SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): January 9, 1997
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TRIATHLON BROADCASTING COMPANY
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(Exact name of registrant as specified in charter)
Delaware 0-26530 33-0668235
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(State or Other Jurisdiction (Commission File No.) (IRS Employer
of Incorporation) Identification No.)
Symphony Towers, 750 B Street, Suite 1920, San Diego, CA 92101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 239-4242
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N/A
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(Former name or former address, if changed since last report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On January 9, 1997, Triathlon Broadcasting Company ("Company") acquired
from Southern Skies Corporation ("Southern Skies") radio stations KZSN (FM)
and KZSN - AM, each operating in the Wichita, Kansas market, for $11,000,000
in cash and 22,464 shares of the Company's Class A Common Stock. The
acquisition of the Wichita stations was financed from proceeds from a Credit
Facility obtained by the Company from AT&T Commercial Finance Corporation in
November 1996. In addition, the Company entered into a noncompetition
agreement with one of the principals of Southern Skies for a five year
period which requires annual payments of $75,000. In connection with the
acquisition of these stations, the Company made a loan of $6 million to
Southern Skies which is to be repaid on the earlier of May 31, 1998 or the
closing of the acquisition of the Little Rock stations (see below). Interest
on the loan is payable quarterly at 9% per annum. The purchase price was
determined pursuant to a contract between Southern Skies and the Company
entered into February 1996, as amended in November 1996 (the "Amendment").
As a result of the Amendment, the acquisition by the Company of stations KSSN
(FM) and KMVK (FM) each operating in the Little Rock, Arkansas market from
Southern Skies was delayed until April 30, 1997 and is conditional on the
stations meeting certain operating and financial goals. Management believes that
the completion of the acquisition is probable. The purchase price for the Little
Rock station is $11,617,000 in cash and 23,725 shares of the Company's Class A
common stock. In addition, payment on the aforementioned noncompetition
agreement is increased and extended to a date five years from the acquisition
date of the Little Rock stations so that the total payment equals $750,000.
ITEM 5. OTHER EVENTS
Effective January 1, 1997, the Company and SFX Broadcasting Company, Inc.,
a company controlled by Robert F.X. Sillerman, who has a substantial economic
interest in the Company, agreed to terminate the Joint Sales Agreement ("JSA")
for radio stations KKRD (FM), KRZZ (FM) and KNSS-AM, each operating in the
Wichita, Kansas market. The Company anticipates that the operating results for
the four months that the JSA was in effect and the loss in connection with
termination of the agreement, if any, will not have a material impact on the
Company's operating results for the year.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of businesses acquired or to be acquired.
The audited financial statements for the radio stations acquired and to be
acquired from Southern Skies for the years ended December 31, 1995 and 1994
are set forth in the Prospectus dated March 4, 1996, contained in the
Registration Statement filed by the Company with the Securities and Exchange
Commission (File No. 333-1186), which is incorporated herein by reference.
The unaudited financial information for the radio stations acquired and to be
acquired from Southern Skies for the nine months ended September 30, 1996
and 1995 follow.
(b) Pro Forma Financial Information
It is impracticable to file the pro forma financial information required by
Item 7(b) at this time for the period ended March 31, 1996 and as at and for
the six months ended September 30, 1996 because that information is not yet
available. The Registrant will file that information as soon as is practicable
but not later than 75 days following January 9, 1997.
SOUTHERN SKIES CORPORATION
ARKANSAS SKIES CORPORATION
COMBINED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS (NOTES 5 AND 8)
----------------------
Current assets:
Cash ......................................................... $ 262,764
Trade accounts receivable .................................... 985,479
Prepaid expenses ............................................. 18,642
Due from employees ........................................... 335
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Total current assets ..................................... 1,267,220
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Property and equipment (note 2) ................................. 2,225,870
Less accumulated depreciation ................................ 1,864,732
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Net property and equipment ............................... 361,138
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Goodwill, net of accumulated amortization ....................... 2,451,763
Other intangible assets, net of accumulated amortization (note 3) 1,952,645
Other assets .................................................... 6,832
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$ 6,039,598
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LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Current installments of long-term obligations (note 5) ....... $ 10,632,500
Accounts payable ............................................. 284,520
Accrued interest (note 4) .................................... 887,601
Other accrued expenses and liabilities ....................... 153,269
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Total current liabilities ................................ 11,957,890
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Long-term obligations, excluding current installments (note 5) . 3,611,498
Notes payable to stockholder (note 4) ........................... 1,254,173
Other noncurrent liabilities .................................... 16,000
Redeemable common stock warrants (note 5) ....................... 2,383,000
Stockholders' deficit (note 5):
Common stock (note 6) ........................................ 110
Additional paid-in capital ................................... 695,130
Accumulated deficit .......................................... (13,878,203)
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Total stockholders' deficit .............................. (13,182,963)
Commitments (notes 5, 7 and 8) ..................................
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$ 6,039,598
==============
See accompanying notes to combined financial statements.
SOUTHERN SKIES CORPORATION
ARKANSAS SKIES CORPORATION
COMBINED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
1996 1995
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Gross revenues ......................................... $ 5,526,121 $ 5,749,071
Less commissions ....................................... 597,411 641,776
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Net revenues .................................... 4,928,710 5,107,295
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Expenses (note 7):
Operating expenses .................................. 986,392 981,800
Selling expenses .................................... 1,813,031 1,653,097
General and administrative expenses ................. 1,075,339 1,039,935
Corporate expenses .................................. 369,578 294,442
Depreciation and amortization (notes 2 and 3) ....... 584,637 580,058
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4,828,977 4,548,332
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Income from operations .......................... 99,733 558,963
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Other income (expense):
Interest expense (note 5) ........................... (960,564) (1,253,613)
Other income ........................................ 1,660 2,975
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(958,904) (1,250,638)
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Net loss ............................................... (859,171) (691,675)
Accumulated deficit, beginning of year ................. (13,019,032) (9,841,644)
(Increase) in redeemable common stock warrants
(note 5) .............................................. -- (2,155,000)
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Accumulated deficit, end of year ....................... $(13,878,203) $(12,688,319)
============== ===============
See accompanying notes to combined financial statements.
SOUTHERN SKIES CORPORATION
ARKANSAS SKIES CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
1996 1995
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Cash flows from operating activities:
Net loss ............................................................... $(859,171) $(691,675)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation .......................................................... 69,145 64,386
Amortization of intangibles ........................................... 515,492 515,672
Accretion of discount ................................................. 50,000 44,086
Changes in operating assets and liabilities:
Accounts receivable .................................................. 312,362 (34,070)
Prepaid expenses and other assets .................................... 1,381 7,652
Due from employees ................................................... (335) 497
Accounts payable ..................................................... (126,203) (47,122)
Accrued interest ..................................................... 255,101 242,500
Other accrued expenses and liabilities ............................... (40,232) (20,312)
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Net cash provided by operating activities ........................... 177,540 81,614
Cash flows from investing activities--purchase of property and equipment (25,178) (46,510)
Cash flows from financing activities--payments on long-term obligations (71,222) (74,500)
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Net increase (decrease) in cash and cash equivalents .................... 81,140 (39,396)
Cash at beginning of period ............................................. 181,624 299,935
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Cash at end of period .................................................. $ 262,764 $ 260,539
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Supplemental cash flow information--cash paid during the period
for interest .......................................................... $ 655,463 $ 917,027
=========== ============
See accompanying notes to combined financial statements.
SOUTHERN SKIES CORPORATION
ARKANSAS SKIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(1) Summary of Significant Accounting Policies
(a) Organization and Operations
Southern Skies Corporation ("Southern Skies") and Arkansas Skies
Corporation ("Arkansas Skies") own and operate radio broadcasting
stations. Southern Skies currently owns and operates an FM station
(KSSN) in Little Rock, Arkansas and an AM/FM station (KZSN) located
in Wichita, Kansas. Arkansas Skies owns an FM station (KMVK) located
in Benton, Arkansas. Southern Skies operates KMVK under a local
marketing agreement dated September 3, 1993, with Arkansas Skies.
Under this agreement, Southern Skies has agreed to provide all
programming, accounting, financial and administrative functions to
KMVK. Southern Skies is responsible for all expenses associated with
the local marketing agreement and receives all revenue from the sale
of advertising time. In return, fees are paid to Arkansas Skies as
set forth in the agreement. The agreement expires on December 31,
2003.
Southern Skies is owned by one individual ("stockholder"). Arkansas Skies
is owned 51% by the stockholder and 49% by the stockholder's spouse.
Because of the common control and management aspects of the
Companies, the accompanying financial statements are presented on a
combined basis to more meaningfully present financial position,
results of operations and cash flows.
(b) Unaudited Interim Information
The accompanying unaudited combined financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information. 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.
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Financial instruments which potentially subject the Companies to
concentrations of credit risk consist primarily of trade receivables.
All of the Companies' receivables are from a large number of
customers located primarily in Arkansas and Kansas. Accordingly, the
Companies' credit risk is affected by general economic conditions in
those areas.
(d) Principles of Combination
The combined financial statements include the accounts of Southern
Skies and Arkansas Skies (collectively, "Companies"). All significant
intercompany transactions and accounts have been eliminated in the
combination.
(e) Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed
the straight-line method based on the estimated useful lives of the
respective assets.
(Continued)
2
SOUTHERN SKIES CORPORATION
ARKANSAS SKIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(f) Goodwill and Other Intangible Assets
The cost of acquired radio stations is allocated first to identifiable
assets and liabilities based on estimated fair market values. The
excess of cost over identifiable assets and liabilities is recorded
as goodwill and amortized on a straight-line basis over a period of
40 years. Accumulated amortization of goodwill approximate $749,000
at September 30, 1996. Costs allocated to identifiable intangible
assets are amortized over the remaining estimated useful lives of the
assets as determined by underlying contract terms, independent
appraisals or asset lives for existing assets (note 3).
The Companies continually reevaluate the propriety of the carrying
amount of goodwill and other intangibles as well as the related
amortization period to determine whether current events and
circumstances warrant adjustments to the carrying values and/or
revised estimates of useful lives. This evaluation is based on the
Companies' projection of the undiscounted operating income before
depreciation, amortization and interest over the remaining lives of
the amortization periods of related goodwill and intangible assets.
The projections are based on the historical trend line of actual
results since the commencement of operations and adjusted for
expected changes in operating results. To the extent such projections
indicate that the undiscounted operating income (as defined above) is
not expected to be adequate to recover the carrying amounts of
related intangibles, such carrying amounts are written down by
charges to expense in amounts equal to the excess of the carrying
amount of intangible assets over related undiscounted operating
income. At this time, the Companies believe that no significant
impairment of the goodwill and other intangibles has occurred and
that no reduction of the estimated useful lives is warranted.
(g) Income Taxes
The Companies operate as Subchapter S corporations for income tax
purposes. Income tax benefits have not been provided in the
accompanying combined financial statements as the results of
operations are reported to the Companies' stockholders for inclusion
in their individual tax returns.
(h) Revenues and Accounts Receivable
Revenues are primarily derived from local, regional and national
advertising and network compensation. Advertising revenues are
recognized upon the airing of commercials, while network revenues are
recognized monthly as earned. Revenues are presented net of
advertising agency and national sales representatives' commissions.
(Continued)
3
SOUTHERN SKIES CORPORATION
ARKANSAS SKIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(i) Barter Transactions
The Companies exchange unsold advertising time for products and
services. These transactions are reported at the estimated fair
market value of the product or services received. Barter revenues are
recorded when the commercials are broadcast and barter expenses are
recorded when merchandise or services are used. If merchandise or
services are received prior to the broadcast of a commercial, a
liability is recorded. Likewise, a receivable is recorded if a
commercial is broadcast before the goods or services are received.
The combined statements of operations and accumulated deficit includes
barter revenues and barter expenses for the nine months ended
September 30, as follows:
1996 1995
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Barter revenues $685,000 $611,000
Barter expenses 724,000 499,000
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(2) Property and Equipment
A summary of property and equipment at September 30, 1996 follows:
LIFE IN YEARS
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Building and leasehold improvements 20-31.5 $ 267,123
Equipment and furnishings 2-7 1,843,747
Towers 15-20 115,000
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$2,225,870
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(3) Other Intangible Assets
A summary of other intangible assets at September 30, 1996 and their
amortization period follows:
AMORTIZATION
PERIOD IN YEARS
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Deferred loan costs 5 $ 531,887
FCC license 10 3,799,273
Favorable leases 14-28 1,399,794
Organization costs 5 174,006
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5,904,960
Less accumulated amortization 3,952,315
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$1,952,645
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(Continued)
4
SOUTHERN SKIES CORPORATION
ARKANSAS SKIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(4) Notes Payable to Stockholder
Notes payable to stockholder are unsecured and consist of a working
capital loan in the amount of $954,173 with no stated maturity and a 10%
promissory note due August 1, 1998 in the amount of $300,000. Interest
on the working capital loan has been waived by the stockholder pursuant
to the term loan agreement (see note 5). The 10% promissory note
represents a portion of a $3,300,000 note which was acquired by the
stockholder from an existing creditor during 1993 (see note 5). Both of
these notes are subordinated to the term loan agreement (see note 8).
Included in accrued interest in the accompanying balance sheet is
$80,000 which is due on this note to stockholder at September 30, 1996.
(5) Long-Term Obligations
A summary of long-term obligations at September 30, 1996 follows:
Term loan agreement, collateralized by all assets of Southern
Skies, including assignment of keyman life insurance policy,
stockholder guarantee and pledge of all issued and outstanding
stock of Southern Skies $10,550,000
10% subordinated promissory note and warrant due August 1, 1998.
Interest (imputed at 13%) payable in quarterly installments;
secured by subordinated claim on all assets of Southern Skies
described in the revolving credit and term loan agreement
(see note 8) 3,000,000
Note payable due in quarterly escalating installments of
$17,500 to $38,750 beginning December 1, 1994 through maturity
on September 1, 2003. Interest due quarterly based on annual
adjustable rate capped at 8% (8% at September 30, 1996);
secured by certain personal property of Arkansas Skies,
stockholder guarantee and pledge of all issued and outstanding
stock of Arkansas Skies 838,778
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Total long-term obligations 14,388,778
Less unamortized discount of subordinated notes (144,780)
Less current installments (10,632,500)
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Long-term obligations excluding current installments $ 3,611,498
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(Continued)
5
SOUTHERN SKIES CORPORATION
ARKANSAS SKIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
The term loan agreement ("Agreement") requires interest to be paid monthly at
the rate of Citibank, N.A.'s prime rate plus 2% (10.25% at September 30,
1996). Southern Skies paid a fee during 1991 to cap the interest rate at 9%
on $8,000,000 of the outstanding debt, subject to Southern Skies' compliance
with all applicable covenants of the loan agreement. The original agreement
requires quarterly principal reductions of $275,000 in 1995. However, the
creditor allowed Southern Skies to defer the 1995 required principal
payments until December 1, 1996. A $13,750 nonrefundable fee was paid by
Southern Skies upon deferral of each quarterly payment. Thereafter,
quarterly reductions escalate through December 1, 1996, when the remaining
principal balance is due. Subsequent to September 30, 1996, the due date on
the loan has been extended until January 31, 1997.
The Agreement establishes certain minimum requirements as to operating cash
flow and cash balances and restricts the amount of corporate expenses (as
defined in the Agreement), rent expense, and capital additions Southern
Skies may incur. The Agreement also restricts Southern Skies from paying any
dividends or redeeming any stock. For the nine months ended September 30,
1996, Southern Skies has not met the minimum cash flow requirements of the
Agreement. Management has not requested a waiver of compliance from the
lender and at September 30, 1996, Southern Skies is in default under the
Agreement. Although the lender has a right to call the debt at any time as a
result of the default, it has not indicated any intention to do so.
Management expects to get waivers from the lender as a result of the pending
sale discussed in note 8.
The warrants issued by Southern Skies in association with the $3,000,000
subordinated promissory note are for the purchase of 626 shares of Southern
Skies' common stock. The warrants became exercisable on July 31, 1993 at a
purchase price of $1.00. Upon issuance, the face value of the subordinated
note was discounted and $499,690 of the proceeds were credited to additional
paid-in capital for the value attributable to the warrants. The lender also
has an option to purchase 385 shares of the common stock of Arkansas Skies
owned by the stockholder's spouse at a purchase price of $1.00 per share.
The warrants and option have a put/call feature which requires/permits
repurchase at the greater of the prorata appraised value of the Companies or
a formula based upon a multiple of cash flow. Since the Companies may have
to redeem the warrants and option, the Companies have classified the
redemption value as redeemable common stock warrants in the accompanying
combined balance sheets. The changes in the redemption value between
accounting periods is reflected in the accompanying combined financial
statements as an adjustment of accumulated deficit. At September 30, 1995,
the amount recorded was based upon the cash flow formula in the agreement
since no appraisal was obtained. At September 30, 1996, the amount was based
upon the amount agreed to by the warrant holder on December 28, 1995, as
described below. At September 30, 1996, the Companies were prohibited from
redeeming any of the stock due to the Agreement discussed above.
(Continued)
6
SOUTHERN SKIES CORPORATION
ARKANSAS SKIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
On December 28, 1995, the holder of the $3,000,000 10% promissory note has, if
the Triathlon transaction described in note 8 closes, agreed to accept in
full satisfaction of its interest in the Companies (including but not
limited to debt instruments, warrants, options, and stockholder guarantees)
an amount equal to: (1) the outstanding principal and interest owed at
December 31, 1995; and (2) $2,383,000.
The aggregate annual maturities of long-term debt at September 30, 1996 for
fiscal years ending December 31 are as follows:
1996 ........ $10,632,500
1997 ........ 92,500
1998 ........ 3,102,500
1999 ........ 112,500
2000 ........ 122,500
Thereafter . 326,278
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$14,388,778
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(6) Common Stock
A summary of common stock authorized and issued by the Companies at September
30, 1996 is as follows:
COMMON SHARES
ISSUED AND
COMMON SHARES AUTHORIZED OUTSTANDING
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Southern Skies 1,000,000, $.10 par value 1,000
Arkansas Skies 1,000,000, $.01 par value 1,000
(7) Commitments
The companies lease certain office space, equipment and land under long-term
operating lease arrangements. A summary of future lease payments at
September 30, 1996 for fiscal years ending December 31, are as follows:
1996 ......... $ 236,135
1997 ......... 235,882
1998 ......... 229,149
1999 ......... 193,398
2000 ......... 142,256
Thereafter.... 132,430
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$1,169,250
==========
(Continued)
7
SOUTHERN SKIES CORPORATION
ARKANSAS SKIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
Rental expense incurred on the above operating leases during the nine months
ended September 30, 1995 and 1996 was approximately $177,000 (including
$63,000 each year, paid to stockholder for rent of office space). Such
amounts are included in the accompanying statements of operations either as
operating or general and administrative expenses. It is expected that in the
normal course of business, leases that expire will be renewed or otherwise
replaced with leases of similar property.
(8) Subsequent Event
On February 8, 1996, the Companies agreed in principle to sell virtually all
of their assets to Triathlon Broadcasting Company ("Triathlon") for
$24,500,000 (consisting of cash of $24,000,000 and common stock of Triathlon
Broadcasting Company ("Triathlon") having a quoted market value of $500,000)
including, but not limited to, all property, equipment and FCC licenses for
the operation of KSSN, KMVK and KZSN. In addition, Triathlon will enter into
a non competition agreement with one of the principals of the Company for a
five year period which requires aggregate payments of $750,000. The sale is
expected to close in early 1997.
Subsequent to September 30, 1996, the purchase price was reduced by $1,383,000
and the holder of the 10% promissory note and warrants agreed to accept
$5,000,000 for all amounts due for the promissory note and the warrants.
(9) Fair Value of Financial Instruments
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
The carrying value of cash, trade accounts receivable and accounts payable
approximates fair value because of the short maturity of those instruments.
The carrying value of redeemable common stock warrants equals the fair value
of such warrants as a result of the agreement with the warrant holder (note
8).
The fair value of the notes payable to stockholder is not determinable due to
the related party nature of such instrument.
The fair value of long-term debt has not been determined, but in the opinion
of management, approximates the carrying value due to the pending sale of
the Company's assets, and the related warrants associated with a portion of
the debt.
(C) Exhibits
10.1 Amendment dated November 26, 1996 to the Asset Purchase
Agreement dated as of February 8, 1996 by and between Triathlon
Broadcasting of Little Rock, Inc., Triathlon Broadcasting
Company, Southern Skies Corporation and Arkansas Skies
Corporation.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
TRIATHLON BROADCASTING COMPANY
January ,1997 By: /s/ Jan E. Chason
----------------------------
Name: Jan E. Chason
Title: Treasurer and Chief
Financial Officer