FORM 10-Q/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 1998
[ ] 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.)
650 Madison Avenue, 16th Floor
New York, New York 10022
(Address of principal executive offices)
(212) 838-3100
(Registrant's telephone number)
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 April 27, 1997, 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 9,681,289 and 1,047,037,
respectively.
SFX BROADCASTING, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 1998
PART I FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1998 (unaudited) and December 31, 1997........................ 3
Consolidated Statements of Operations for Three Months Ended
March 31, 1998 and 1997 (unaudited).................................................................... 5
Consolidated Statements of Cash Flows for Three Months Ended
March 31, 1998 and 1997 (unaudited).................................................................... 6
Consolidated Statements of Shareholders' Equity for Three Months Ended
March 31, 1998 and 1997 (unaudited)..................................................................... 7
Notes to Consolidated Financial Statements (unaudited).................................................. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 12
SIGNATURES......................................................................................................... 22
2
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 38,464 $ 24,686
Accounts receivable less allowance for doubtful accounts of $2,400 in 1998
and $2,264 in 1997 64,447 71,241
Assets under contract for sale 38,268 42,883
Prepaid and other current assets 3,791 3,109
Receivable from SFX Entertainment 125,378 11,539
----------- -----------
Total current assets 270,348 153,458
Property and equipment:
Land 6,169 6,169
Buildings and improvements 20,389 18,295
Broadcasting equipment and other 68,714 67,821
----------- -----------
95,272 92,285
Less accumulated depreciation and amortization (19,976) (17,456)
----------- -----------
Net property and equipment 75,296 74,829
Intangible Assets:
Broadcast licenses 915,020 913,887
Goodwill 131,601 131,601
Deferred financing costs 22,250 22,250
Other 5,406 5,406
----------- -----------
1,074,277 1,073,144
Less accumulated amortization (46,898) (39,580)
----------- -----------
Net intangible assets 1,027,379 1,033,564
Net assets to be distributed to shareholders 11,454 102,144
Deposits and other payments for pending acquisitions 4,295 5,830
Other assets 5,123 5,790
----------- -----------
TOTAL ASSETS $ 1,393,895 $ 1,375,615
=========== ===========
See accompanying notes.
3
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 14,624 $ 8,665
Accrued expenses 11,966 19,246
Payable to former national sales representative 11,783 23,025
Accrued interest and dividends 25,851 20,475
Income tax payable 115,037 --
Current portion of long-term debt 535 509
Current portion of capital lease obligations 82 101
----------- -----------
Total current liabilities 179,878 72,021
Long-term debt, less current portion 763,882 763,966
Capital lease obligations, less current portion 103 126
Deferred income taxes 77,781 102,681
----------- -----------
Total liabilities 1,021,644 938,794
Redeemable preferred stock 376,615 361,996
Minority interests-SFX Entertainment 56,200 --
Shareholders' Equity (Deficit):
Class A Voting common stock, $.01 par value; 100,000,000 shares
authorized; and 9,562,602 issued and 9,532,157 outstanding at
March 31, 1998 and 9,508,379 issued and 9,477,934 outstanding at
December 31, 1997 95 95
Class B Voting convertible common stock, $.01 par value; 10,000,000
shares authorized; 1,190,911 issued and 1,047,037 outstanding at
March 31, 1998 and at December 31, 1997 12 12
Additional paid-in capital 183,141 185,537
Treasury Stock; 174,319 shares (6,523) (6,523)
Accumulated deficit (237,289) (104,296)
----------- -----------
Total shareholders' equity (deficit): (60,564) 74,825
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,393,895 $ 1,375,615
=========== ===========
See accompanying notes.
4
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED MARCH 31,
--------------------------------
1998 1997
---------- ------------
Gross revenues $ 74,405 $ 50,994
Less agency commissions (8,654) (6,003)
---------- ---------
Net revenues 65,751 44,991
Station operating expenses 44,636 29,916
Depreciation, amortization, duopoly integration costs and acquisition
related costs 10,653 7,485
Corporate expenses 1,569 1,035
Non-cash stock compensation 138 156
Non-recurring and unusual charges 24,974 --
---------- ---------
Total operating expenses 81,970 38,592
---------- ---------
Operating income (16,219) 6,399
Investment income (202) (1,654)
Interest expense 19,190 12,712
---------- ---------
Loss before income taxes and operations to be distributed to shareholders (35,207) (4,659)
Income tax expense 210 285
---------- ---------
Loss from continuing operations (35,417) (4,944)
Discontinued operations:
Income (loss) from operations to be distributed to shareholders, net of
income tax benefit of $17,310 (97,576) (1,544)
Loss on disposal of operations to be distributed to shareholders -- --
---------- ---------
Income (loss) from discontinued operations (97,576) (1,544)
---------- ---------
Net loss (132,993) (6,488)
Redeemable preferred stock dividends and accretion 10,350 7,952
---------- ---------
Net loss applicable to common stock $(143,343) $(14,440)
========== =========
Loss per basic common share from continuing operations $(4.34) $(1.41)
Loss per basic common share from operations to be distributed to shareholders (9.24) (.17)
---------- ---------
Basic loss per common share $(13.58) $(1.58)
========== =========
Weighted average common shares outstanding 10,554,130 9,161,433
========== =========
See accompanying notes.
5
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
THREE MONTHS ENDED MARCH 31,
-----------------------------
1998 1997
---- -----
OPERATING ACTIVITIES:
Net loss $(132,993) $ (6,488)
Loss from operations to be distributed to shareholders 27,296 1,544
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 2,986 2,253
Amortization 7,546 4,932
Noncash portion of non-recurring and unusual charges 4,196 --
Deferred income taxes (13,500) --
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable 6,794 6,076
Prepaid and other assets 6,140 (1,256)
Accrued interest and dividends 12,098 11,966
Accounts payable, accrued expenses and other liabilities (14,991) (9,959)
--------- ---------
Net cash provided by continuing operations (94,428) 9,068
Cash from operating activities of SFX Entertainment 9,140 307
--------- ---------
Net cash provided by operating activities (85,288) 9,375
--------- ---------
INVESTING ACTIVITIES:
Purchase of stations and related businesses, net of cash acquired -- (63,667)
Proceeds from sales of stations and other assets 4,692 717
Deposits and other payments for pending acquisitions (59) (14,545)
Purchase of property and equipment (3,602) (2,763)
Loans to officers -- (2,800)
Net tax liability on Spin-Off to be reimbursed 105,975 --
--------- ---------
Net cash provided by (used in) investing activities 107,006 (83,058)
Cash from investing activities of SFX Entertainment (379,782) (22,612)
--------- ---------
Net cash used in investing activities (272,776) (105,670)
--------- ---------
FINANCING ACTIVITIES:
Payments on long-term debt (100) (50,123)
Additions to debt issuance costs -- (52)
Proceeds from issuance of senior and subordinated debt -- 20,000
Net proceeds from sales of preferred stock -- 215,258
Dividends paid on preferred stock (2,459) (2,459)
Proceeds from exercise of options, warrants and other 3,759 46
--------- ---------
Net cash provided by financing activities 1,200 182,670
Cash from financing activities of SFX Entertainment 458,654 (29)
--------- ---------
Net cash provided by financing activities 459,854 182,641
--------- ---------
Net increase in cash and cash equivalents 101,790 86,346
Cash and cash equivalents at beginning of period 30,666 30,601
Cash of SFX Entertainment at the end of period 93,992 (2,622)
--------- ---------
Cash and cash equivalents at end of period $ 38,464 $ 114,325
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 7,085 $ 841
Income taxes $ 1,267 $ 1,441
Issuance of 250,838 shares of Class A Common Stock and the assumption of
$15.4 million of debt in connection with the Meadows Acquisition
See accompanying notes.
6
SFX BROADCASTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands)
(unaudited)
THREE MONTHS ENDED MARCH 31,
-------------------------------
1998 1997
---- ----
Balance at beginning of year $ 74,825 $ 100,571
Redeemable preferred stock dividends and accretion (10,350) (7,952)
Issuance of stock for acquisitions -- 7,522
Other, principally shares issued pursuant to stock option plans 7,954 47
Net Loss (132,993) (6,488)
--------- ---------
Balance at March 31 $ (60,564) $ 93,700
========= =========
See accompanying notes.
7
SFX BROADCASTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Information with respect to the three months ended March 31, 1998 and 1997
is unaudited. The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and 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 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, 1997.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
statement No. 131 ("SFAS 131"), "Disclosures About Segments of an Enterprise
and Related Information," which establishes new standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that these enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 is effective for financial
statements for fiscal years beginning after December 31, 1997, and therefore
the Company will adopt the new requirements in 1998. Management has not yet
completed its review of SFAS 131 but does not expect that its adoption will
have a material effect on the Company's Statement of Position or revenues, only
on the composition of its reportable segments.
NOTE 2 - RECENT DEVELOPMENT; SPIN-OFF AND PENDING MERGER
On August 24, 1997, the Company entered into an Agreement and Plan of
Merger with SBI Holdings Corporation ("Buyer") and SBI Radio Acquisition
Corporation pursuant to which the Company will become a wholly owned subsidiary
of Buyer (the "Merger"). In the Merger, holders of the Company's Class A Common
Stock will receive $75.00 per share, Class B Common Stock will receive $97.50
per share, and the 6 1/2% Series D Cumulative Convertible Exchangeable
Preferred Stock will convert into the right to receive an amount equal to the
product of (i) $75.00 and (ii) the number of shares of Class A Common Stock
into which that share would convert immediately prior to the consummation of
the Merger; in each case, subject to adjustment under certain circumstances.
Pursuant to the merger agreement, the Company distributed the net assets (the
"Spin-Off") of its live entertainment business ("SFX Entertainment") pro-rata
to its stockholders and the holders of certain warrants, options, and stock
appreciation rights on April 27, 1998.
Until the consummation to the Merger, senior management of the Company
will continue to serve in their present capacities with the Company while
devoting such time as they deem reasonably necessary to conduct the operations
of SFX Entertainment. Although SFX Entertainment has not yet entered into
employment agreements with such members of senior management, most members of
existing management have agreed in principle to become full-time employees of
SFX Entertainment and that Mr. Sillerman, Executive Chairman, will continue to
be Executive Chairman of SFX Entertainment upon consummation of the Merger.
SFX Entertainment is required to repay to the Company all amounts paid in
connection with its concert promotion acquisitions and certain capital
improvements since the date of the Merger agreement and SFX Entertainment will
assume all the liabilities and obligations related to such company's business.
8
As of March 31, 1998, the Company had a $5.4 million receivable from SFX
Entertainment related to such obligations. In April 1998, SFX Entertainment
reimbursed such amount to the Company.
Upon the consummation of the Merger, all net working capital of the
Company, as determined in accordance with the merger agreement, will be paid to
SFX Entertainment by the Company or any net negative working capital will be
paid to the Company by SFX Entertainment. As of March 31, 1998, the Company
estimates that the working capital to be paid to SFX Entertainment would have
been approximately $3.3 million.
The consummation of the Merger is subject to the receipt of certain
regulatory approvals. In February 1998, the Company received the consents of
the holders of the Series E Preferred Stock and certain of the Company's
outstanding notes and in March 1998 the required approval of shareholders.
SFX Entertainment also will be responsible for any taxes of the Company
resulting from the Spin-Off, including any income taxes to the extent that the
income taxes result from a gain on the distribution that exceeds the net
operating losses of the Company and SFX Entertainment available to offset gain.
In connection with the use of the Company's NOL's to offset the Spin-off gain,
a tax benefit of $13,500,000 has been recorded in operations to be distributed
to shareholders. Such tax benefit includes a $8,500,000 reversal of the
Company's deferred tax asset valuation allowance at December 31, 1997, the
balance reflects benefit for a $5,000,000 estimation use of the Company's NOL
generated in during the first quarter of 1998. In addition, the Spin-off gain
was also offset by Company NOL's generated from the exercise of stock options
in 1997. As a result the deferred tax asset valuation allowance at December 31,
1997 was reduced by an additional $11,400,000 and the related tax benefit has
been credited directly to paid in capital.
The actual amount of the tax indemnification payment will be based largely
on the excess of the value of SFX Entertainment's Common Stock on the date of
the Spin-Off over the tax basis of that stock. Management estimates that SFX
Entertainment will be required to pay approximately $120.0 million pursuant to
such indemnification obligation, based on the $30 1/2 average per share price
on the Spin-Off date. The company expects that such indemnity payment will be
received on or about June 15, 1998.
The Company anticipates that the Merger will be consummated in the second
quarter of 1998. There can be no assurance that the regulatory approvals will
be given or that the conditions to consummating the Merger will be met.
The operations of SFX Entertainment have been presented in the financial
statements as operations to be distributed to shareholders pursuant to the
Spin-Off. During the three months ended March 31, 1998, revenue and loss from
operations for SFX Entertainment were $60,994,000 and $27,571,000,
respectively. Included in operating expenses is $1,314,000 of allocated
corporate expenses, net of $133,000 of reimbursements from Triathlon
Broadcasting Company, an affiliate. Additionally, interest expense relating to
the debt to be distributed to the shareholders pursuant to the Spin-Off of
$6,748,000 has been allocated to SFX Entertainment. The Company provides
various administrative services to SFX Entertainment. It is the Company's
policy to allocate these expenses on the basis of direct usage. In the opinion
of management, this method of allocation is reasonable and allocated expenses
approximate what SFX Entertainment would have occurred on a stand-alone basis.
NOTE 3 - RADIO BROADCASTING TRANSACTIONS
Completed radio broadcasting transactions .In January 1998, the Company
sold one radio station operating in Richmond, Virginia (the "Richmond
Disposition") for $4.3 million. No gain or loss was recognized on the sale.
Pending radio broadcasting transactions. Pursuant to separate agreements,
the Company has agreed to acquire three radio stations operating in Nashville,
Tennessee, where the Company currently
9
owns two radio stations, for $35 million (the "Nashville Acquisition"); and
sell six stations in Jackson, Mississippi and two stations in Biloxi,
Mississippi for $66.0 million in cash (the "Jackson and Biloxi Disposition").
The assets related to the Jackson and Biloxi Deposition are classified as
assets under contract for sale in the accompanying consolidated balance sheet
as of March 31, 1998. The Nashville Acquisition is referred to as the "Pending
Acquisition." The Jackson and Biloxi Disposition is referred to herein as the
"Pending Disposition."
The aggregate proceeds to be received from these transactions, net of
acquisitions, is approximately $31 million. The Company has deposited $2.0
million in escrow to secure its obligations under these agreements. The Company
expects to record a pre-tax gain of approximately $20.0 million on the Jackson
and Biloxi Disposition. The Company does not expect to record a gain or loss on
the other transactions as the assets were recently acquired.
In addition, the Company had agreed to exchange four radio stations owned
by the Company and located on Long Island, New York, for $11 million cash and
two radio stations operating in Jacksonville, Florida, where the Company
currently owns four stations, (the "Chancellor Exchange"). The U.S. Department
of Justice, Antitrust Division (the "DOJ") has brought suit alleging that the
Chancellor Exchange is likely to reduce competition. The complaint requests
permanent injunctive relief preventing the consummation of the acquisition of
the Long Island stations by Chancellor Media Corporation ("Chancellor"). The
Company, Chancellor, an affiliate of Buyer, and the DOJ have concluded
settlement discussions which resolved all competitive issues raised by the DOJ
and terminated all investigations or litigation by the DOJ with respect to the
Company, the Merger, the Chancellor Exchange Acquisitions and the Pending
Disposition. Pursuant to the settlement agreement, the Company, Chancellor, and
the Buyer agreed that the Long Island Stations would not be transferred to
Chancellor. In addition, the Company, Chancellor and the Buyer agreed that,
subsequent to the Merger, the Jacksonville stations would be exchanged for
certain assets of the Company and that the Long Island stations would be sold
to a third party.
At March 31, 1998, the Company had capitalized $1.7 million of costs
related to the acquisition of the Jacksonville radio stations. In the event the
Company does not acquire the Jacksonville stations the Company will be required
to write-off such costs.
NOTE 4 - LIVE ENTERTAINMENT TRANSACTIONS
During 1997, the Company acquired the following concert promotion
companies, which were contributed to SFX Entertainment at the Spin-Off date.
In January 1997, the Company purchased Delsener/Slater Enterprises
("Delsener/Slater") for an aggregate consideration of approximately $27.6
million, including $2.9 million for working capital and the present value of
deferred payments of $3.0 million to be paid, without interest, over five
years, and $1.0 million to be paid, without interest, over ten years. The
deferred payments are subject to acceleration in certain circumstances.
In March 1997, Delsener/Slater consummated the acquisition of certain
companies which collectively own and operate the Meadows for $900,000 in cash,
250,838 shares of SFX Class A Common Stock with a value of approximately $7.5
million and the assumption of approximately $15.4 million of debt.
The Company assigned obligation to exercise an option held by the Company
to repurchase 250,838 shares of the Company's Class A Common Stock for an
aggregate purchase price of $8.3 million. This option was granted in connection
with the acquisition of the Meadows Music Theater
In June 1997, the Company acquired Sunshine Promotions for $53.9 million
in cash at closing, $2.0 million in cash payable over 5 years, 62,792 shares of
Class A Common Stock issued and issuable over a two year period with a value of
approximately $4.0 million and the assumption of
10
approximately $1.6 million of debt. In April 1998, the acquisition agreement
was amended to require the Company to accelerate the issuance of the shares.
The remaining shares due the seller, were issued in April 1998. The assets
acquired include Deer Creek Music Center, a 21,000 seat complex located in
Indianapolis, Indiana, the Polaris Amphitheater, a 20,000 seat complex located
in Columbus, Ohio and a 99 year lease to operate Murat Centre, a 2,700 seat
theater and 2,200 seat ballroom, located in Indianapolis, Indiana.
In the first quarter of 1998, SFX Entertainment acquired the following
live entertainment businesses.
PACE Entertainment Corporation ("PACE"), one of the largest diversified
producers and promoters of live entertainment in the United States, having what
SFX Entertainment believes to be the largest distribution network in the United
States in each of its music, theater and specialized motor sports businesses
(the "PACE Acquisition"), for total consideration of approximately
$156,056,000. In connection with the PACE Acquisition, SFX Entertainment
acquired 100% of Pavilion Partners, a partnership that owns interest in 10
venues ("Pavilion"), through the PACE Acquisition and directly from PACE's
various partners for $90,627,000.
The Contemporary Group, a fully-integrated live entertainment and special
event promoter and producer, venue owner and operator and consumer marketer,
for total consideration of approximately $101,402,000.
The Network Magazine Group, a publisher of trade magazines for the radio
broadcasting industry, and SJS Entertainment, an independent creator, producer
and distributor of music-related radio programming, services and research which
it exchanges with radio broadcasters for commercial air-time sold, in turn, to
national network advertisers, for total consideration of approximately
$66,784,000.
BG Presents, one of the oldest promoters of, and owner-operators of venues
for, live entertainment in the United States, and a leading promoter in the San
Francisco Bay area, for total consideration of approximately $80,327,000.
Concert/Southern Promotions, a promoter of live music events in the
Atlanta, Georgia metropolitan area, for total consideration of approximately
$16,600,000.
Westbury Music Fair, a theater located in Westbury, New York, for an
aggregate consideration of $3,000,000 in cash and an agreement to issue 75,019
shares of Class A common Stock of SFX Entertainment.
For financial statement purposes, all of the acquisitions described above
were accounted for using the purchase method, with the aggregate purchase price
allocated to the tangible and identifiable intangible assets based upon current
estimated fair market values. The acquisitions are based on preliminary
estimates of the fair value of the net assets acquired and subject to final
adjustment. The assets and liabilities of these acquisitions and the results of
their operations for the period from the date of acquisition have been included
as net assets and income from operations to be distributed to shareholders in
the accompanying consolidated financial statements.
NOTE 5 - OTHER RECENT TRANSACTIONS
On February 11, 1998, SFX Entertainment completed the private placement of
$350.0 million of 9 1/8% Senior Subordinated Notes (the "Notes") due 2008.
Interest is payable on the Notes on February 1 and August 1 of each year.
On February 26, 1998, SFX Entertainment executed a Credit and Guarantee
Agreement (the "Credit Agreement") which established a $300.0 million senior
secured credit facility comprised of (i) a $150.0 million
11
eight-year term loan (the "Term Loan") and (ii) a $150.0 million seven-year
reducing revolving credit facility. Borrowings under the Credit Agreement are
secured by substantially all of the assets of SFX Entertainment , including a
pledge of the outstanding stock of substantially all of its subsidiaries and
guaranteed by all of SFX Entertainment 's subsidiaries. On February 27, 1998,
SFX Entertainment borrowed $150.0 million under the Term Loan. Together with
the proceeds from the Notes, the proceeds from the Term Loan were used to
finance the 1998 acquisitions discussed above.
Consent Solicitation. To facilitate the Spin-Off, SFX Entertainment's 1998
acquisitions and its financing thereof, the Company sought and obtained
consents from the holders of its Senior Subordinated Notes due 2006 and the
holders of its 12 5/8% Series E Preferred Stock. In connection with these
consents, the Company modified certain covenants. Management anticipates that
the Company will be in compliance with these covenants in the foreseeable
future. Fees and expenses of approximately $18.0 million were incurred by the
Company in connection with the consent solicitations and were reimbursed by SFX
Entertainment with the proceeds of the Notes. Such charges are included in
non-recurring and unusual charges.
Legal Proceedings. On August 29, 1997, two lawsuits were commenced against the
Company's an its directors which allege that the consideration to be paid as a
result of the Merger to the holders of the Company's Class A Common Stock is
unfair and that the individual defendants have breached their fiduciary duties.
On March 16, 1998, all of the parties entered into a Memorandum of
Understanding, pursuant to which they have reached an agreement providing for a
settlement of the action (the "Settlement"). The Settlement provides for the
Company to pay plaintiffs' counsel an aggregate of $950,000, including all fees
and expenses as approved by the court. The Company anticipates that a
significant portion of such payment will be funded by the Company's insurance.
The Settlement is conditioned on the (a) consummation of the Merger, (b)
completion of the confirmatory discovery and (c ) approval of the court.
NOTE 6 - NON-RECURRING AND UNUSUAL CHARGES
In the first quarter 1998, the Company recorded non-recurring and unusual
charges of $24,974,000 which consisted primarily of (i) $4,196,000 of
compensation expense related to stock options issued, (ii) $550,000 relating to
the settlement of a lawsuit, (iii) $489,000 relating to the increase in value
of certain SAR's, (iv) $16,600,000 relating to the consent solicitations from
the holders of its Senior Subordinated Notes due 2006 and the holders of its
12 5/8% Series E Preferred Stock in connection with the Spin-off and
(v) $3,139,000 of expenses, primarily legal, accounting and regulatory fees
associated with the pending Merger and the consent solicitations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BASIS OF PRESENTATION
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and related notes thereto. The following discussion
contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, risks and uncertainties relating to leverage,
the need for additional funds, consummation of the Pending Acquisitions,
integration of the recently completed acquisitions, the ability of the Company
to achieve certain cost savings, the management of growth, the introduction of
new technology, changes in the regulatory environment, the popularity of radio
as a broadcasting and advertising medium and changing consumer tastes. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
12
SPIN-OFF AND MERGER
On August 24, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") pursuant to which the Company will become a
wholly owned subsidiary of Buyer. In the Merger, holders of the Company's Class
A Common Stock will receive $75.00 per share and the holders of the Company's
Class B Common Stock will receive $97.50 per share, subject to adjustment under
certain circumstances. Pursuant to the Merger Agreement, the Company
contributed its live entertainment businesses to SFX Entertainment and on April
27, 1998 distributed all of the outstanding shares of common stock of SFX
Entertainment to the holders of the Company's common stock, Series D Preferred
Stock, interests in the Company's directors' deferred stock ownership plan and
certain warrants of the Company. The Merger is subject to certain conditions,
and there can be no assurance that either the Merger will be consummated on the
terms described herein or at all.
GENERAL
The Company currently owns or operates, provides programming to or sells
advertising on behalf of 86 radio stations located in 24 markets. Following
completion of the Pending Acquisition and Pending Disposition, the Company will
own and operate, provide programming to or sell advertising on behalf of 74
radio stations located in 21 markets.
The performance of a radio station group, such as the Company, is
customarily measured by its ability to generate Broadcast Cash Flow. Broadcast
Cash Flow is defined as net revenues less station operating expenses. Although
Broadcast Cash Flow is not a measure of performance calculated in accordance
with 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. The Company's most significant station operating
expenses are employee salaries and commissions, programming expenses and
advertising and promotional expenditures. The Company strives to control these
expenses by working closely with local station management.
The Company's revenues are primarily affected by the advertising rates its
radio stations can obtain in the face of competition from radio and other
media. The Company's advertising rates are in large part based on a station's
ability to attract audiences in the demographic groups targeted by its
advertisers, as measured principally by Arbitron (an independent rating
service) on a quarterly basis. Because audience ratings in local markets are
crucial to a station's financial success, the Company endeavors to develop
strong listener loyalty. The Company believes that the diversification of
formats on its stations helps to insulate it from the effects of changes in the
musical tastes of the public in any particular format. The number of
advertisements that can be broadcast without jeopardizing listening levels (and
the resulting ratings) is limited in part by the format of a particular
station. The Company's stations strive to maximize revenue by constantly
managing the number of commercials available for sale and adjusting prices
based upon local competitive conditions. In the broadcasting industry, radio
stations often utilize trade (or barter) agreements which exchange advertising
time for goods or services (such as travel or lodging), instead of for cash.
The Company seeks to minimize its use of such agreements. The Company's
advertising contracts are generally short-term. The Company generates most of
its revenue from local advertising, which is sold primarily by a station's
sales staff. In the first quarter of 1998, approximately 76% 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
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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 Telecom Act, the radio broadcasting industry has
become increasingly consolidated, resulting in the existence of radio
broadcasting companies which are significantly larger, with greater financial
resources, than the Company. Furthermore, the Telecom Act will permit other
radio broadcasting companies to enter the markets in which the Company operates
or may operate in the future. Although the Company believes that each of its
stations is able to compete effectively in its market, there can be no
assurance that any of the Company's stations will be able to maintain or
increase current audience ratings and advertising revenue market share. The
Company's stations also compete with other advertising media such as
newspapers, television, magazines, billboard advertising, transit advertising
and direct mail advertising. Radio broadcasting is also subject to competition
from new media technologies that are being developed or introduced, such as the
delivery of audio programming by cable television systems or the introduction
of digital audio broadcasting. The Company cannot predict the effect, if any,
which these new technologies may have on the radio broadcasting industry.
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Seasonality
The Company's revenues are largely seasonal in nature. As is typical in
radio broadcasting, the Company's first calendar quarter generally produces the
lowest revenues from radio for the year, and the fourth calendar quarter
generally produces the highest revenues for the year. Operating results from
radio 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.
RESULTS OF OPERATIONS
The results of operations of the live entertainment business of SFX
Entertainment are included in the results of operations of the Company as
income from operations distributed to shareholders and, therefore, are not
included in the operating income of the Company.
The Company's consolidated financial statements tend not to be directly
comparable from period to period due to acquisition activity. The major
acquisitions during the year ended December 31, 1997, all of which have been
accounted for using the purchase method of accounting, were as follows:
1997 Acquisitions and Dispositions . In January 1997, the Company
purchased one radio station operating in Albany, New York, for a purchase price
of $1.0 million (the "Albany Acquisition").
In February 1997, the Company purchased WWYZ-FM, operating in Hartford,
Connecticut, for a purchase price, including the payment of fees and expenses,
of $25.9 million (the "Hartford Acquisition"). The Hartford Acquisition
increased the number of stations the Company owns in the Hartford market to
five.
In March 1997, the Company acquired two radio stations operating in
Houston, Texas, for a purchase price of approximately $43.0 million, exclusive
of certain additional contingent liabilities which may become payable (the
"Texas Coast Acquisition"). The Texas Coast Acquisition increased the number of
stations the Company owns in the Houston market to four.
In March 1997, the Company exchanged one radio station operating in
Washington, D.C./Baltimore, Maryland, for two radio stations operating in
Dallas, Texas (the "CBS Exchange") and completed the sale of two radio stations
operating in the Myrtle Beach, South Carolina market for $5.1 million payable
in installments over a five year period (present value approximately $4.3
million). The CBS Exchange was structured as a substantially tax free exchange
of like-kind assets. The contract for the sale of the Myrtle Beach stations was
in place prior to the merger with Multi-Market Radio, Inc. No gain or loss was
recognized on these transactions as the Myrtle Beach stations were recently
acquired.
In April 1997, the Company acquired substantially all of the assets of
three radio stations in Indianapolis, Indiana and in June 1997 the Company
acquired substantially all of the assets of four stations in Pittsburgh,
Pennsylvania from Secret Communications Limited Partnership ("Secret
Communications") for a total purchase price of $255.0 million.
Also in April 1997, the Company sold one radio station operating in Little
Rock, Arkansas to Triathlon Broadcasting Company, an affiliate, ("Triathlon"),
a publicly traded radio broadcasting company. The station was sold for $4.1
million, of which $3.5 million had been held as a deposit by the Company since
1996. No gain or loss was recorded on the transaction as the station was
recently acquired.
In July 1997, the Company acquired substantially all of the assets of four
radio stations operating in Richmond, Virginia for approximately $46.5 million,
including payments made to buy out minority equity interests which the Company
had originally agreed to provide to certain of the sellers.
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In August 1997, the Company acquired two radio stations operating in
Pittsburgh, Pennsylvania and two radio stations in Milwaukee, Wisconsin for
$35.0 million.
In August 1997, the Company exchanged one radio station in Pittsburgh,
Pennsylvania, which the Company had recently acquired from Secret
Communications, and $20.0 million in cash for one radio station in Charlotte,
North Carolina. The Company operated the radio station in Charlotte, North
Carolina pursuant to a local market agreement during July 1997.
1998 Disposition In January 1998, the Company sold WVGO in Richmond,
Virginia for $4.3 million. No gain or loss was recognized on the sale.
The Albany Acquisition, the Hartford Acquisition, the Texas Coast
Acquisition, the CBS Exchange, the Secret Communications Acquisition, the
Little Rock Disposition, the Richmond Acquisition, the Hearst Acquisition and
the Charlotte Exchange are collectively referred to as the "1997 Radio
Acquisitions."
Results for the quarter ended March 31, 1998 include (i) the Jacksonville
Stations, for which the Company has provided programming and sold advertising
time pursuant to an LMA since July 1, 1996, (ii) and the results for WJZC-FM,
WLAC-FM and WLAC-AM in Nashville, Tennessee for which the Company has provided
programming and sold advertising time pursuant to an LMA since November 1,
1997.
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
For the three months ended March 31, 1998, net revenues increased 46% to
$65,751,000 from $44,991,000 primarily as a result of the 1997 Radio
Acquisitions which increased net revenues by $18,675,000. In addition, net
revenue at radio stations owned for full years in both 1998 and 1997 increased
as a result of strong radio advertising growth combined with improved inventory
management, ratings and other factors generally affecting sales and rates. On a
same station basis, assuming all stations owned and operated as of March 31,
1998 were owned for all periods reported, net revenues would have increased 5%
from 1997.
Station operating expenses increased 49% to $44,636,000 from $29,916,000
primarily due to the inclusion of expenses related to the 1997 Radio
Acquisitions of $14,652,000 and increases in variable expenses related to the
increases in net revenue at the existing stations.
Depreciation, amortization, duopoly integration costs and acquisition
related costs increased 42% to $10,653,000 from $7,485,000 due to the inclusion
of $2,927,000 of depreciation and amortization related to the 1997 Radio
Acquisitions.
Corporate expenses, including non-cash stock compensation, were $1,707,000
and $1,191,000 for the 1998 quarter and 1997 quarter, respectively. The
increase reflects the growth in the Company's overall operations, partially
offset by the allocation of certain expenses and Triathlon advisory fees to SFX
Entertainment, which is included in operations to be distributed to
shareholders. As a percentage of total revenues, corporate expenses remained
constant at 2.6%.
In 1998, the Company recorded non-recurring and unusual charges of
$24,974,000 which consisted primarily of (i) $4,196,000 of compensation expense
related to stock options issued, (ii) $550,000 relating to the settlement of a
lawsuit, (iii) $489,000 relating to the increase in value of certain SARs,
(iv) $16,600,000 relating to the consent solicitations from the holders of its
Senior Subordinated Notes due 2006 and the holders of its 12 5/8% Series E
Preferred Stock in connection with the Spin-Off and (v) $3,139,000 of
expenses, primarily legal, accounting and regulatory fees associated with the
Merger and the consent solicitations.
Operating loss was $16,219,000 for the 1998 quarter compared to an
operating income of $6,399,000 for the same period in 1997 due to the results
discussed above.
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Interest expense, net of interest income, increased 72% to $18,988,000
from $11,058,000 in the 1997 quarter, primarily due to interest on borrowings
under the Credit Agreement which were used primarily to fund the 1997 Radio
Acquisitions.
The Company recorded an income tax expense of $210,000 in the 1998
quarter, as compared to an income tax expense of $285,000 for the 1997 quarter,
which was primarily related to state income taxes.
In the first quarter of 1998, the net loss of the live entertainment
business of SFX Entertainment of $27,296,000 was included in the results of
operations of the Company as income from operations to be distributed to
shareholders. This amount is partially offset by the net tax benefit associated
with the Spin-off of $17,310,000. SFX Entertainment's first quarter of 1998
operating results consisted of $60,994,000 of revenue, a $2,923,000 operating
loss and $26,796,000 of loss before provision for income taxes.
The Company's net loss was $132,993,000 for the 1998 quarter compared to a
net loss of $6,488,000 for the 1997 quarter due to the factors discussed above.
Net loss applicable to common stock increased to $143,343,000 in the 1998
quarter from $14,440,000 in 1997 due to stock dividends on the Series E
Preferred Stock issued in January 1997 and the increase in net loss discussed
above.
Broadcast Cash Flow increased 40% to $21,115,000 for the 1998 quarter from
$15,075,000 for 1997. The increase was primarily a result of the inclusion of
the results of the 1997 Radio Acquisitions of $4,023,000, as well as improved
results at the Company's existing stations. On a same station basis, assuming
all stations owned and operated as of March 31, 1998 were owned for all periods
reported, Broadcast Cash Flow would have increased approximately 18% from 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal need for funds has historically been to fund the
acquisition of radio stations and live entertainment businesses, including
related working capital needs, and, to a lesser extent, capital expenditures
and the redemption of outstanding securities and debt service. The Company's
principal sources of funds for these requirements have historically been the
proceeds from offerings of equity and debt securities, borrowings under credit
agreements and, to a significantly lesser extent, cash flows from operations.
Historical Cash Flows
Cash used in operations (before distribution to shareholders) for the
quarter ended March 31, 1998 was $94,428,000, as compared to cash provided by
operations of $9,068,000 in the comparable period in 1997. The increase in cash
provided by operations in 1998 as compared to 1997 was primarily attributable
to improved Broadcast Cash Flow and a decrease in the investment in working
capital of radio stations acquired without the related working capital
partially offset by the increase in net loss including the impact of the
non-recurring and unusual charges.
Cash provided by investing activities (before distribution to
shareholders) for the quarter ended March 31, 1998 was $107,006,000, as
compared to cash used in investing activities of $108,104,000 in the comparable
period in 1997. Cash provided by investing activities in 1998 consisted of the
sale of a radio station offset partially offset by capital expenditures. Cash
used in investing activities in 1997 related primarily to the Texas Coast
Acquisition, the Hartford Acquisition and the 1997 Entertainment Acquisitions.
Cash provided by financing activities for the quarter ended March 31, 1998
was $1,200,000, as compared to cash provided by financing activities of
$182,641,000 in the comparable period in 1997. Cash provided by financing
activities in 1998 related primarily to the exercise of options and warrants.
Cash
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provided by financing activities for 1997 related primarily to $215,258,000 of
proceeds from the Series E Preferred Stock Offerings partially offset by
repayments of net borrowings under the Credit Agreement.
Cash flow from the operations to be distributed to shareholders in the
Spin-Off was $9,140,000 from operating activities, $379,782,000 of cash used in
investing activities and $458,654,000 of cash used in financing activities. The
investing and financing activities in the quarter ended March 31, 1998 were
related the 1998 SFX Entertainment acquisitions as described below.
1998 Radio Station Acquisitions and Dispositions
In January 1998, the Company sold WVGO in Richmond, Virginia for $4.3
million. No gain or loss was recognized on the sale.
1998 Activity Regarding Merger and Spin-Off
1998 SFX Entertainment Acquisitions. In February and March of 1998, SFX
Entertainment consummated its acquisitions of PACE Entertainment Corporation,
Pavilion Partners, The Contemporary Group, BG Presents, Inc., The Network
Group, Concert/Southern Promotions and certain related entities for an
aggregate purchase price of $506.1 million, consisting of $442.1 million in
cash, including repayment of debt and payments for working capital, $7.8
million of assumed debt and agreements to issue, or the issuance of securities
convertible into, an aggregate of approximately 4.2 million shares of SFX
Entertainment's common stock upon the consummation of the Spin-Off with an
attributed negotiated value of approximately $56.2 million
SFX Entertainment financed these acquisitions with the proceeds from its
recent private placement of $350 million in aggregate principal amount of 9
1/8% Senior Subordinated Notes due 2008 (the "SFX Entertainment Notes") and
from borrowings under SFX Entertainment's credit facility, as described below.
SFX Entertainment Credit Agreement. On February 26, 1998, SFX
Entertainment, its subsidiaries and the lenders that are parties thereto
entered into a Credit and Guarantee Agreement (the "SFX Entertainment Credit
Facility") which provides for a $300 million senior secured credit facility
comprised of (i) a $150.0 million seven year revolving facility and (ii) a $150
million eight year term loan. Borrowings under the SFX Entertainment Credit
Facility are secured by substantially all the assets of SFX Entertainment,
including a pledge of the outstanding stock of substantially all of its
subsidiaries, and are guaranteed by substantially all of the Company's
subsidiaries. On February 27, 1998, SFX Entertainment borrowed $150.0 million
pursuant to the term loan in connection with the acquisitions described above.
Under certain circumstances, such facility may be increased by $50 million in
available borrowings.
Consent Solicitations. To facilitate the Spin-Off, SFX Entertainment's
1998 acquisitions and its financing thereof, the Company sought and obtained
consents from the holders of its 2006 Notes and the holders of its 12 5/8%
Series E Cumulative Exchangeable Preferred Stock of the Company (the "Series E
Preferred Stock"). Fees and expenses of $18.0 million incurred by the Company
in connection with the consent solicitations were reimbursed by SFX
Entertainment with the proceeds of the SFX Entertainment Notes and recorded as
non-recurring and unusual charges.
Pending Radio Station Acquisitions and Dispositions
Pursuant to separate agreements, the Company has agreed to acquire three
radio stations operating in Nashville, Tennessee, where the Company currently
owns two radio stations, for $35 million (the "Nashville Acquisition"); and
sell six stations in Jackson, Mississippi and two stations in Biloxi,
Mississippi for $66.0 million in cash (the "Jackson and Biloxi Disposition").
The assets related to the Jackson and Biloxi Deposition are classified as
assets under contract for sale in the accompanying consolidated balance sheet
as of March 31, 1998. The Nashville Acquisition is referred to as the "Pending
Acquisition." The Jackson and Biloxi Disposition is referred to herein as the
"Pending Disposition."
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The aggregate proceeds to be received from these transactions, net of
acquisitions, is approximately $31 million. The Company has deposited $2.0
million in escrow to secure its obligations under these agreements. The Company
expects to record a pre-tax gain of approximately $20.0 million on the Jackson
and Biloxi Disposition. The Company does not expect to record a gain or loss on
the other transactions as the assets were recently acquired. The company
expects that Nashville Acquisition will be consummated in the second quarter
and that the Jackson and Biloxi Disposition will occur in the third quarter of
1998.
In addition, the Company had agreed to exchange four radio stations owned
by the Company and located on Long Island, New York, for $11 million cash and
two radio stations operating in Jacksonville, Florida, where the Company
currently owns four stations, (the "Chancellor Exchange"). The U.S. Department
of Justice, Antitrust Division (the "DOJ") has brought suit alleging that the
Chancellor Exchange is likely to reduce competition. The complaint requests
permanent injunctive relief preventing the consummation of the acquisition of
the Long Island stations by Chancellor Media Corporation ("Chancellor"). The
Company, Chancellor, an affiliate of Buyer, and the DOJ have concluded
settlement discussions which resolved all competitive issues raised by the DOJ
and terminated all investigations or litigation by the DOJ with respect to the
Company, the Merger, the Chancellor Exchange Acquisitions and the Pending
Disposition. Pursuant to the settlement agreement, the Company, Chancellor, and
the Buyer agreed that the Long Island Stations would not be transferred to
Chancellor. In addition, the Company, Chancellor and the Buyer agreed that,
subsequent to the Merger, the Jacksonville stations would be exchanged for
certain assets of the Company and that the Long Island stations would be sold
to a third party.
The timing and completion of each of the above transactions are subject to
a number of closing conditions, certain of which are beyond the Company's
control. It is presently contemplated that the Nashville Acquisition, Jackson
and Biloxi Disposition and the Chancellor exchange will be consummated after
the consummation of the Merger. Although the Company is not obligated to do so,
the Buyer has requested that the Company complete the Nashville Acquisition
prior to the Merger. The Company and the Buyer are currently negotiating an
agreement whereby the Buyer will provide the financing to complete the
Nashville Acquisition. In the event that the Company is required to complete
the Nashville Acquisition prior to the consummation of the Merger, the Company
will require outside financing. Due to limited availability under the Credit
Agreement, the Company would be required to seek alternate debt or equity
financing. There can be no assurance that the Company would be able to obtain
the necessary financing to complete the Nashville Acquisition.
Capital Expenditures
Capital expenditures totaled $ 3,602,000 for the quarter ended March 31,
1998 as compared to $2,763,000 in the quarter ended March 31, 1997. The 1998
and 1997 capital expenditures consisted primarily of the consolidation of
operations in Raleigh, Hartford, Houston and Charlotte and upgrades to the
Company's broadcasting, office and computer equipment in various markets.
Merger and Spin-Off-Potential Uses
Merger. In the event the Merger Agreement is terminated, under certain
circumstances, the Company may be required to pay fees and expenses ranging
from $10 million to $52.5 million.
Tax Indemnification Arrangement. SFX Entertainment is subject to certain
indemnification obligations, including an obligation to indemnify the Company
for any taxes resulting from the Spin-Off, including income taxes to the extent
that such income taxes result from gain on the distribution that exceeds the
net operating losses of the Company available to offset such gain (including
net operating losses generated in the current year prior to the Spin-Off). The
actual amount of the tax indemnification payment will be based largely on the
excess of the value of SFX Entertainment's Common Stock on the date of the
Spin-Off over the tax basis of that stock. Management estimates that SFX
Entertainment will be required to pay approximately $120.0 million pursuant to
such indemnification obligation, based on the $30 1/2 average per share price
on the Spin-Off date. The Company expects that such indemnity payment will be
due on or
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about June 15, 1998. In the event that SFX Entertainment were unable to finance
its indemnification obligation, the Company would be responsible for such
income taxes.
Working Capital. Upon the consummation of the Merger, all net working
capital of the Company, as determined in accordance with the merger agreement,
will be paid to SFX Entertainment by the Company or any net negative working
capital will be paid to the Company by SFX Entertainment. As of March 31, 1998,
the Company estimates that the working capital to be paid to SFX Entertainment
would have been approximately $3.3 million.
Interest and Dividends
The Company pays interest on the 2006 Notes of approximately $24 million
semi-annually on each May 15 and November 15. The 2006 Notes are guaranteed on
a senior subordinated basis by each of the Company's subsidiaries. The
indenture governing the 2006 Noes contains certain covenants which limit the
ability of the Company and certain of its subsidiaries to, among other things,
incur additional indebtedness, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, incur indebtedness that is senior in right of payment to the 2006
Notes, incur liens, impose restrictions on the ability of a subsidiary to pay
dividends or make certain payments to the Company and its subsidiaries, merge
or consolidate with any other person or dispose of all or substantially all of
the assets of the Company.
The interest incurred under the Credit Agreement is paid as each
short-term borrowing matures. The Company's current LIBOR based rate loans
mature in one to four months. As of May 1, 1998, the Company had outstanding
borrowings under the Credit Agreement of $313.0 million and the average
interest rate on these borrowings was 8.13%.
Dividends on the $225.0 million Series E Preferred Stock accrue at the
rate of 12.625% per annum and are payable in cash or additional shares of
Series E Preferred Stock on January 15 and July 15 of each year. Dividends may
be paid, at the Company's option, through January 15, 2000, in cash or
additional shares of Series E Preferred Stock. On July 15, 1997, the Company
elected to pay a cash dividend. On January 15, 1998, the Company elected to pay
a preferred stock dividend.
Dividends on the $149.5 million Series D Preferred Stock accrue at the
rate of 6.5% per annum and are payable on February 28, May 31, August 31 and
November 30 of each year.
The $2.0 million Series C Preferred Stock accrues dividends at the rate of
6.0% per annum which are payable on January 1, April 1, July 1, and October 1
of each year.
Year 2000 Compliance
As a result of the Merger, the Company has not addressed the risks
associated with Year 2000 compliance issues with respect to its accounting and
financial reporting systems with respect to the broadcasting business.
Sources of Liquidity
As of March 31, 1998, the Company's cash and cash equivalents totaled
approximately $26.4 million, net of a deposit of $12.1 million that the Company
is obligated to pay to a national advertising representative company
It is currently anticipated that the Merger will be consummated in the
second quarter. The Company believes that its cash on hand will be sufficient
to meet its anticipated scheduled liquidity needs prior to the consummation of
the Merger. However, in the event that the timing of the Merger changes, so
that the Nashville Acquisition occurs prior to the consummation of the Merger,
and the Company cannot obtain financing from the Buyer, or SFX is unable to
fund the tax indemnity payment by June 15, 1998, the
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Company will require additional borrowings under the Credit Agreement. The
Credit Agreement prohibits the Company from borrowing unless the Company meets
certain specified tests, such as total leverage and senior leverage ratios and
pro forma interest expense. The ability of the Company to meet such tests is
dependent on the cash flow of the Company, giving effect to the consummation of
pending acquisitions and dispositions. The Company currently has limited
borrowing availability under the Credit Agreement which would not be sufficient
to finance a substantial portion of the Nashville Acquisition, for which the
Company has deposited $2 million in escrow. There can be no assurance that the
Company will have adequate borrowing capacity under the Credit Agreement to
finance the Nashville Acquisition and certain other payments described above in
the event that the consummation of the Merger were delayed. In such case the
Company would require additional financing. There can be no assurance that the
Company would be able to obtain additional financing on terms acceptable to the
Company or at all.
In the event that the Merger Agreement is terminated the Company may,
under certain circumstances, be required to make certain payments. In such
event there can be no assurance that the Company would have cash on hand,
borrowing capacity under the Credit Agreement or that additional financing
would be available to fund such payments.
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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: May 26, 1998 By: /s/Thomas P. Benson
--------------------
Thomas P. Benson
Chief Financial Officer,
Vice President and Director
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