FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - ----- ACT OF 1934 For the quarterly period ended September 30, 1996 _____ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ________________ to __________________________ Commission File Number 0-26530 TRIATHLON BROADCASTING COMPANY (Exact name of small business issuer as specified in its charter) DELAWARE 33-0668235 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) Symphony Towers 750 B Street, Suite 1920 San Diego, CA 92101 (Address of principal executive offices) (619) 239-4242 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares of the Company's equity outstanding as of November 14, 1996 is: 3,102,344 shares of Class A Common Stock, par value $.01 per share; 244,890 shares of Class B Common Stock, par value $.01 per share; 50,000 shares of Class C Common Stock, par value $.01 per share; 1,444,366 shares of Class D Common Stock, par value $.01 per share; and 5,834,000 Depository Shares, each representing a one-tenth interest in a share of 9% Mandatory Convertible Preferred Stock, par value $.01 per share. Transitional Small Business Disclosure Format. Yes [ ] No [X] TRIATHLON BROADCASTING COMPANY FORM 10-QSB INDEX Page PART I-FINANCIAL INFORMATION Item 1. Financial Statements - ------- -------------------- Condensed consolidated balance sheets - September 30, 1996 (unaudited) and March 31, 1996 3 Condensed consolidated statements of operations - Three and six months ended September 30, 1996 and 1995 (unaudited) 4 Condensed consolidated statements of cash flows - Six months ended September 30, 1996 and 1995 (unaudited) 5 Condensed consolidated statements of stockholders' equity -Six months ended September 30, 1996 (unaudited) 6 Notes to condensed consolidated financial statements 7 Item 2. Management's Discussion and Analysis or Plan of Operation 11 - ------- --------------------------------------------------------- PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 17 - ------- --------------------------------------------------- Item 5. Other Information 19 - ------- ----------------- Item 6. Exhibits and Reports on Form 8-K. 20 - ------- --------------------------------- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TRIATHLON BROADCASTING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) September 30, March 31, 1996 1996 (unaudited) (Note) ASSETS Current Assets Cash and cash equivalents $ 12,783 $ 36,845 Accounts receivable, net 4,120 1,394 Notes receivable from officer 50 50 Other current assets 758 88 ----------- ------------ Total Current Assets 17,711 38,377 Property and equipment - less accumulated depreciation 5,334 2,809 Intangible assets, net of accumulated amortization 41,408 19,339 Other assets, principally deposits for station acquisitions 7,215 8,856 ---------- ---------- $ 71,668 $ 69,381 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Due to affiliates $ 613 $ 4,270 Accounts payable and accrued expenses 2,734 1,520 ---------- ---------- Total Current Liabilities 3,347 5,790 Deferred taxes 2,502 2,502 Deferred compensation 129 27 Stockholders' Equity Preferred Stock 12 11 Common Stock 48 48 Paid-in-capital 66,784 62,370 Accumulated deficit (1,154) (1,367) ---------- ---------- 65,690 61,062 --------- --------- $ 71,668 $ 69,381 ======== ======== Note: The balance sheet at March 31, 1996 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 condensed consolidated financial statements. 3 TRIATHLON BROADCASTING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited) Three Months Ended Six Months Ended September 30, September 30, 1996 1995 1996 1995 Net revenues .......................... $ 5,424 $ 135 $ 9,950 $ 135 ------- ------- ------- ------- Operating expenses Station operating expenses ..... 3,795 119 $ 7,028 119 Depreciation and amortization .. 427 36 760 36 Corporate expenses ............. 311 24 802 24 Deferred compensation .......... 113 81 226 81 ------- ------- ------- ------- Total operating expenses 4,646 260 8,816 260 ------- ------- ------- ------- Operating income ...................... 778 (125) 1,134 (125) Interest expense - net ................ 418 5 867 12 ------- ------- ------- ------- Income (loss) before income taxes ..... 360 (130) 267 (137) Provision for income taxes ............ 54 -- 54 -- ------- ------- ------- ------- Net income (loss) ..................... 306 (130) 213 (137) Preferred stock dividend requirement .. 1,378 -- 2,724 -- ------- ------- ------- ------- Net loss applicable to common stock ... $(1,072) $ (130) $(2,511) $ (137) ======= ======= ======= ======= Net loss per common share ............. $ (.22) $ (0.05) $ (0.52) $ (0.10) ======= ======= ======= ======= Weighted average common shares outstanding ....................... 4,842 2,417 4,842 1,331 See accompanying notes to condensed consolidated financial statements. 4 TRIATHLON BROADCASTING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Six Months Ended September 30, 1996 1995 ------------ ---------- Cash (used in)/provided by operations .............. $ (3,059) $ 107 Investing activities Acquisition of net assets of radio stations (24,389) (6,770) Capital expenditures ...................... (628) -- Deposits on radio station acquisitions .... (277) -- -------- -------- (25,294) (6,770) Financing activities Net proceeds from sale of preferred stock .. 7,015 -- Preferred stock dividends .................. (2,724) -- Net proceeds from initial public offering .. -- 11,387 -------- -------- 4,291 11,387 Net (decrease)/increase in cash and cash equivalents (24,062) 4,724 Cash and cash equivalents at April 1, 1996 ......... 36,845 -- -------- -------- Cash and cash equivalents at September 30, 1996 .... $ 12,783 $ 4,724 ======== ======== Supplemental cash flow information: Cash paid for interest $ 293 ======== Cash paid for taxes $ 35 ======== Non-cash operating and financing activities: Restricted cash transferred by SCMC in exchange for issuance of Common Stock and Liability $ 765 ======== Conversion of Liability to Radio Investors, Inc. into: Note Payable $ 515 Common Stock 247 -------- $ 762 ======== See accompanying notes to condensed consolidated financial statements. 5 TRIATHLON BROADCASTING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED SEPTEMBER 30, 1996 (in thousands) (unaudited) Series B Mandatory Convertible Convertible Class A Class B Class C Class D Preferred Preferred Common Common Common Common Stock Stock Stock Stock Stock Stock ----- ----- ----- ----- ----- ----- Balances at March 31, 1996 $6 $5 $28 $2 $4 $14 Issuance of 63 shares of Mandatory Convertible Preferred Stock 1 Issuance of 317 shares of Class A Common Stock upon conversion of Class C Common Stock on a one-for-one basis 3 (3) Deferred compensation Dividends on Mandatory Convertible Preferred Stock Net income ---- ---- ----- ---- ---- ----- Balances at September 30, 1996 $6 $6 $31 $2 $1 $14 == == === == == === Total Paid-In Accumulated Stockholders' Capital Deficit Equity ------- ------- ------ Balances at March 31, 1996 $62,370 $(1,367) $61,062 Issuance of 63 shares of Mandatory 7,014 7,015 Convertible Preferred Stock Issuance of 317 shares of Class A Common Stock upon conversion of Class C Common Stock on a one-for-one basis 124 124 Deferred compensation Dividends on Mandatory (2,724) (2,724) Convertible Preferred Stock 213 213 Net income ------- --------- ---------- $66,784 $(1,154) $65,690 Balances at September 30, 1996 ======= ======= ======= See accompanying notes to condensed consolidated financial statements. 6 TRIATHLON BROADCASTING COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for an interim period are not necessarily indicative of the results that may be expected for a full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Triathlon Broadcasting Company ("Company") annual report on Form 10-KSB for the year ended March 31, 1996. The condensed consolidated financial statements include the amounts of the Company and its wholly owned subsidiaries. The Company's revenues vary throughout the year. As is typical in the radio broadcasting industry, the Company's fourth fiscal quarter (first calendar quarter) generally produces the lowest revenues for the year and the third fiscal quarter (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. NOTE 2 - MANDATORY CONVERTIBLE PREFERRED STOCK In March 1996, the Company completed an offering of 5,834,000 Depositary Shares, including the partial exercise of the underwriters' over-allotment in April 1996, each representing a one-tenth interest in a share of 9% Mandatory Convertible Preferred Stock (the "Preferred Stock") at a price of $10.50 per share (the "Preferred Stock Offering"). The Company's net proceeds from the Preferred Stock Offering was approximately $56,400,000. NOTE 3- ACQUISITIONS The Company did not commence radio station ownership and operations until September 13, 1995. As of September 30, 1996, the Company owns and operates, sells advertising pursuant to Joint Sales Agreements ("JSAs") or provided programming and sells advertising pursuant to Local Marketing Agreements ("LMAs") on 23 FM and 11 AM radio stations in the following seven markets: Wichita, Kansas; Lincoln, Nebraska; Omaha, Nebraska; Little Rock, Arkansas; Colorado Springs, Colorado; Spokane, Washington; and Tri-Cities, Washington. Stations Owned and Operated. In September 1995, the Company acquired radio stations KRBB(FM), KWSJ(FM), KFH-AM, and KQAM-AM, each operating in the Wichita, Kansas market, for an aggregate purchase price of $5.9 million. On January 24, 1996, the Company acquired radio stations KZKX(FM) and KTGL(FM), each operating in the Lincoln, Nebraska market, for an aggregate purchase price of approximately $9.7 million. On April 10, 1996, the Company acquired the assets of KTNP(FM), operating in the Omaha, Nebraska market, from 93.3 Inc. for a purchase price of $2.7 million, and the assets of KXKT(FM) from Valley Broadcasting Inc., also operating in the Omaha market, for a purchase price of $8.1 million creating a duopoly in this market. Also in April 1996, the Company acquired from Sterling Realty Organization Co. the assets of KALE-AM and KIOK(FM), each operating in the Tri-Cities, Washington market, for an aggregate purchase price of $1.2 million. 7 TRIATHLON BROADCASTING COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements On May 15, 1996, the Company acquired the assets of KISC(FM), KNFR(FM) and KAQQ-AM, each operating in the Spokane, Washington market, from Silverado Broadcasting Company, Inc., for an aggregate purchase price of approximately $8.75 million (the "Silverado Acquisition"). The Company had been providing programming and selling advertising on these stations since March 1, 1996, pursuant to an LMA. In connection with the Silverado Acquisition, the Company also assumed Silverado's rights and obligations under two JSAs for KNJY(FM) and KCDA(FM) operating in the Spokane market. Pursuant to these JSAs, the Company pays to the station owners a fee determined pursuant to formulas based on net collected revenues. In June 1996, the Company acquired KIBZ(FM), KKNB(FM) and KHAT-AM from Rock Steady, Inc., each operating in Lincoln, Nebraska, for an aggregate purchase price of $3.3 million. The Company, since January 29, 1996, had been selling advertising on KIBZ(FM) and KKNB(FM) pursuant to a JSA. The JSA terminated upon the acquisition. Stations Under JSA or LMA. Pursuant to a JSA entered into in September 1995, the Company began selling advertising on FM radio station in the Wichita market, KEYN(FM). The JSA is for a term of 5 years or until the closing of the Company's acquisition of KEYN(FM), whichever is earlier. The Company retains all of the revenue it receives from the sale of advertising time less a monthly payment to the owner. On January 15, 1996, the Company entered into an agreement to acquire from Pourtales Radio Partnership, for an aggregate purchase price of $22.5 million, radio stations KVOR-AM, KSPZ(FM), KTWK-AM and KVUU(FM) each operating in the Colorado Springs, Colorado market (collectively, the "Colorado Springs Stations"), radio stations KEYF-AM/FM, KUDY-AM and KKZX(FM) each operating in the Spokane, Washington market (collectively, the "Spokane Stations") and radio stations KEGX(FM) and KTCR-AM , each operating in the Tri-Cities, Washington market (collectively, the "Tri-Cities Stations"), and to assume an LMA on July 1, 1996 for radio station KNLT(FM), also operating in the Tri-Cities, Washington market (the "Pourtales Acquisition"). In connection with the Pourtales Acquisition, the Company made a non-refundable deposit in the form of an irrevocable stand-by letter of credit in the amount of $925,000 and made further non-refundable deposits in the aggregate amount of $2 million. The Company has also entered into an LMA to provide programming on the Colorado Springs Stations and Spokane Stations ("Colorado Springs/Spokane LMA") until the Pourtales Acquisition is consummated. The additional $2 million deposit is being recorded as a financing expense by the Company during the period of the Colorado Springs/Spokane LMA. Additionally, to take advantage of certain synergies in these markets the Company entered into a JSA with Citadel Broadcasting Company with respect to the stations subject to the Colorado Springs/Spokane LMA whereby Citadel sells advertising time on these stations and shares the Broadcast Cash Flow with the Company. Further, on July 1, 1996, the Company began selling advertising on and providing programming to the Tri-Cities Stations pursuant to an LMA until the Pourtales Acquisition is consummated. In March 1996, the Company and Multi-Market Radio, Inc. ("MMR"), an affiliate, entered into an LMA pursuant to which the Company provides programming and sells advertising on KOLL(FM), which operates in the Little Rock, Arkansas market, pending the consummation of the acquisition of the station by the Company. In July 1996, the Company entered into an agreement with MMR to purchase KOLL(FM) (the "MMR Acquisition") for a purchase price of $4.1 million, based on an independent valuation. In connection with entering into the LMA, the Company made a payment of $3.5 million to MMR which will be credited towards the purchase price of the station. As of September 1, 1996, the Company began selling advertising on radio stations KKRD(FM), KRZZ(FM) and KNSS-AM operating in the Wichita, Kansas market pursuant to a JSA with SFX Broadcasting, Inc., an affiliate; for 8 TRIATHLON BROADCASTING COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements 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 the Company 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 the Company, as defined in the agreement. The Company has received a request from the Department of Justice to provide information regarding the agreement, and there can be no assurance that the Department of Justice will allow the Company to continue to provide services under the agreement. Additional Stations to be Acquired. On February 8, 1996, the Company entered into an agreement with Southern Skies Corporation and its affiliate Arkansas Skies Corporation (collectively, "Southern Skies") to acquire radio stations KZSN(FM) and KZSN-AM, and KSSN(FM) and KMVK(FM) operating in the Wichita, Kansas and Little Rock, Arkansas markets, respectively, for an aggregate purchase price of $24.5 million (the "Southern Skies Acquisition"). A portion of the purchase price of the Southern Skies Acquisition equal to $.5 million will be paid by delivery of 46,189 shares of Class A Common Stock and the Company has granted registration rights to Southern Skies with respect to such shares. In addition, $750,000 of such purchase price will be paid over five years in consideration for one of the principals entering into a non-competition agreement. The Company has provided a deposit in the form of a letter of credit in the amount of approximately $1.2 million. On October 17 , 1996, the Company entered into an agreement to acquire radio stations KGOR(FM) and KFAB-AM, both serving the Omaha, Nebraska market from American Radio Systems Corporation for $39 million (the "ARS Acquisition"). In addition to the two stations, the Company will acquire the exclusive Muzak franchise for the Omaha and Lincoln, Nebraska markets. The Company has provided a deposit in the form of a letter of credit in the amount of $2,000,000. The Pourtales Acquisition, the MMR Acquisition, the Southern Skies Acquisition and the ARS Acquisition are hereafter referred to as the Pending Acquisitions. There can be no assurance that the Company will be able to consummate the Pending Acquisitions. The Company's cash on hand, anticipated cash from operations, and amounts which may be available under a proposed Credit Agreement will not be sufficient to fund all of the Pending Acquisitions. Each of these acquisitions is subject to a number of conditions, certain of which are beyond the Company's control. They are subject to the approval of the Federal Communications Commission. Additionally, the Federal Trade Commission and the Department of Justice (" 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 Telecommunication Act of 1996 (the "Recent Legislation"). While the Company believes that each of its Pending Acquisitions 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 of the Pending Acquisitions or require the Company to restructure its ownership in the relevant market or markets. NOTE 4 - INCOME TAXES A provision for income taxes has been reflected in the Statements of Operations for the three and nine month periods ended September 30, 1996, in accordance with FAS 109, Accounting for Income Taxes. 9 TRIATHLON BROADCASTING COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements NOTE 5 - LOSS PER COMMON SHARE Loss per common share is based upon the net loss applicable to common shares which is net of preferred stock dividends and upon the weighted average of common shares outstanding during the period. The conversion of securities convertible into common stock and the exercise of stock options were not assumed in the calculation of loss per common share because the effect would be antidilutive. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION INTRODUCTION 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 Company's acquisitions since it started operations, the ability of the Company to achieve certain costs 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 currently owns and operates, provides programming to or sells advertising on 23 FM and 11 AM radio stations in seven markets: Wichita, Kansas; Lincoln, Nebraska; Omaha, Nebraska; Little Rock, Arkansas; Colorado Springs, Colorado; Tri-Cities, Washington and Spokane, Washington. In addition, the Company has pending acquisitions subject to FCC approval. Assuming the consummation of each of the acquisitions, the Company will own or operate 40 radio stations in the following seven markets: Number of Stations Number of Presently Under Additional Stations LMA or JSA Number of Presently Which Will Be Stations To Be Stations Total Number Owned Acquired Acquired Under LMA or JSA of Stations Market AM FM AM FM AM FM AM FM AM FM ------ -- -- -- -- -- -- -- -- -- -- Wichita, Kansas.............. 2 2 -- 1 1 1 1(2) 2(2) 4 6 Lincoln, Nebraska............ 1(1) 4 -- -- -- -- -- -- 1 4 Omaha, Nebraska.............. -- 2 -- -- 1 1 -- -- 1 3 Colorado Springs, Colorado -- -- 2 2 -- -- -- -- 2 2 Tri-Cities, Washington....... 1 1 1 1 -- -- -- 1 2 3 Spokane, Washington.......... 1 2 2 2 -- -- -- 2 3 6 Little Rock, Arkansas........ -- -- -- 1 -- 2 -- -- -- 3 -- -- -- - -- - -- -- -- - Total..................... 5 11 5 7 2 4 1 5 13 27 = == = = = = = = == == (1) KHAT-AM is not currently operating and the Company is exploring options for the FCC License for this station. (2) The Company began selling advertising on KKRD(FM), KRZZ(FM) and KNSS-AM pursuant to a JSA, effective September 1, 1996. 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 less station operating expenses and excludes depreciation, amortization and corporate and non-cash compensation expenses. Broadcast Cash Flow, although not calculated in accordance with generally accepted accounting principles ("GAAP"), is widely used in the broadcasting industry as a measure of a radio broadcasting company's operating performance. Broadcast Cash Flow is not an alternative to operating income, net income or 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 revenues is from the sale of radio advertising time. The Company's most significant 11 station operating expenses are employee salaries and commissions, programming expenses and advertising and promotional expenses. 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 charged by radio stations. 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 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. In addition, revenues of radio stations may be affected by many other factors including: (i) the popularity of programming; (ii) regulatory restrictions on types of programming or advertising (such as beer, wine, liquor and cigarette advertising); (iii) competition within national, regional or local markets from programming on other stations and from other media; and (iv) loss of market share to other technologies. 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 will strive to maximize station revenue by 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 trade agreements. 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 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. To generate national advertising sales, the Company engages independent advertising sales representatives that specialize in national sales for each of its stations. 12 The Company's revenues vary throughout the year. As is typical in the radio broadcasting industry, the Company's fourth fiscal quarter (first calendar quarter) generally produces the lowest revenues for the year and the third fiscal quarter (fourth calendar quarter) generally produces the highest revenues for the year. The Company's operating results in any period may be affected by the incurrence of advertising and promotion expenses that do not necessarily produce commensurate revenues until the impact of the advertising and promotion is realized in future periods. The Company may experience significant charges to results of operations as a results of charges anticipated high levels of depreciation and amortization arising from the acquisitions as well as interest expense arising under the Proposed Credit Agreement (as defined herein) and any future borrowings resulting from station acquisitions and financing therefor. RESULTS OF OPERATIONS The Company did not commence radio broadcast operations until September 13, 1995. The same station pro forma comparisons described below compare the Company's results of operations for the stations owned and operated at September 30, 1996 as if such stations were owned for all periods discussed. THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1995 Net revenues (total revenues less agency commissions) for the three months ended September 30, 1996 were $5,424,000 versus $135,000 for the prior year period. On a same station basis, pro forma net revenues increased 3.4 % to $7,218,000 for the 1996 period from $6,984,000 for the three months ended September 30, 1995. The increase was attributable to increased advertising revenues in the Spokane and Tri-Cities, Washington and Omaha, Nebraska markets, the full impact of which was limited due to format changes at two stations in these markets. Station operating expenses for the three months ended September 30, 1996 was $3,795,000 versus $119,000 for the three months ended September 30, 1995. On a same station basis, pro forma station operating expenses increased 1.7% to $5,405,000 for 1996 from $5,313,000 for the three month period ended September 30,1995. The benefits of the Company's cost reduction programs and efficiencies of combined operations in the markets served have not been fully implemented and were offset by increased promotional expense, begun in the first quarter of 1996, related to station format changes in the Omaha and Tri-Cities markets. In addition, the pro forma station operating expenses for the 1996 quarter includes an adjustment arising from the sale of advertising time in connection with JSA agreements for certain stations in Spokane and Colorado Springs markets. Broadcast Cash Flow for the three month period ended September 30, 1996 was $1,629,000 with a Broadcast Cash Flow Margin (broadcast cash flow as a percentage of net revenues) of 30 % versus Broadcast Cash Flow of $16,000 and Broadcast Cash Flow Margin of 11.9% for the prior year three month period. On a same station basis, pro forma Broadcast Cash Flow increased 8.5% to $1,813,000 for the three month period ended September 30, 1996 from $1,671,000 for the 1995 period principally as a result of the revenue increase mentioned above. Depreciation and amortization expenses for the three month period ended September 30, 1996 was $427,000 versus $36,000 for 1995 period. The increase was attributable to the acquisitions since September 30, 1995. Corporate expenses consisting primarily of officer's salary, professional fees and expenses and corporate office expenses for the 1996 three month period were $311,000 as compared to $24,000 in 1995. The increase in corporate expense are principally the result of the increased number of stations owned, operated or served as well as operating for the entire quarter in 1996. 13 The Company recorded deferred compensation expense of $113,000 in 1996 and $81,000 in 1995. This recurring expense, not currently affecting cash flow, is related to stock options and stock appreciation rights granted to officers, directors and advisors in the prior year. Operating income (net revenues less total operating expenses) for the three month period ended September 30, 1996 was $778,000 as compared to an operating loss of $125,000 in the comparable prior year period. The improvement in operating income results form the inclusion of a full quarter's results of operations in the 1996 period for stations acquired during the 1995 period and the additional results of operations, for applicable periods, for stations acquired subsequent to September 30, 1995. Net interest expense for the 1996 period was $418,000, principally financing costs as a result of delays in closing on certain acquisitions, net of interest income of $189,000 from the Company's investment of cash which will be used for the Pending Acquisitions. The provision for income taxes is $54,000 for the three month period ended September 30, 1996. The Company did not provide for taxes in the prior year period since a loss was anticipated for the first fiscal year. Net income for the three months ended September 30, 1996 was $306,000 as compared to a net loss of $130,000 in the prior year period. Net loss applicable to common stock for this period was $1,072,000 after the provision for dividends of $1,378,000 for preferred stock issued in March and April 1996. SIX MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 1995 Net revenues for the six month period ended September 30, 1996 were $9,950,000 versus $135,000 for the prior year period. On a same station basis, pro forma net revenues decreased 1.3 % to $14,137,000 for the 1996 period from $14,329,000 for the six month period ended September 30, 1995. The decrease was attributable to decreased advertising at certain stations as a result of adjustments to the programming format instituted by the Company, principally during the first quarter 1996. The format changes were instituted to better position the stations for future growth. Station operating expenses for the six months ended September 30, 1996 was $7,028,000 versus $119,000 in the prior year period. On a same station basis, pro forma station operating expenses decreased 1.7% to $10,879,000 for 1996 from $11,054,000 for the six month period ended September 30,1995. The benefits of the Company's cost reduction programs and efficiencies of combined operations in the markets served which have not been fully implemented in all markets were partially offset by increased promotional expense related to station format changes in the Lincoln, Omaha and Tri-Cities markets and the pro forma adjustments in connection with the JSA agreements in Colorado Springs and Spokane. Broadcast Cash Flow for the six month period ended September 30, 1996 was $2,922,000 with a Broadcast Cash Flow Margin of 29.4% versus Broadcast Cash Flow of $16,000 and Broadcast Cash Flow Margin of 11.9% for the prior year six month period. On a same station basis, pro forma Broadcast Cash Flow decreased .5% to $3,258,044 for the six month period ended September 30, 1996 from $3,275,000 for the 1995 period, principally, as a result of the revenue decreases related to the station format changes mentioned above. Depreciation and amortization expenses for the six month period ended September 30, 1996 was $760,000 versus $36,000 for 1995 period. The increase was principally attributable to the acquisitions since September 30, 1995. 14 Corporate expenses for the 1996 six month period were $802,000 as compared to $24,000 in 1995. The increase is corporate expense is directly attributable to six months of actual operations in 1996 versus a partial month for the prior year. The Company recorded deferred compensation expense of $226,000 in 1996 and $81,000 in 1995. This recurring expense, not currently affecting cash flow, is related to stock options and stock appreciation rights granted to officers, directors and advisors principally in October 1995. Operating income for the six month period ended September 30, 1996 was $1,134,000 as compared to an operating loss of $125,000 in the comparable prior year period. The improvement in operating income results from the inclusion of the results of operations for six months in the 1996 period for stations acquired during the 1995 period and the additional results of operations, for applicable periods, for stations acquired subsequent to September 30, 1995. Net interest expense for the 1996 period was $867,000, principally financing costs as a result of delays in closing on certain acquisitions, net of interest income of $425,000 versus $12,000 for the six months ended September 30, 1995. The provision for income taxes is $54,000 for the six month period ended September 30, 1996. No provision was required in the 1995 period. Net income for the six month period ended September 30, 1996 was $213,000 as compared to a net loss of $137,000 in the prior year period. Net loss applicable to common stock for this period was $2,511,000 after the provision for dividends of $2,724,000. LIQUIDITY AND CAPITAL RESOURCES Cash used in operating activities for the six months ended September 30, 1996 totaled $3,059,000. Cash used for investing activities for the period of $25,294,000 related to acquisitions, capital expenditures and deposits and other costs of Pending Acquisitions. Cash provided by financing activities for the Company totaled $4,291,000 and related primarily to the proceeds of the over-allotment from the Preferred Stock Offering reduced by the payments of dividends to the preferred stockholders. The Company's principal source of funds has been the net proceeds from the Initial Public Offering of approximately $12,900,000, a $9,000,000 credit agreement from AT&T Commercial Finance Corporation (the "Credit Agreement") and net proceeds from the Preferred Stock Offering, of approximately $56,400,000. The cost of the acquisitions completed through September 30, 1996 of approximately $46,529,000, including deposits in connection with the Pending Acquisitions, were financed with the proceeds from the Company's Initial Public Offering and the Preferred Stock Offering. Amounts borrowed under the Credit Agreement for acquisitions were also repaid with proceeds from the Company's Initial Public Offering and the Preferred Stock Offering. As of November 12, 1996, the Company has entered into agreements to consummate the Pending Acquisitions pursuant to which it will acquire eleven FM and seven AM stations for an aggregate purchase price of $90,100,000. In order to consummate the Pending Acquisitions, the Company must seek additional funding sources as amounts available under the Proposed Credit Agreement (see below) and cash on hand and from operations will not be sufficient to fund the purchase price of all of the Pending Acquisitions. The Company has received a commitment letter from AT&T for a proposed credit agreement (the "Proposed Credit Agreement") of up to $40,000,000 which will be used to fund a portion of the purchase price of the Pending Acquisitions. Pursuant to the proposal, the amount of funding available under the Proposed Credit Agreement will be limited to an amount, which equals 5.5 times historical 12-month trailing Broadcast Cash Flow. The calculation 15 of Broadcast Cash Flow is made on a pro forma basis which includes the trailing 12 month Broadcast Cash Flow of the stations currently owned and/or operated by the Company and the stations subject to the Pending Acquisitions. There can be no assurance that the Company will be able to enter into the Proposed Credit Agreement or that the stations will achieve the requisite cash flow levels required thereunder to obtain the financing necessary to fund the Pending Acquisitions. Further, the total available under the Proposed Credit Agreement, together with cash on hand, will not be sufficient to fund all of the Pending Acquisitions. In the event the Company does not enter into the Proposed Credit Agreement and/or otherwise obtains additional financing, there can be no assurance that the Company will be able to consummate the Pending Acquisitions and, thus, the Company may lose all, or part of the deposits totaling $9,650,000 made in connection with the Pending Acquisitions. The Company believes that cash flows from operations, borrowings under the Proposed Credit Agreement and existing funds will be sufficient to meet the Company's current operating cash requirements. However, the Company will require additional financing to fund all of its Pending Acquisitions. In addition, as anticipated, current dividend payments on the Preferred Stock have been and will be made out of the remaining proceeds of the Preferred Stock Offering and/or the Proposed Credit Agreement. In order to fund future dividend payments from operating income, the Company will have to improve the operating results of its current radio stations and those to be acquired in the Pending Acquisitions. The Company's ability to make these improvements will be subject to prevailing economic conditions and to legal, financial, business, regulatory, industry and other factors, many of which are beyond the Company's control. In addition to the borrowings under the Proposed Credit Agreement, the Company will be required to incur additional indebtedness or raise additional equity financing in connection with the Pending Acquisitions. Further the Company will also need to incur or raise additional financing when the balloon payment is due in 2002 under the Proposed Credit Agreement. There can be no assurance that the Company will be able to incur such additional indebtedness or raise additional equity on terms acceptable to the Company. The Company's ability to consummate the Pending Acquisitions and incur additional indebtedness will also be restricted by the Proposed Credit Agreement. Without additional sources of funding, it is unlikely that the Company will be able to implement its acquisition strategy and will lose all or part of the deposits made in connection with its Pending Acquisitions. 16 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Stockholders, held on November 13, 1996, the following proposals were approved: PROPOSAL 1 - ELECTION OF DIRECTORS BY THE CLASS A COMMON STOCK, THE CLASS B COMMON STOCK AND THE DEPOSITARY SHARES Class A Common Class B Common Depositary Stock Stock Shares For Withheld For Withheld For Withheld --- -------- --- -------- --- -------- John D. Miller 2,836,291 28,900 2,448,900 - 3,371,000 480,000 Norman Feuer 2,836,291 28,900 2,448,900 - 3,369,400 481,600 Dennis R. Ciapura 2,836,291 28,900 2,448,900 - 3,369,400 481,600 - Election of Directors by the Class A Common Stock and the Depositary Shares Class A Common Depositary Stock Shares For Withheld For Withheld --- -------- --- -------- Frank E. Barnes III 2,835,791 29,400 3,369,160 481,840 Jeffrey W. Leiderman 2,836,291 28,900 3,370,360 480,640 PROPOSAL 2 - AMENDMENT TO THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION For Against Abstain --- -------- ------- Class A Common 852,749 67,700 12,240 Stock Class B Common 2,448,900 - - - Stock Depositary Shares 1,903,712 2,012,704 4,834,972 PROPOSAL 3 - APPROVAL OF THE COMPANY'S 1996 STOCK OPTION PLAN For Against Abstain --- -------- ------- Class A Common 828,822 121,920 24,260 Stock Class B Common 2,448,900 - - Stock Depositary Shares 2,260,792 1,655,464 1,600 17 PROPOSAL 4 - RATIFICATION OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING MARCH 31, 1997 For Against Abstain --- -------- ------- Class A Common 2,838,016 20,500 7,900 Stock Class B Common 2,448,900 - - Stock Depositary Shares 4,018,120 2,400 - 18 ITEM 5. OTHER INFORMATION On November 13, 1996, the Board of Directors appointed Jan E. Chason as Chief Financial Officer of the Company. Since June 1996, Mr. Chason has been serving as a consultant to Sillerman Communications Management Corporation. Mr. Chason is also the principle in JEC Consulting Associates which he began in October 1994. From 1982 until September 30, 1994, Mr. Chason was a Partner in the firm of Ernst & Young LLP. 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K The Company filed Form 8-K/A on August 27, 1996. Exhibits 10.1 Asset Purchase Agreement dated as of October 17, 1996 between Triathlon Broadcasting of Omaha, Inc. and American Radio Systems Corporation. 10.2 Asset Purchase Agreement dated as of July 15, 1996 between Triathlon Broadcasting of Little Rock, Inc. and Southern Starr of Arkansas, Inc. 27 Financial Data Schedule 20 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRIATHLON BROADCASTING COMPANY By: /s/Norman Feuer --------------------------- Norman Feuer Chief Executive Officer By: /s/Jan E. Chason --------------------------- Jan E. Chason Chief Financial Officer Dated: November 14, 1996