number of conditions, certain of which are beyond SFX's control, and there can
be no assurance that such transactions will be completed during such periods,
approved by the FCC or the Department of Justice or completed on the terms
described herein, or at all.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and related notes thereto. The following discussion
contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, risks and uncertainties relating to leverage,
the need for additional funds, consummation of the Pending Acquisitions ,
integration of the Acquisitions, the ability of the Company to achieve certain
cost savings, the management of growth, the introduction of new technology,
changes in the regulatory environment, the popularity of radio as a
broadcasting and advertising medium and changing consumer tastes. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
GENERAL
The Company currently owns and operates, provides programming to or
sells advertising on behalf of 53 radio stations located in 18 markets.
Following completion of the Pending Acquisitions and the Pending Dispositions,
the Company will own and operate, provide programming to or sell advertising on
behalf of 80 radio stations located in 23 markets. SFX will be required to
obtain additional financing in order to consummate the Pending Acquisitions.
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
consolidated financial statements and notes thereto.
The performance of a radio station group, such as the Company, is
customarily measured by its ability to generate Broadcast Cash Flow. Broadcast
Cash Flow is defined as net revenues (including, where applicable, fees earned
by the Company pursuant to the SCMC Termination Agreement) less station
operating expenses. Although Broadcast Cash Flow is not a measure of
performance calculated in accordance with generally accepted accounting
principles ("GAAP"), the Company believes that Broadcast Cash Flow is accepted
by the broadcasting industry as a generally recognized measure of performance
and is used by analysts who report publicly on the performance of broadcasting
companies. Nevertheless, this measure should not be considered in isolation or
as a substitute for operating income, net income, net cash provided by
operating activities or any other measure for determining the Company's
operating performance or liquidity which is calculated in accordance with GAAP.
The primary source of the Company's revenue is the sale of advertising
time on its radio stations. In April 1996, the Company entered into the SCMC
Termination Agreement and expects to receive fees pursuant thereto. In
addition, in October 1996, the Company agreed to acquire Delsener/Slater, which
is in the concert promotion business. The Company's
13
most significant station operating expenses are employee salaries and
commissions, programming expenses and advertising and promotional expenditures.
The Company strives to control these expenses by working closely with local
station management.
The Company's revenues are primarily affected by the advertising rates
its radio stations charge. The Company's advertising rates are in large part
based on a station's ability to attract audiences in the demographic groups
targeted by its advertisers, as measured principally by Arbitron (an
independent rating service) on a quarterly basis. Because audience ratings in
local markets are crucial to a station's financial success, the Company
endeavors to develop strong listener loyalty. The Company believes that the
diversification of formats on its stations helps to insulate it from the
effects of changes in the musical tastes of the public in any particular
format.
The number of advertisements that can be broadcast without
jeopardizing listening levels (and the resulting ratings) is limited in part by
the format of a particular station. The Company's stations strive to maximize
revenue by constantly managing the number of commercials available for sale and
adjusting prices based upon local market conditions. In the broadcasting
industry, radio stations often utilize trade (or barter) agreements which
exchange advertising time for goods or services (such as travel or lodging),
instead of for cash. The Company seeks to minimize its use of such agreements.
The Company's advertising contracts are generally short-term. The
Company generates most of its revenue from local advertising, which is sold
primarily by a station's sales staff. For the three and nine months ended
September 30, 1996, approximately 77% of the Company's revenues were from local
advertising. To generate national advertising sales, the Company engages
independent advertising sales representatives that specialize in national sales
for each of its stations.
The radio broadcasting industry is highly competitive and the
Company's stations are located in highly competitive markets. The financial
results of each of the Company's stations are dependent to a significant degree
upon its audience ratings and its share of the overall advertising revenue
within the station's geographic market. Each of the Company's stations competes
for audience share and advertising revenue directly with other FM and AM radio
stations, as well as with other media, within their respective markets. The
Company's audience ratings and market share are subject to change, and any
adverse change in audience rating and market share in any particular market
could have a material and adverse effect on the Company's net revenues.
Although the Company competes with other radio stations with comparable
programming formats in most of its markets, if another station in the market
were to convert its programming format to a format similar to one of the
Company's radio stations, if a new radio station were to adopt a competitive
format, or if an existing competitor were to strengthen its operations, the
Company's stations could suffer a reduction in ratings or advertising revenue
and could require increased promotional and other expenses. In addition,
certain of the Company's stations compete, and in the future other stations may
compete, with groups of stations in a market operated by a single operator. As
a result of the Telecommunications Act of 1996 (the "Recent Legislation"), the
radio broadcasting industry has become increasingly consolidated, resulting in
the existence of radio broadcasting companies which are significantly larger,
with greater financial resources, than the Company. Furthermore, the Recent
Legislation will permit other radio broadcasting companies to enter the markets
in which the Company operates or may operate in the future. Although the
Company believes that each of its stations is able to compete effectively in
its market, there can be no assurance that any of the Company's stations will
be able to maintain or increase current audience ratings and advertising
revenue market share. The Company's stations also compete with other
advertising media such as newspapers, television, magazines, billboard
advertising, transit advertising and direct mail advertising. Radio
broadcasting is also subject to competition from new media technologies that
are being developed or introduced, such as the delivery of audio programming by
cable television systems or the introduction of digital audio broadcasting. The
Company cannot predict the effect, if any of these new technologies may have on
the radio broadcasting industry.
The Company's revenue vary throughout the year. As is typical in the
radio broadcasting industry, the Company's first calendar quarter generally
produces the lowest revenues for the year, and the fourth calendar quarter
generally produces the highest revenues for the year. The Company's operating
results in any period may be affected by the incurrence of advertising and
promotion expenses that do not necessarily produce commensurate revenues until
the impact of the advertising and promotion is realized in future periods.
Fee revenue from the SCMC Termination Agreement will fluctuate
principally based upon the level of acquisition and financing activity of
Triathlon above the minimum annual fees of $800,000 (which minimum fees shall
increase to $900,000 at such time as Triathlon has used an amount equal to the
net proceeds of its last public offering in the manner contemplated by the
registration statement filed in connection therewith) of which $625,000 is due
in the first calendar quarter of 1997.
14
Results of Operations
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
The Company's net revenue increased 117% to $45.3 million from $20.9
million, for the three months ended September 30, 1996 ("1996 quarter") and
1995 ("1995 quarter"), respectively, primarily as a result of the Greenville
Acquisition and the HMW Acquisition in June of 1996 and the Liberty
Acquisition, the Prism Acquisition and the Jackson Acquisitions in July and
August of 1996 (collectively the "Recent Acquisitions") which increased net
revenues $23.7 million. In addition, the net revenue at existing SFX stations
(excluding KTCK-AM Dallas, which was operated by a third party under an LMA in
the 1996 quarter) increased $1.7 million or 9% as a result of strong radio
advertising, combined with improved inventory management, ratings and other
factors generally affecting sales and rates.
Station operating expenses increased 115% to $28.3 million in the 1996
quarter from $13.2 million in the 1995 quarter primarily due to: the inclusion
of expenses of $13.6 million related to the stations which SFX began operating
as discussed above; and $386,000 of increases in variable costs related to the
increase in net revenues of the existing SFX stations.
Depreciation, amortization, duopoly integration costs and acquisition
related costs increased 203% to $6.0 million from $2.0 million due to the
inclusion of $3.7 million of depreciation and amortization related to the
Recent Acquisitions.
Corporate, general and administrative expenses were $1.7 million and
$1.1 million for the 1996 quarter and 1995 quarter, respectively. The increase
reflects the growth in the Company's overall operations.
Operating income was $9.3 million for the 1996 quarter as compared to
operating income of $4.7 million for the 1995 quarter due to the results
discussed above.
Interest expense, net of interest income, increased 273% to $11.6
million from $3.1 million in 1995 quarter, primarily due to interest on the
$450 million of subordinated debt issued in May 1996.
The Company recorded no income tax benefit for the 1996 quarter
compared to income tax expense of $2.3 million for the 1995 quarter. The
Company has not provided a tax benefit for the 1996 quarter based upon the
expectation of recording a full valuation allowance for the current year loss,
prior to giving effect to the pending acquisitions.
The Company's net loss was $2.2 million for the 1996 quarter compared
to a net loss of $731,000 for the 1995 quarter due to the factors discussed
above.
Net loss applicable to common stock increased to $4.8 million in the
1996 quarter from $806,000 in the 1995 quarter due to dividends on the Series D
Preferred Stock issued in May 1996 and the increase in the net loss discussed
above.
Broadcast Cash Flow increased 121% to $17 million for the 1996 quarter
from $7.7 million for the 1995 quarter. The increase was a result of the
inclusion of the Recent Acquisitions in the results of the 1996 quarter as well
as improved results at the Company's existing stations in all markets except
Nashville.
Results for the 1996 quarter included WLYT-FM and WTDR-FM, Charlotte,
North Carolina, (the "Charlotte Stations") for which the Company had provided
programming and sold advertising time pursuant to an LMA prior to the
acquisition of such stations in March 1996 (the "Charlotte Acquisition"); and
WHSL-FM in Greensboro, North Carolina for which the Company had sold
advertising pursuant to a JSA beginning in the first of 1996 quarter.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
The Company's net revenue increased 68% to $92.8 million from $55.3
million, for the nine months ended September 30, 1996 and 1995, respectively,
primarily as a result of the Recent Acquisitions which increased net revenues
$30 million. Net revenue from existing SFX Stations (excluding the Recent
Acquisitions and KTCK-AM Dallas which was operated by a third party under an LMA
during the third quarter of 1996 and the Charlotte Stations which the Company
did not operate for the entire 1995 period) increased 10% as a result of strong
radio advertising growth in the Company's markets, combined with improved
inventory management, ratings and other factors generally affecting sales and
rates.
15
Station operating expenses increased 68% to $61.4 million for the nine
months ended September 30, 1996 from $36.6 million for the nine months ended
September 30, 1995 primarily due to the inclusion of: expenses related to the
Recent Acquisitions of $19.8 million as discussed above; the inclusion of
expenses of $2 million related to KTCK-AM, Dallas, Texas, and WTDR-FM and
WLYT-FM, both operating in Charlotte, North Carolina for the entire nine month
period ended September 30, 1996; and $877,000 of increases in variable expenses
related to the increases in net revenue at the existing SFX stations.
Depreciation, amortization, duopoly integration costs and acquisition
related costs increased 88% to $10.7 million from $5.7 million due to the
inclusion of depreciation and amortization related to the Recent Acquisitions
and the San Diego, Charlotte and Dallas Acquisitions, and to $355,000 of
certain one time acquisition related costs.
Corporate, general and administrative expenses were $4.5 million and
$2.8 million for the nine months ended September 30, 1996 and 1995,
respectively. The increase reflects the growth in the Company's overall
operations.
The Company recorded a non-recurring charge of $27.5 million in the
second quarter of 1996 which consisted primarily of payments in excess of the
fair value of stock repurchased totaling $12.5 million to Mr. Hicks and the
reserve by the Company of $2.3 million relating to the loan and accrued
interest to Mr. Hicks, $5.6 million related to the reserve of the $2.0 million
loan and accrued interest to SCMC and the issuance of 600,000 warrants to SCMC,
$4.6 million for the repurchase of Mr. Armstrong's options, and a charge of
$1.6 million related to the termination of the Company's contractual four-year
broadcast rights of Texas Rangers baseball and an adjustment in the value of
the contract for the 1996 season. In the 1995 period, the Company recorded a $5
million special charge related to the write down in value of the Company's
broadcast rights of Texas Rangers baseball.
The operating loss was $11.2 million for the nine month period ended
September 30, 1996 compared to operating income of $5.3 million for the same
period in 1995 due to the results discussed above.
Interest expense, net of interest income, increased 108% to $18.8
million from $9.1 million in the period ended September 30, 1995, primarily due
to interest on the $450 million of subordinated debt issued in May 1996.
Additionally, interest on borrowings earlier in the year, related to the
Charlotte Acquisition contributed to the increase.
The Company incurred an extraordinary loss totaling $15.2 million in
the period ended September 30, 1996 which consisted primarily of payments of $9
million for the repurchase premium and consent payments related to the early
redemption of $79.4 million of the Company's Old Notes in the Tender Offer and
the related Consent Solicitations and the write-off of $5.6 million of debt
issue costs.
The Company has not recorded an income tax benefit for the nine month
periods ended September 30, 1996 or 1995. A tax benefit for the 1996 was not
provided based upon the expectation of recording a full valuation allowance for
the current year loss, prior to giving effect to the pending acquisitions.
The Company's net loss was $45.3 million for the nine month period
ended September 30, 1996 compared to a net loss of $3.8 million for the same
period ended 1995 due to the factors discussed above.
Net loss applicable to common stock increased to $48.9 million in the
1996 quarter from $4.0 million in the 1995 quarter due to dividends on the
Series D Preferred Stock issued in May 1996 and the increase in the net loss
discussed above.
Broadcast Cash Flow increased 67% to $31.4 million for the nine months
ended September 30, 1996 from $18.8 million for the 1995 period. The increase
was primarily a result of the inclusion of the results of the Recent
Acquisitions of $10.2 million and KYXY-FM, KTCK-AM, WTDR- FM, and WLYT-FM for
the portions of the periods the Company owned and operated, provided
programming to or sold advertising on behalf of the stations as well as
improved results at the Company's existing stations in all markets except
Jackson.
Results for the nine month period ending September 30, 1996 include
WLYT-FM and WTDR-FM, Charlotte, North Carolina, for which the Company had
provided programming and sold advertising time pursuant to an LMA prior to its
acquisition in the first quarter of 1996; KYXY-FM, San Diego, California, for
which the Company had provided programming and sold advertising time pursuant
to an LMA since January 1995 and was acquired on April 13, 1995; KTCK-AM,
Dallas, Texas for which the Company had provided programming and sold
advertising time pursuant to an
16
LMA since March 1995 and was acquired on September 14, 1995; and WMAG-FM,
WTCK-AM, WMFR-AM and WHSL-FM, each operating in Greensboro, North Carolina;
WSTZ-FM, Jackson, Mississippi and WROQ-FM, Greenville, South Carolina for which
the Company had sold advertising pursuant to a JSA beginning in the first
quarter of 1996 quarter.
Charges. In April 1996, the Company and SCMC entered into the SCMC
Termination Agreement pursuant to which the consulting arrangement between such
parties was terminated in consideration for the assignment by SCMC to the
Company of the right to receive certain consulting fees payable by MMR and
Triathlon, the agreement to cancel $2.0 million of indebtedness plus accrued
interest thereon owing from SCMC to the Company upon completion of the MMR
Merger and the issuance of warrants to SCMC to purchase up to 600,000 shares of
Class A Common Stock at an exercise price of $33.75 per share (fair value of
approximately $9 million). In connection with the SCMC Termination Agreement,
the Company has allocated $5.6 million of value to the Triathlon agreement and
will amortize such amounts over the life of the agreement.
Pursuant to the Armstrong Agreement, Mr. Armstrong's employment may be
terminated by either party during the one-month period commencing on the first
anniversary of the consummation of the MMR Merger upon 30 day's written notice.
If his employment agreement is terminated, Mr. Armstrong will receive a payment
of $1.2 million pursuant to the provisions of his employment agreement which
are currently deferred, and the Company will purchase all of his outstanding
options under the Company's stock options plans for an amount equal to the
difference between (x) the number of such options multiplied by the respective
exercise price of such options and (y) the number of such options multiplied by
the greater of $40.00 and the average trading price of a Class A Common Share
during the 20 days prior to five days before the effective date of the
termination of the employment agreement. In the event that the Company is
required to purchase Mr. Armstrong's options, based upon a repurchase price of
$40.00 per share, the Company will make a payment to Mr.
Armstrong of approximately $3.25 million.
Liquidity and Capital Resources. The Company's principal need for
funds has historically been to fund the acquisition of radio stations, and to a
lesser extent, capital expenditures and the redemption of outstanding
securities. The Company's principal sources of funds for these requirements
have historically been the proceeds from the public and private offerings of
equity and debt securities, borrowings under credit agreements and, to a
significantly lesser extent, cash flows from operations.
Statements of Cash Flows. Net cash used in operating activities was
$18.8 million for the nine months ended September 30, 1996 as compared to $2.1
million for the nine months ended September 30, 1995. The increase in 1996 was
primarily due to the cash portion of the non-recurring charges.
Net cash used in investing activities was $442.8 million for the nine
months ended September 30, 1996 as compared to $25.5 million for the nine
months ended September 30, 1995. The cash used in investing activities in 1996
related primarily to the Charlotte, Greenville, HMW, Liberty, Prism, Louisville
and Jackson Acquisitions. In addition, proceeds from sale of radio stations of
$25 million was offset by advances to related parties of $20.4 million,
deposits and other payments for Pending Acquisitions of $13.1 million and
capital expenditures of $1.8 million.
Net cash provided by financing activities was $489.8 million for the
nine months ended September 30, 1996 as compared to $35.7 million for the nine
months ended September 30, 1995. The net cash provided by financing activities
in 1996 was primarily due to $614.9 million of proceeds from the Note Offering
and the Preferred Stock Offering and the borrowing under a credit agreement. In
addition, cash provided was offset by payments on subordinated debt, senior
loans and capital lease obligations of $101.3 million during 1996.
Recent Acquisitions and Dispositions. In June 1996, SFX completed the
Greenville Acquisition and the HMW Acquisition. MMR initially entered into the
acquisition agreements relating to these stations. SFX and MMR agreed that SFX
would finance the purchase of such stations and that MMR would transfer the
purchased assets to SFX simultaneously with the acquisition by MMR.
In July and August 1996, SFX completed the Jackson Acquisitions, the
Prism Acquisition, the Liberty Acquisition and the Washington Dispositions. In
September and October 1996, SFX completed the Louisville Acquisitions and
related Louisville Dispositions and the Dallas Disposition.
Pending Acquisitions and Dispositions. The Company has entered into
agreements relating to the Pending Acquisitions and the Dispositions. In April
1996, the Company entered into the Merger Agreement pursuant to which it has
17
agreed to acquire MMR in exchange for capital stock of the Company having a
value estimated at approximately $80.0 million assuming the reported price of
the Company's stock is $40.00 per share. The Company has agreed to repay MMR's
senior debt and subordinated notes totaling approximately $39.6 million as of
October 31,1996 and to treat any amounts outstanding under the MMR Loan as
contributed capital. As of November 1996, substantially all of MMR's
outstanding Class A Warrants to purchase 1,840,000 shares of MMR Class A Common
Stock were exercised at an exercise price of $7.75 per share. Such exercise
resulted in net proceeds to MMR of approximately $13.2 million. In November
1996, MMR also completed an exchange offer whereby 1,090,540 of MMR's 1,840,000
original outstanding Class B Warrants were exchanged for 218,101 shares of MMR
Class A Common Stock.
In the event that the MMR Merger is terminated, the Company will be
required, except in certain circumstances, to pay $3.5 million to MMR. In
addition, the Company will be required to pay MMR $1.0 million in the event the
majority of the combined voting power of SFX votes with respect to, but does
not vote in favor of, the MMR Merger.
The Company anticipates that it will consummate all of the Pending
Acquisitions by the second or third quarter of 1997. However, the timing and
completion of the Pending Acquisition and the Dispositions are subject to
number of conditions, certain of which are beyond the Company's control. Each
of the Pending Acquisitions (other than the Delsener/Slater Acquisition) and
the Dispositions is subject to the approval of the FCC. Additionally, the
Federal Trade Commission and the Department of Justice, Antitrust Division (the
"Antitrust Agencies") have increased their scrutiny of the radio industry. The
Antitrust Agencies have indicated their intention to review matters related to
the concentration of ownership within markets even when the ownership in
question is permitted under the provisions of the Recent Legislation. While the
Company believes that each of the Pending Acquisitions and the Dispositions
does not represent or result in an impermissible concentration of ownership,
there can be no assurance that the Antitrust Agencies will not take a contrary
position, which could delay or prevent the consummation of any or all the
Pending Acquisition or Dispositions or require the Company to restructure its
ownership in the relevant market or markets. In order to fund certain of the
Pending Acquisitions, the Company will required to seek additional financing.
There can be no assurance that such financing will be available to the Company
on commercially acceptable terms, if at all. The MMR Merger is also subject to
the approval of stockholders of MMR and the Company.
The Company expects that the Acquisitions will be accounted for using
the purchase method of accounting, that the intangible assets created in the
purchase transactions will be amortized against future earnings of the combined
companies, that such amounts will be substantial and that they will continue to
affect the Company's operating results in the future. These expenses, however,
do not result in an outflow of cash by the Company and do not impact the
Company's Broadcast Cash Flow.
SOURCES OF LIQUIDITY. In May 1996, the Company repaid all amounts
owing under the Old Credit Agreement with the proceeds of the Financing. The
Company has received a firm commitment from a lending institution to underwrite
the New Credit Agreement, a $225 million senior credit facility. The Company's
obligations under the New Credit Agreement will be secured by substantially all
of its assets in which a security interest may lawfully be granted, including
property, stock of subsidiaries and accounts receivable, and guaranteed by the
subsidiaries of the Company. It is expected that the New Credit Agreement will
prohibit SFX from utilizing funds available thereunder unless SFX meets certain
specified financial ratios, such as total leverage and senior leverage ratios.
The Company expects to complete the New Credit Agreement prior to the MMR
Merger. The Company currently anticipates that borrowings will be required
under the New Credit Agreement to finance a portion of the Pending
Acquisitions, including the repayment of MMR's debt upon completion of the
merger. There can be no assurance, however, that the Company will be able to
enter into the New Credit Agreement on a timely basis, or at all, or that the
Company will be able to borrow under the New Credit Agreement.
In May 1996, the Company issued $149.5 million in aggregate
liquidation preference of the Series D Preferred Stock. Dividends on the Series
D Preferred Stock are payable quarterly in cash. The Series D Preferred Stock
will be converted into shares of Class A Common Stock at any time prior to the
close of business on the maturity date, unless previously redeemed or
repurchased. The Certificate of Designation contains certain covenants that,
among other things, limit the ability of the Company and its subsidiaries to
engage in transactions with their affiliates.
In May 1996, the Company issued $450.0 million of its 10.75% Senior
Subordinated Notes due in 2006. The indenture relating to its 10.75% Senior
Subordinated Notes due 2006 ("Indenture") contains covenants that, among other
things, limit the ability of the Company and its subsidiaries to engage in
transactions with their affiliates.
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In addition, SFX is currently exploring a number of alternatives,
including offerings of equity and/or debt securities to fund certain of the
Pending Acquisitions. SFX's ability to issue preferred stock or debt securities
and to make borrowings under the New Credit Agreement may be significantly
impacted by the covenants in the New Credit Agreement, the Certificate of
Designations relating to the Series D Preferred Stock, and/or the Indenture.
SFX's ability to raise financing on favorable terms and to make certain
borrowings under the New Credit Agreement is also dependent on improvements in
the Broadcast Cash Flow of SFX's existing stations and the stations which SFX
has agreed to acquire.
The Company expects that any additional acquisitions of radio stations
will be financed through funds generated from operations, cash on hand, funds
which may be available under the New Credit Agreement and additional debt and
equity financing. The availability of additional acquisition financing on
favorable terms cannot be assured, and, depending on the terms of the proposed
acquisition financing, could be restricted by the New Credit Agreement and/or
the debt incurrence test under the Indenture and the Series D Preferred Stock.
The Company's ability to fund the Pending Acquisitions, make scheduled
payments of principal, or to pay interest on or to refinance its debt and to
make dividend payments on the Series D Preferred Stock, to make conversion
payments with respect to the Series D Preferred Stock and to redeem the Series
B Preferred Stock and the Series D Preferred Stock depends on its future
financial performance, which, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors
beyond its control, as well as the success of the radio stations to be acquired
and the integration of such stations into the Company's operations. There can
be no assurance that the Company will be able to borrow under the New Credit
Agreement, that the Company's business will generate sufficient cash flow from
operations, that anticipated improvements in operating results will be achieved
or that future financing including borrowings under the New Credit Agreement
will be available in an amount sufficient to enable the Company to service its
debt, to make dividend, conversion or redemption payments on the Series D
Preferred Stock or to make necessary capital or other expenditures. The Company
may be required to refinance a portion of the Notes or the aggregate
liquidation preference of the Series D Preferred Stock prior to their
respective maturities. There can be no assurance that the Company will be able
to raise additional capital through the sale of securities, the disposition of
radio stations or otherwise for any such refinancing.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As reported in the Forms 10-Q filed by the Company in respect of the
quarterly periods ended March 31, 1996 and June 30, 1996, in a complaint (Index
No. 602056/96) dated April 18, 1996, Paul Pops, who purports to be a
stockholder of MMR, brought suit in the Supreme Court of the State of New York
against MMR, each of the directors of MMR, the Company and Robert F.X.
Sillerman, the Chief Executive Officer of the Company, seeking to enjoin the
MMR Merger, or, in the alternative, seeking monetary damages. The suit alleges
that the consideration to be paid to the MMR security holders in the MMR Merger
is unfair and grossly inadequate. The suit also alleges that in connection with
entering into the Merger Agreement, the directors of MMR violated their
fiduciary duties to MMR and its stockholders and that the Company aided and
abetted such violation. The complaint also alleges that the action should be
certified as a class action representing the interests of the stockholders of
MMR. The defendants filed a motion to dismiss the complaint for failure to
state a cause of action. On September 25, 1996, the parties entered into a
Memorandum of Understanding, pursuant to which the parties have reached an
agreement in principle providing for the settlement of the action. Pursuant to
the Settlement, the plaintiff has agreed that the Exchange Ratio, as set forth
in Amendment No. 3 to the Merger Agreement, is fair to the public shareholders
of MMR. The Settlement provides for the Company to pay plaintiff's counsel's
fees as approved by the Court. The Settlement is conditioned upon the (i)
consummation of the MMR Merger, (ii) completion of certain confirmatory
discovery, and (iii) approval of the Court. Pursuant to the Settlement, the
defendants have denied, and continue to deny, that they committed any
violations of law or have acted in bad faith. There can be no assurance that
the Court will approve the Settlement on the terms and conditions provided for
therein, or at all. Management believes that this proceeding will not impact
the planned closing of the MMR Merger on November 22, 1996.
The Company is a defendant in a lawsuit filed October 21, 1996 by
Cardinal Communications Partners, L.P. ("Cardinal") in the District Court of
Dallas County, Texas (No. 9611157). Also named as defendants are D. Geoffrey
Armstrong and Robert F.X. Sillerman, executive officers of the Company. The
complaint alleges that Cardinal is entitled to contingent payments related to
its sale of Dallas radio station KTCK-AM to the Company in April 1995 and the
Company's subsequent sale of KTCK-AM in October 1996 in the Dallas Disposition.
The complaint seeks a declaratory judgment and actual and punitive damages in
an unspecified amount, as well as attorneys' fees, based on claims of breach of
contract,
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fraud, negligent misrepresentation, quantum meruit and unjust enrichment. The
Complaint has not yet been joined and there has been no discovery or other
proceedings. The Company intends to defend the case vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
2.1 Stock Purchase Agreement by and among SFX Broadcasting, Inc.,
Liberty Broadcasting, Incorporated, Josephthall, Littlejohn
and Levy Fund, L.P., Michael Craven and James Thompson dated
as of November 15, 1995 (incorporated by reference to Exhibit
10.34 of the Form 10-K of SFX Broadcasting, Inc. (Commission
File No. 0-22486) for the fiscal year ended December 31,
1995).
2.2 Asset Purchase Agreement, dated May 1, 1996, among SFX
Broadcasting, Inc., KIRO, Inc. and Bonneville Holding Company
(incorporated by reference to Exhibit 10.2 to the Form 8-K of
SFX Broadcasting, Inc. (Commission File No. 0-22486) filed
with the Securities and Exchange Commission on May 9, 1996).
2.3 Asset Purchase Agreement by and between Prism Radio Partners,
L.P. and SFX Broadcasting, Inc. (incorporated by reference to
Exhibit 10.40 of the Form 10-K of SFX Broadcasting, Inc.
(Commission File No. 0-22486) for the fiscal year ended
December 31, 1995).
2.4 Amendment No. 2, dated as of July 30, 1996, to the Amended
and Restated Agreement and Plan of Merger, dated as of April
15, 1996, as amended on May 6, 1996, among SFX Broadcasting,
Inc., SFX Merger Company and Multi-Market Radio, Inc.
(incorporated by reference to Exhibit 2.1 to the Form 8-K of
SFX Broadcasting, Inc. (Commission File No. 0-22486) filed
with the Securities and Exchange Commission on August 22
1996).
2.5 Exchange Agreement, dated July 1, 1996, between Chancellor
Radio Broadcasting Company and SFX Broadcasting, Inc.
(incorporated by reference to Exhibit 10.59 of Amendment No.
1 to the Form S-4 of SFX Broadcasting, Inc. (Commission File
No. 333-06553) filed with the Securities and Exchange
Commission of July 16, 1996).
2.6 Asset Purchase Agreement by and between SFX Broadcasting of
Texas (KTCK) Licensee, Inc., SFX Broadcasting of Texas
(KTCK), Inc. and KRBE Co. (incorporated by reference to
Exhibit 10.58 of Amendment No. 1 to the Form S-4 of SFX
Broadcasting, Inc. (Commission File No. 333-06553) filed with
the Securities and Exchange Commission on July 16, 1996).
2.7 Option Agreement by and between Capstar Communications of
Mississippi, Inc. and SPUR Capital, Inc. dated December 15,
1993 (incorporated by reference to Exhibit 10.1 of the Form
10-Q of SFX Broadcasting, Inc. (Commission File No. 0-22486)
for the three-month period ended March 31, 1996).
2.8 Amendment No. 3, dated as of September 30, 1996, to the
Amended and Restated Agreement and Plan of Merger, dated as
of April 15, 1996, as amended on May 6, 1996 and July 30,
1996, among SFX Broadcasting, Inc, SFX Merger Company and
Multi-Market Radio, Inc. (incorporated by reference to
Exhibit 2.1 to the Form 8-K of SFX Broadcasting, Inc.
(Commission File No. 0-22486) filed with the Securities and
Exchange Commission on October 3, 1996).
2.9 Asset Purchase Agreement between Lewis Broadcasting
Corporation and Multi-Market Radio Acquisition Corp.
(incorporated by reference to Exhibit 10.49 of the Form SB-2
of Multi-Market Radio, Inc. (Commission File No. 333-1712)
filed on February 27, 1996).
2.10 Letter of intent, dated August 28, 1996, between SFX
Broadcasting, Inc. and EZ Communications, Inc.
2.11 Letter of intent, dated August 9, 1996, between SFX
Broadcasting, Inc., Kenneth A. Brown, ABS Communications,
Inc., ABS Communications, L.L.C., ABS Richmond Partners,
L.P., ABS Richmond Partners II, L.P., EBF, Inc. and EBF
Partners.
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2.12 Asset Exchange Agreement, dated as of September 24, 1996,
among WHFS, Inc., Liberty Broadcasting of Maryland
Incorporated, SFX Broadcasting, Inc. and CBS Inc.
(incorporated by reference to Exhibit 2.5 to the Form 8-K of
SFX Broadcasting, Inc. (Commission File No. 0-22486) filed
with the Securities and Exchange Commission on October 3,
1996).
2.13 Asset Purchase Agreement between Jarad Broadcasting Company
of Albany Inc. and Liberty Broadcasting of Albany,
Incorporated.
2.14 Asset Purchase Agreement between Secret Communications
Limited Partnership and SFX Broadcasting, Inc. (incorporated
by reference to Exhibit 10.2 to the Form 8-K of SFX
Broadcasting, Inc. (Commission File No. 0-22486) filed with
the Securities and Exchange Commission on October 30, 1996).
2.15 Purchase and Sale Agreement among WWYZ, Inc. Great American
Music Fest & Production Co. (collectively the "Companies"),
each of the shareholders of the Companies and SFX
Broadcasting, Inc. (incorporated by reference to Exhibit 10.4
to the Form 8-K of SFX Broadcasting, Inc. (Commission File
No. 0-22486) filed with the Securities and Exchange
Commission on October 30, 1996).
2.16 Amendment to Asset Purchase Agreement between Texas Coast
Broadcasters, Inc. and Multi-Market Radio, Inc. (incorporated
by reference to Exhibit 10.5 to the Form 8-K of SFX
Broadcasting, Inc. (Commission File No. 0-22486) filed with
the Securities and Exchange Commission on October 30, 1996).
2.17 Stock Purchase Agreement between Delsener/Slater Enterprises,
Ltd., Beach Concerts, Inc. Connecticut Concerts,
Incorporated, Broadway Concerts, Inc., Ardee Productions,
Ltd., Ardee Festivals NJ, Inc., In- House Tickets, Inc. Exit
116 Revisited, Inc. Dumb Deal, Inc., Ron Delsener, Mitch
Slater and SFX Broadcasting, Inc. (incorporated by reference
to Exhibit 10.3 to the Form 8-K of SFX Broadcasting, Inc.
(Commission File No. 0-22486) filed with the Securities and
Exchange Commission on October 30, 1996).
10.1 Loan Agreement, dated September 4, 1996, by and between
Multi-Market Radio, Inc. and SFX Broadcasting, Inc.
(incorporated by reference to Exhibit 10.1 of the Form 8-K of
Multi-Market, Inc. (Commission File No. 0-22080) filed on
September 10, 1996).
11. Statement regarding Calculation of Per Share Earnings.
27. Financial Data Schedule.
(b) Reports on Form 8-K
On July 10, 1996, the Company filed a Form 8-K under cover of Items 2
(Acquisition or Disposition of Assets) and 5 (Other Events) thereof disclosing
various acquisitions and dispositions by the Company and the consummation of a
tender offer and consent solicitation by the Company in respect of its 11.375%
Senior Subordinated Notes due 2000. The Form 8- K included historical financial
statements for the businesses acquired by the Company. The Form 8-K was amended
by a Form 8-K/A filed on August 22, 1996. The Form 8-K/A included historical
financial statements for the businesses acquired by the Company and unaudited
pro forma financial information of the Company.
On August 8, 1996, the Company filed a Form 8-K under cover of Item 5
(Other Events) thereof, to disclose the execution of Amendment No. 2 to the
Merger Agreement among the Company, SFX Merger Company and MMR, the
consummation of certain private placements and the effectiveness of related
registration statements, the execution of agreements relating to the
acquisition and disposition of certain radio stations, the acquisition of one
radio station and the announcement of a date by which stockholders of the
Company must submit proposals for inclusion in the proxy statement relating to
the 1996 annual meeting of stockholders of the Company. The Form 8-K included
certain unaudited pro forma financial information of the Company.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SFX BROADCASTING, INC.
Date: November 14, 1996 By:/s/Howard Tytel
-------------------------------
Howard J. Tytel
Executive Vice President and
Secretary
Date: November 14, 1996 By:/s/D. Geoffrey Armstrong
-------------------------------
D. Geoffrey Armstrong
Vice President, Treasury, and Chief
Financial Officer
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