1
REPORT of INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Regent Communications, Inc.
We have audited the accompanying consolidated balance sheets of Regent
Communications, Inc. and Subsidiaries (the "Company") as of December 31, 1997
and 1996 and the related consolidated statements of operations, shareholders'
equity, and cash flows for the year ended December 31, 1997 and for the period
from November 5, 1996 (inception) through December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Regent
Communications, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the year ended
December 31, 1997 and for the period from November 5,1996 (inception) through
December 31, 1996, in conformity with generally accepted accounting principles.
Coopers & Lybrand, L.L.P.
Cincinnati, Ohio
January 30, 1998
F-50
2
REGENT COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
as of December 31, 1997 and 1996
ASSETS 1997 1996
Current assets:
Cash $ 1,013,547 $ 592
Accounts receivable, less allowance for doubtful
accounts of $86,000 in 1997 1,507,623 -
Other receivables 197,639 -
Other current assets 28,780 -
Deposits held in escrow for station acquisitions 1,975,000 -
Assets held for sale 7,500,000 -
------------ ----------
Total current assets 12,222,589 592
Property, plant and equipment, net 53,792 -
Other assets, net 1,089,462 -
------------ ----------
Total assets $ 13,365,843 $ 592
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 526,004 $ 500
Accounts payable, shareholders - 11,906
Accrued expenses 655,078
Notes payable 7,500,000
------------ ----------
Total current liabilities 8,681,082 12,406
Redeemable preferred stock:
Series B Senior convertible preferred stock, 1,000,000 shares authorized, 1,000,000 issued
and outstanding, $5.00 stated value (liquidation value; $1,122,055), net of
subscription for 780,000 shares for $3,900,000 1,122,055 -
Series D convertible preferred stock, 1,000,000 shares authorized, 220,000 issued
and outstanding , $5.00 stated value (liquidation value; $1,104,852) 1,104,852 -
------------ ----------
Total redeemable preferred stock 2,226,907 -
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value: 20,000,000 shares authorized:
Series A convertible preferred stock, 620,000 shares authorized,
600,000 issued and outstanding, $5.00 stated value 3,000,000 -
(liquidation value: $3,119,268)
Series C convertible preferred stock, 4,000,000 shares authorized, none issued - -
or outstanding, $5.00 stated value
Series E convertible preferred stock, 5,000,000 shares authorized,
none issued or outstanding, $5.00 stated value - -
Common stock, $.01 par value; 30,000,000 shares
authorized; 240,000 shares issued and outstanding 2,400 2,400
Additional paid-in capital 571,285 (1,808)
Deficit (1,115,831) (12,406)
------------ ----------
Total shareholders' equity (deficit) 2,457,854 (11,814)
------------ ----------
Total liabilities and shareholders' equity $ 13,365,843 $ 592
============ ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-51
3
REGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the year ended December 31, 1997 and the period from November 5,1996
(inception) through December 31, 1996
1997 1996
Broadcast revenue $ 5,302,603 $ -
Less agency commissions (386,598) -
----------- -----------
Net revenue 4,916,005 -
Broadcast operating expenses 4,167,002 -
Time brokerage agreement fees, net 1,223,054 -
Depreciation and amortization expense 655 -
Corporate general and administrative expenses 517,486 12,406
----------- -----------
Operating loss (992,192) (12,406)
Interest expense, net 73,901 -
Other expense, net 37,332 -
----------- -----------
Net loss $(1,103,425) $ (12,406)
=========== ===========
Loss applicable to common shares:
Net loss (1,103,425) (12,406)
Preferred stock dividend requirements (146,175) -
----------- -----------
Loss applicable to common shares $(1,249,600) $ (12,406)
=========== ===========
Basic and diluted net loss per common share $ (5.21) $ (0.05)
=========== ===========
Shares used in basic and diluted per share calculation 240,000 240,000
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-52
4
REGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the year ended December 31, 1997 and the period November 5, 1996 (inception)
through December 31, 1996
ADDITIONAL
PAID-IN
COMMON STOCK PREFERRED STOCK CAPITAL DEFICIT TOTAL
---------------------- -------------------------- ------------ ----------- ------------
SHARES AMOUNT SHARES AMOUNT
Balance, November 5, 1996 - - - - - - -
(inception)
Issuance of common stock 240,000 $ 2,400 $ (1,808) $ 592
Net loss $ (12,406) (12,406)
---------- ---------- ------------ ------------ ------------ ----------- ------------
Balance December 31, 1996 240,000 2,400 (1,808) (12,406) (11,814)
Contribution from common shareholders 600,000 600,000
Issuance of Series A 600,000 $ 3,000,000
preferred stock 3,000,000
Preferred dividends on Series B and D
redeemable stock (26,907) (26,907)
Net loss (1,103,425) (1,103,425)
---------- ---------- ------------ ------------ ------------ ----------- ------------
Balances, December 31, 1997 240,000 $ 2,400 600,000 $ 3,000,000 $ 571,285 $(1,115,831) $ 2,457,854
========== ========== ============ ============ ============ =========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-53
5
REGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the year ended December 31, 1997 and the period November 5, 1996 (inception)
through December 31, 1996
1997 1996
Cash flows from operating activities:
Net loss $(1,103,425) $ (12,406)
Adjustments to reconcile net loss to net
cash used in operating activities:
Provision for bad debts 86,000 -
Net barter expense 25,976 -
Depreciation expense 361 -
Amortization expense 294 -
Changes in operating assets and liabilities:
Accounts receivable (1,593,623) -
Other receivables and other current assets (252,395) -
Accounts payable 513,598 12,406
Accrued expenses 655,078 -
----------- -----------
Net cash used in operating activities (1,668,136) -
----------- -----------
Cash flows used in investing activities:
Cash paid for acquisitions costs (774,762) -
Cash paid for organizational costs (17,637)
Deposits held in escrow for station acquisitions (1,975,000) -
Capital expenditures (54,153) -
----------- -----------
Net cash used in investing activities (2,821,552) -
----------- -----------
Cash flows from financing activities:
Proceeds from the issuance of preferred stock 5,200,000 -
Proceeds from the issuance of common stock - 592
Contributions from common shareholders 600,000 -
Payments for financing costs (297,357) -
----------- -----------
Net cash provided by financing activities 5,502,643 592
----------- -----------
Net increase in cash and cash equivalents 1,012,955 592
----------- -----------
Cash, beginning of period 592 -
----------- -----------
Cash, end of period $ 1,013,547 $ 592
=========== ===========
Cash paid for interest $ 35,000 $ -
=========== ===========
Cash paid for fees under time brokerage agreements $ 1,287,808 $ -
=========== ===========
Noncash investing and financing activities:
Issuance of notes payable for acquisitions $ 7,500,000 $ -
=========== ===========
Issuance of preferred stock for note receivable $ 3,900,000 $ -
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-54
6
REGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS:
a. ORGANIZATION: JS Communications, Inc., a Delaware corporation, was
established in November 1996. In March 1997, JS Communications, Inc.
changed its name to Regent Communications, Inc. (the "Company"). The
Company was formed to acquire, own and operate radio stations in small
and medium-sized markets in the United States. At December 31, 1997,
the Company owned one radio station and provided programming and
other services to 21 radio stations located in 9 markets. See Note 2.
The Company began its broadcasting activities on March 1, 1997 by
providing programming and other services to radio station KBCQ (FM) in
San Diego under a time brokerage agreement and has continued to
operate it as an owned station from and after June 6, 1997. Throughout
the year, the Company also provided programming to 26 other stations
over different periods of time: WEZL (FM) and WXLY (FM) in Charleston,
South Carolina from June 1 to August 31; WXZZ (FM) in Lexington,
Kentucky from July 1 to August 22; WLRO (FM) and WLTO (FM) in
Lexington, Kentucky from September 1 to November 18; the 16 stations
of The Park Lane Group from August 18 to December 31; KRDG (FM), KNNN
(FM), KRRX (FM), and KNRO (FM) in Redding, California from October 10
to December 31; and WSSP (FM) in Charleston, South Carolina from
December 5 to December 31.
b. BASIS OF PRESENTATION: The accompanying consolidated financial
statements include the accounts of Regent Communications, Inc. and its
subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
c. BROADCAST REVENUE: Broadcast revenue for commercial broadcasting
advertisements is recognized when the commercial is broadcast.
d. BARTER TRANSACTIONS: Barter transactions (advertising provided in
exchange for goods and services) are reported at the estimated fair
value of the product or services received. Revenue from barter
transactions is recognized when advertisements are broadcast and
merchandise or services received are charged to expense when received
or used. If merchandise or services are received prior to the
broadcast of the advertising, a liability (deferred barter revenue) is
recorded. If advertising is broadcast before the receipt of the goods
or services, a receivable is recorded. For the year ended December 31,
1997, barter revenue was approximately $492,000, and barter expense
was approximately $518,000.
e. CONCENTRATIONS OF CREDIT RISK: Financial instruments which potentially
subject the Company to concentrations of credit risk consist
principally of accounts receivable. The credit risk is limited due to
the large number of customers comprising the Company's customer base
and their dispersion across several different geographic areas of the
country.
F-55
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS, CONTINUED:
f. PROPERTY, PLANT AND EQUIPMENT: Property and equipment are stated at
cost and depreciated on the straight-line basis over 5 - 10 years for
equipment and 6 years for furniture.
g. 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.
h. PER SHARE DATA: The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"). SFAS 128 requires the presentation of basic and diluted
earnings per share. Basic earnings per share is computed by dividing
income (loss) available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted earnings
per share is computed giving effect to all dilutive potential common
shares that were outstanding during the period. The Company's
convertible preferred stock was anti-dilutive and, therefore, was not
included in the diluted earnings per share computation.
i. TIME BROKERAGE AGREEMENTS: At December 31, 1997, the Company operated
21 radio stations under the terms of time brokerage agreements
(hereafter referred to as "TBA's"). Revenues and expenses related to
such stations are included in operations since the effective dates of
the agreements. Fees paid and received under such agreements are
included in time brokerage agreement fees in the accompanying
Consolidated Statements of Operations.
2. STATION TRANSACTIONS AND PENDING ACQUISITIONS:
On June 6, 1997, the Company acquired substantially all of the assets of
radio station KCBQ(AM) in San Diego, California for $6,000,000, subject
to a 5-year term note payable to the seller. See Note 9. Upon completion
of the purchase, the Company's TBA with the seller, effective since March
1, 1997, was terminated. Pursuant to the TBA and the Asset Purchase
Agreement, the seller has agreed to reimburse the Company for operating
losses incurred by KCBQ (AM) from March 1, 1997 through December 31,
1997. Such operating losses amounted to approximately $136,000.
Additionally, the seller has agreed to reimburse the Company for all
operating losses subsequent to December 31, 1997, while the station is
held for sale. See Note 6. The results of operations of the acquired
business is included in the Company's financial statements since the date
of acquisition.
F-56
8
Notes to CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. STATION TRANSACTIONS AND PENDING ACQUISITIONS, CONTINUED:
On June 16, 1997, the Company entered into a stock purchase agreement to
acquire all of the outstanding capital stock of The Park Lane Group, a
California corporation which owns 16 radio stations. The purchase price
for the stock is $23,075,000 in cash, subject to adjustment as defined in
the agreement. In addition, the Company entered into a TBA with the Park
Lane Group, effective August 18, 1997, which will end upon consummation
of the acquisition described above or upon termination of the related
stock purchase agreement. The Company paid approximately $827,000 in TBA
fees related to the Park Lane Group during 1997. The Company received
Federal Communications Commission (FCC) approval in November 1997 and
expects to close the transaction prior to May 1998. At December 31, 1997,
the Company had placed a $1,175,000 deposit held in escrow pending the
closing of the Park Lane Group transaction.
On June 1, 1997, the Company entered into a TBA with WEZL(FM) and
WXLY(FM) located in Charleston, South Carolina. The TBA was terminated on
August 31, 1997. The Company paid TBA fees of approximately $413,009
related to these stations.
On August 22, 1997, the Company entered into an asset purchase agreement
to acquire substantially all of the assets of radio stations WLRO(FM) and
WLTO(FM) located in Richmond and Nicholasville, Kentucky, respectively,
for $4.5 million in cash. Simultaneously with the execution of the asset
purchase agreement, the Company entered into a TBA with respect to
WLRO(FM) and WLTO(FM), whereby the Company operated the stations from
September 1, 1997 through November 18, 1997 and the Company paid TBA fees
of approximately $45,000 related to these stations. Simultaneously with
the previously mentioned agreements, the Company entered into an
Assignment and Assumption Agreement with HMH Broadcasting ("HMH"),
whereby the Company assigned to HMH all of its rights, title and interest
in, to and under the original asset purchase agreement for WLRO(FM) and
WLTO(FM).
In August 1997, the Company entered into an agreement to acquire the
assets of two radio stations, WRFQ (FM) and WSUY (FM) (collectively,
"Charleston/FMs") in Charleston, South Carolina for $4.5 million. In
December 1997, after it was determined that the Company would be unable
to purchase additional stations in the market, the Company consummated
the acquisitions of the Charleston/FMs subject to a note payable, and
immediately sold the two radio stations to a third-party at no gain or
loss, in exchange for cancellation of the note payable.
F-57
9
Notes to CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. STATION TRANSACTIONS AND PENDING ACQUISITIONS, CONTINUED:
On August 22, 1997, the Company acquired substantially all of the assets
of WXZZ (FM) located in Georgetown, Kentucky for $3,450,000, subject to a
note payable with a third party. A TBA effective July 1, 1997, with WXZZ
(FM) was terminated upon consummation of the purchase. On August 22,
1997, the Company entered into an agreement to sell WXZZ (FM) to HMH
Broadcasting ("HMH") for $3,450,000, in exchange for cancellation of the
previously mentioned $3,450,000 note payable. In conjunction with this
agreement, the Company also entered into a TBA with HMH effective August
22, 1997, with respect to WXZZ (FM) which was terminated on November 12,
1997, upon consummation of the sale of the station by the Company to HMH.
The Company received TBA fees of approximately $62,254 related to the HMH
TBA.
On October 10, 1997, the Company entered into an Agreement of Merger,
pursuant to which the Company will acquire all of the outstanding capital
stock of Alta California Broadcasting, Inc. ("Alta") (a wholly-owned
subsidiary of Redwood Broadcasting, Inc.), which owns and operates radio
stations KRDG (FM) and KNNN (FM) located in Redding, California. The
purchase price for the stock consists of $1 million in cash and 200,000
shares of the Company's Series E Preferred Stock at a stated value of $1
million, subject to adjustment as defined in the agreement. The closing
is conditioned on, among other things, receipt of FCC and other
regulatory approvals. Additionally, Alta holds an option to purchase, and
is required to purchase prior to closing, all of the assets held by Power
Surge, Inc. for use in the operation of radio stations KRRX (FM) and KNRO
(AM) located in Redding, California. In conjunction with this agreement
and effective October 10, 1997, the Company entered into a TBA with
Redwood Broadcasting, Inc. related to radio stations KRDG (FM), KNNN
(FM), KRRX (FM) and KNRO (AM); payments under the TBA approximated $2,500
during 1997. The TBA will end upon closing of the merger described above
or upon termination of the Agreement of Merger. At December 31, 1997, the
Company has placed a $175,000 deposit held in escrow pending the closing
of the Alta transaction.
On December 5, 1997, the Company entered into an Agreement of Merger with
Faircom, Inc. ("Faircom"), pursuant to which Faircom will be merged with
and into the Company. At the effective date of the merger, each then
outstanding share of Faircom common stock will be exchanged for
approximately 3,850,000 shares of the Company's Series C preferred stock,
subject to adjustment as defined in the agreement. Approximately
300,000 shares of such Series C stock will be subject to the right of the
holder to put such shares to the Company for redemption. Additionally,
the holders of Faircom common stock options at the time of the merger
will receive substitute stock options for the Company's Series C
preferred stock under the Regent Communications, Inc. Faircom Conversion
Stock Option Plan. The closing is conditioned on, among other things,
receipt of FCC and other regulatory approvals, Faircom shareholder
approval, closing of the Park Lane Group acquisition previously
discussed, effectiveness of a Registration Statement to be filed by the
Company, and the conversion of certain Faircom Subordinated Notes into
Faircom Common Stock.
F-58
10
Notes to CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. STATION TRANSACTIONS AND PENDING ACQUISITIONS, CONTINUED:
On December 8, 1997, the Company entered into an asset purchase agreement
with Continental Radio Broadcasting L.L.C. to acquire substantially all
of the assets of radio stations KFLG(AM) and KFLG(FM) located in Bullhead
City, Arizona for $3.6 million in cash, subject to adjustment as defined
in the agreement. The closing is conditioned on, among other things,
receipt of FCC and other regulatory approvals. At December 31, 1997, the
Company has placed a $175,000 deposit held in escrow pending the closing
of the transaction.
On December 17, 1997, the Company entered into an asset purchase
agreement to acquire substantially all of the assets of radio stations
KIXW (AM) and KZXY (FM) located in Apple Valley, California for $6
million in cash, subject to adjustment as defined in the agreement. The
stations are owned by Ruby Broadcasting, Inc. ("Ruby"), a sister
corporation and affiliate of Topaz Broadcasting, Inc. ("Topaz"). The
closing is conditioned on, among other things, receipt of FCC and other
regulatory approvals. The closing is also conditioned on the prior
occurrence of a closing between the Company and Topaz (see below).
Effective January 1, 1998 the Company entered into a TBA with respect to
radio stations KIXW (AM) and KZXY (FM), which will end upon closing of
the acquisition described above or upon the termination of the asset
purchase agreement.
On December 17, 1997, the Company entered into an Agreement of Merger,
pursuant to which the Company will acquire all of the outstanding capital
stock of Topaz. The purchase price for the stock consists of 400,000
shares of the Company's Series E preferred stock at a stated value of $2
million, subject to adjustment as defined in the agreement. The closing
is conditioned on, among other things, receipt of FCC and other
regulatory approvals. Additionally, Topaz is a party to an asset purchase
agreement, and is required to purchase the assets of radio station KIXA
(FM) located in Lucerne Valley, California, prior to closing of the
Agreement of Merger with the Company. In conjunction with this agreement
and effective January 1, 1998, the Company entered into a TBA with Topaz,
including radio station KIXA (FM), which will end upon closing of the
merger described above or upon termination of the Agreement of Merger. At
December 31, 1997, the Company has placed a $400,000 deposit held in
escrow pending the closing of the Ruby and Topaz transactions.
In December 1997, the Company acquired an option to purchase
substantially all of the assets of radio station WSSP (FM) located in
Goose Creek, South Carolina. The purchase price for the option was $1.5
million, subject to a 5 year term note payable to a third party. See Note
9. The term of the option is one year. Due to a lack of complimentary
stations in the market, the Company is currently seeking a buyer for the
option. At December 31, 1997, the cost of the option is included in
Assets Held for Sale in the accompanying Consolidated Balance Sheet. The
Company also entered into a TBA with respect to WSSP (FM) effective
December 5, 1997.
F-59
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
1997 1996
Equipment $ 12,520 $ -
Furniture & Fixtures 968 -
Equipment under installation 40,665 -
---------------- ----------------
54,153 -
Less accumulated depreciation (361) -
---------------- ----------------
$ 53,792 $ -
================ ================
4. OTHER ASSETS:
Other assets consists of the following:
1997 1996
Deferred finance costs $ 297,357 $ -
Organizational costs 17,637 -
Deferred acquisition costs 774,762 -
---------------- ----------------
1,089,756
Less accumulated amortization (294) -
---------------- ----------------
$ 1,089,462 $ -
================ ================
5. ACCRUED EXPENSES:
Accrued expenses at December 31, 1997 consists of the following:
Accrued payroll $ 34,496
Accrued license fees 78,779
Accrued property and other taxes 82,318
Accrued commissions 149,576
Accrued professional services 227,350
Accrued other 82,559
----------------
$ 655,078
================
F-60
12
Notes to CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. PENDING DISPOSITION:
On December 16, 1997, the Company signed a Letter of Intent with a third
party to sell substantially all of the assets of radio station KCBQ (AM)
located in San Diego, California for $6.5 million in cash. The Company is
currently involved in negotiating a definitive agreement and anticipates
the sale will close prior to July 31, 1998. At December 31, 1997, the
KCBQ (AM) assets are stated at cost and are included in Assets Held for
Sale in the accompanying Consolidated Balance Sheet. Net broadcast
revenue of approximately $66,000 and broadcast expenses of approximately
$202,000 related to KCBQ (AM) were included in the Consolidated Statement
of Operations for the year ended December 31, 1997.
7. CAPITAL STOCK:
The Company's Amended and Restated Certificate of Incorporation
authorizes 30,000,000 shares of common stock and 20,000,000 shares of
preferred stock and designates 620,000 shares as Series A Convertible
Preferred Stock ("Series A"), 1,000,000 shares as Series B Senior
Convertible Preferred Stock ("Series B"), 4,300,000 shares as Series C
Convertible Preferred Stock ("Series C"), 1,000,000 shares as Series D
Convertible Preferred Stock ("Series D"), and 5,000,000 shares as Series
E Convertible Preferred Stock ("Series E"). The stated value of all
series of preferred stock is $5 per share.
Series A, Series C, and Series E have the same voting rights as common
stock and may be converted at the option of the holder into one share of
common stock, subject to adjustment, as defined. The Company's Board of
Directors also has the right to require conversion of all shares of
Series A, C and E upon the occurrence of certain events, as defined.
Series B and Series D have no voting power except for specific events, as
defined. Series A, Series C, Series D and Series E have equal rights for
the payment of dividends and the distribution of assets and rights upon
liquidation, dissolution or winding up of the Company. Series B ranks
senior to all other series of preferred stock and may be converted at the
option of the holder into one-half share of common stock, subject to
adjustment, as defined. The Company's Board of Directors also has the
right to require conversion of all shares of Series B and D upon the
occurrence of certain events, as defined.
F-61
13
Notes to CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. CAPITAL STOCK, CONTINUED:
Upon liquidation of the Company, no distribution shall be made (a) to
holders of stock ranking junior to the Series B unless the holders of the
Series B have received the stated value per share, plus an amount equal
to all unpaid dividends or (b) to the holders of stock ranking on a
parity with the Series B, except distributions made ratably on the Series
B and all other such parity stock. Dividends accrue on all series of
preferred stock at a cumulative annual rate of $.35 per share. The
Company may redeem Series A, B, and D at the stated value, plus an amount
equal to all unpaid dividends to the date of redemption, whether or not
declared. The Company is also required to redeem all shares of Series B
and D in the event the closing of the Faircom merger and Park Lane Group
acquisition is terminated or has not occurred on or before June 30, 1998,
at the stated value plus an amount equal to all unpaid dividends to the
date of redemption, whether or not declared. Undeclared dividends in
arrears on all outstanding series of preferred stock amounted to $146,175
at December 31, 1997.
In connection with the issuance of 1,000,000 shares of the Company's
Series B senior convertible preferred stock, the Company received cash
proceeds of $1,100,000 and a promissory note for $3,900,000. The note is
due upon consummation of the Faircom merger as described in Note 2. The
note bears interest at 7%; provided that to the extent dividends have
accrued on the Series B shares but have not been paid, such interest will
be offset against the amount of such accrued but unpaid dividends.
Under the terms of a Stock Purchase Agreement dated December 1, 1997, the
Chief Operating Officer of the Company has agreed to purchase 20,000
shares of Series A Convertible Preferred Stock for $100,000 on or before
the closing of the Company's Park Lane Group acquisition. See Note 2.
Under the terms of a Stock Purchase Agreement dated December 8, 1997, an
existing shareholder of the Company has agreed to purchase 780,000 shares
of Series D Convertible Preferred Stock for $3,900,000 on or before the
closing of the merger with Faircom discussed in Note 2.
8. INCOME TAXES:
The Company recorded no income tax expense or benefit for the years ended
December 31, 1997 and 1996.
F-62
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INCOME TAXES, CONTINUED:
Components of the Company's deferred tax assets and liabilities at
December 31, 1997 and 1996 are as follows:
1997 1996
Deferred tax assets:
Federal and state net operating loss carryforward $ 465,219 $ -
Accounts receivable 27,844 -
Other miscellaneous accruals 33,220 -
---------------- ----------------
526,283 -
Valuation allowance (430,360) -
---------------- ----------------
95,923 -
Deferred tax liabilities:
Depreciation (95,923) -
---------------- ----------------
Net $ - $ -
================ ================
The Company has cumulative federal and state tax loss carryforwards of
approximately $1,163,000 at December 31, 1997. The loss carryforwards
will expire in the year 2012.
9. NOTES PAYABLE:
Notes payable at December 31, 1997 consists of the following:
Promissory note $ 6,000,000
Promissory note 1,500,000
---------------
$ 7,500,000
===============
In connection with the acquisition of radio station KCBQ (AM), the
Company issued to the seller a promissory note for $6,000,000, which is
collateralized by the assets of the station. See Note 2. The note matures
on the earlier of June 6, 2002 or upon the sale of the KCBQ (AM) assets
to a third party. The note does not bear interest prior to the maturity
date, as defined. Interest on the unpaid principal after maturity bears
interest at 10%. As discussed in Note 6, the Company is currently
negotiating the terms of a definitive agreement to sell KCBQ (AM) to an
unrelated third party. As a result, the unpaid principal balance of $6
million has been classified as a current liability at December 31, 1997
in the accompanying Consolidated Balance Sheet.
F-63
15
Notes to CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. NOTES PAYABLE, CONTINUED:
In connection with the acquisition of an option to acquire radio station
WSSP (FM), the Company issued a 5 year term promissory note for $1.5
million to a third party. The terms of the promissory note obligate the
Company to pay the lesser of the principal amount of the note or the
proceeds from a sale of the option to acquire WSSP(FM). The note is
collateralized by the Company's option to acquire WSSP (FM) and matures
on the earlier of December 3, 2002 or upon the sale of the WSSP (FM)
assets to a third party. The note does not bear interest prior to the
maturity date, as defined. Interest on the unpaid principal after
maturity bears interest at 10%. Because the Company is currently
searching for a buyer of its option to acquire WSSP (FM), the unpaid
principal balance of $1.5 million has been classified as a current
liability at December 31, 1997 in the accompanying Consolidated Balance
Sheet. See Note 2.
10. BANK CREDIT FACILITY:
In November 1997, the Company entered into an agreement with a group of
lenders (the "Credit Agreement") which provides for a senior reducing
revolving credit facility with a commitment of up to $55,000,000 expiring
in March 2005 (the "Revolver"). The Credit Agreement is available for
working capital and acquisitions, including related acquisition expenses.
In addition, the Company may request from time to time that the lenders
issue Letters of Credit in accordance with the same provisions as the
Revolver. At December 31, 1997, no revolving loans were outstanding under
the Credit Agreement.
The Credit Agreement requires that the commitment under the Revolver be
reduced quarterly for each of the four quarters in the period ending
December 31, 1999 and by increasing quarterly amounts thereafter, and,
under certain circumstances, requires mandatory prepayments of any
outstanding loans and further commitment reductions. The indebtedness of
the Company under the Credit Agreement is collateralized by liens on
substantially all of the assets of the Company and its operating and
license subsidiaries and by a pledge of the operating and license
subsidiaries' stock, and is guaranteed by those subsidiaries. The Credit
Agreement contains restrictions pertaining to the maintenance of
financial ratios, capital expenditures, payment of dividends or
distributions of capital stock and incurrence of additional indebtedness.
F-64
16
Notes to CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. BANK CREDIT FACILITY, CONTINUED:
Interest under the Credit Agreement is payable, at the option of the
Company, at alternative rates equal to the LIBOR rate (5.75% at December
31, 1997) plus 1.25% to 2.50% or the base rate announced by the Bank of
Montreal plus 0% to 1.25%. The spreads over the LIBOR rate and such base
rate vary from time to time, depending upon the Company's financial
leverage. The Company will pay quarterly commitment fees equal to 3/8% to
1/2% per annum, depending upon the Company's financial leverage, and the
aggregate unused portion of the aggregate commitment under the Credit
Agreement. The Company also is required to pay certain other fees to the
agent and the lenders for the administration of the facilities and the
use of the credit facility. At December 31, 1997, the Company had paid
nonrefundable fees totaling approximately $275,000 which are classified
as other assets in the accompanying Consolidated Balance Sheet. In
addition, the Company is committed to pay the remaining facility fee in
the amount of approximately $500,000 upon the completion of the merger
between the Company and Faircom. See Note 2.
11. LEASES:
The Company and its subsidiaries lease certain equipment and facilities
used in their operations. Future minimum rentals under all noncancelable
operating leases as of December 31, 1997 are payable as follows,
including lease commitments under fine brokerage agreements.
1998 $ 557,208
1999 185,594
2000 104,210
2001 96,135
2002 47,868
Thereafter 120,799
Rental expense was approximately $214,692 and $0 for the years ended
December 31, 1997 and 1996, respectively, including lease rental payments
under time brokerage agreements.
12. EMPLOYEE BENEFIT PLAN
On December 15, 1997 the Company adopted a 401(k) plan effective January
1, 1997 which covers all eligible employees. The Company may make a
matching contribution in any year at the discretion of the Board of
Directors. The Company did not make any such contributions in 1997.
F-65
17
Notes to CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. RECENT PRONOUNCEMENTS:
In June, 1997 the Financial Accounting Standards Board issued Statement
No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS 130 establishes
standards of disclosure and financial statement display for reporting
total comprehensive income and its individual components. It is effective
for the Company in 1998.
14. SUBSEQUENT EVENTS:
In January 1998, the Board of Directors of the Company adopted the Regent
Communications, Inc. 1998 Management Stock Option Plan (the "1998" Plan).
The 1998 Plan provides for the issuance of up to 2,000,000 common shares
in connection with the issuance of nonqualified and incentive stock
options and eligibility is determined by the Company's Board of
Directors. The exercise price of the options is to be not less than the
fair market value at the grant date, except for any 10% owner (as
defined), for whom the option share price must be at least 110% of fair
market value at the grant date. The options expire no later than ten
years from the date of grant, or earlier in the event a participant
ceases to be an employee of the Company. The Company intends to apply the
provisions of APB Opinion 25, "Accounting for Stock Issued to Employees,"
in accounting for the 1998 Plan. Under APB 25, no compensation expense is
recognized for options granted to employees at exercise prices which are
equal to the fair market value of the underlying common stock at the
grant date.
In February 1998 and effective upon consummation of the Faircom merger,
the Board of Directors authorized a grant of incentive stock options to
the Chief Executive Officer and Chief Operating Officer of the Company.
The options will provide the holders with the right to acquire up to
733,333 shares of the Company's common stock at an expected price per
share of $5.00. Of these options, that portion providing for the purchase
of shares having a total fair market value on the grant date of $1
million will be exercisable by each holder in equal 10% increments
beginning on the grant date and on each of the following nine anniversary
dates of the grants. The balance of the options will be exercisable in
equal one-third increments at the end of each of the first three years
following the grant. All options expire on February 28, 2008.
ADDITIONAL UNAUDITED ITEMS:
In March 1998, Waller-Sutton Media Partners, L.P. ("Waller-Sutton")
entered into a commitment letter with Regent which provides for the
investment by Waller-Sutton, subject to negotiation of definitive
agreements and the satisfaction of certain conditions, of at least
$11,500,000 in convertible preferred stock of Regent. This investment
would consist of the purchase from Regent of $10,000,000 of its Series F
Preferred Stock and the acquisition from Blue Chip Capital Fund II, L.P.
and Miami Valley Venture Fund, L.P. of $1,500,000 in principal amount of
Class A and Class B Faircom Subordinated Notes that would be converted to
Faircom Common Stock and exchanged for Series C Preferred Stock in the
Faircom Merger. Waller-Sutton would receive, as part of this investment,
warrants to purchase 820,000 shares of Regent Common Stock at an exercise
price of $5.00 per share. Waller-Sutton has reserved the right to assign
up to $3,500,000 of its investment commitment and an unspecified portion
of its warrant rights to partners or affiliates of Waller-Sutton and/or
other purchasers of Series F Preferred Stock and to so reduce its
investment commitment in respect of the first $3,500,000 of Series F
Preferred Stock purchased by others. One of the conditions precedent to
Waller-Sutton investment in Regent is the consummation of the Faircom
Merger. Upon making its investment, Waller-Sutton will have the right to
elect two members to Regent's Board of Directors.
The Waller-Sutton commitment letter provides that the terms of the Series
F Preferred Stock to be acquired by it will include the right of the
holders to require Regent to repurchase the Series F Preferred Stock at
any time after five years at a price equal to the greater of its fair
market value or the sum of its stated value of $5.00 per share and all
accrued but unpaid dividends thereon (as well as any warrants held by
such holders at a price equal to the fair market value of the Regent
Common Stock less the exercise price). Holders of the Series A, Series B
and Series D Preferred Stock would have similar "put" rights only if the
holders of the Series F Preferred Stock were to exercise their "put"
rights. The Series C and Series E Preferred Stock will not have these
tag-along "put" rights.
In order to induce River Cities Capital Fund Limited Partnership ("River
Cities"), as a holder of Regent's Series A Preferred Stock, to approve
the Faircom Merger, Regent agreed to issue to River Cities, upon
consummation of the Faircom Merger, five-year warrants to purchase 80,000
shares of Regent Common Stock at an exercise price of $5.00 per share. R.
Glen Mayfield, a member of Regent's Board of Directors, serves as the
general partner of River Cities Management Limited Partnership, which is
the general partner of River Cities.
In order to induce General Electric Capital Corporation ("GE Capital"),
as a holder of Regent's Series B Preferred Stock, to approve the addition
of mandatory conversion rights to the terms of the Series B Preferred
Stock in conjunction with issuance of the Series F Preferred Stock,
Regent has agreed to issue to GE Capital, upon issuance of the Series F
Preferred Stock, warrants to purchase 50,000 shares of Regent Common
Stock at an exercise price of $5.00 per share. It is contemplated the
terms of these warrants will be substantially the same as those which are
to be issued to River Cities upon consummation of the Faircom Merger.
F-66
18
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
The Park Lane Group
Menlo Park, California
We have audited the accompanying consolidated balance sheets of The Park Lane
Group and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' deficit and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Park Lane
Group and Subsidiaries as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
Coopers and Lybrand L.L.P.
Menlo Park, California
February 16, 1998
F-67
19
THE PARK LANE GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
-------
ASSETS 1996 1997
--------------- ---------------
Current assets:
Cash and cash equivalents $ 223,292 $ 431,466
Accounts receivable - trade, less allowance for doubtful accounts of
$45,414 in 1997 and $62,375 in 1996 1,292,543 53,009
Prepaid expenses and other current assets 100,201 83,474
--------------- ---------------
Total current assets 1,616,036 567,949
Property and equipment, net 3,156,578 2,502,766
Intangible assets, net 6,515,270 5,937,566
--------------- ---------------
Total assets $ 11,287,884 $ 9,008,281
=============== ===============
LIABILITIES, REDEEMABLE PREFERRED STOCK, CONVERTIBLE
PREFERRED STOCK, COMMON STOCK AND
SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 547,675 $ 94,513
Accrued expenses:
Compensation and related expenses 163,679 86,432
Interest 69,556 45,508
Other 11,521 119,725
Note payable to bank 650,800 70,526
Notes payable to shareholders 120,000 120,000
Current portion, long-term debt 253,809 760,964
--------------- ---------------
Total current liabilities 1,817,040 1,297,668
Long-term debt 6,353,299 5,607,199
--------------- ---------------
Total liabilities 8,170,339 6,904,867
--------------- ---------------
Commitments (Note 6).
Mandatorily redeemable Series B preferred stock, $0.01 par value:
Authorized: 43,000 shares;
Issued and outstanding: 42,805 shares in 1997 and 1996 4,187,127 5,231,150
(Liquidation value: $6,343,735 in 1997 and $5,384,004 in 1996)
Mandatorily redeemable convertible Series C preferred stock, $0.01 par value:
Authorized: 13,500 shares;
Issued and outstanding: 12,021 in 1997 and none in 1996 1,165,849
(Liquidation value: $1,435,656 in 1997 and $1,301,917 in 1996) 1,327,101
--------------- ---------------
Convertible Series A preferred stock, $0.01 par value: 5,352,976 6,558,251
Authorized: 6,117,945 shares;
Issued and outstanding: 5,595,875 shares in 1997 and 1996 5,595,875 5,595,875
(Liquidation value: $5,595,875 in 1997 and 1996)
Class B common stock, $0.01 par value:
Authorized: 3,238,828 shares;
Issued and outstanding: 3,238,821 shares in 1997 and 1996 1,163,612 1,163,612
Class C common stock, $0.01 par value:
Authorized: 1,350,000 shares;
Issued and outstanding: 1,202,100 in 1997 and in 1996 80,915 80,915
Class A common stock, $0.01 par value:
Authorized: 15,000,000 shares;
Issued and outstanding: 797,225 shares in 1997 and 758,944 shares in
1996 386,522 389,202
Note receivable from shareholders - (2,680)
Accumulated deficit (9,462,355) (11,681,761)
--------------- ---------------
Total convertible preferred stock, common stock and other
shareholders' deficit (2,235,431) (4,454,837)
--------------- ---------------
Total liabilities, redeemable preferred stock, convertible
preferred stock, common stock and shareholders' deficit $ 11,287,884 $ 9,008,281
=============== ===============
The accompanying notes are an integral part of these financial statements.
F-68
20
THE PARK LANE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
-------
1995 1996 1997
--------------- ---------------- ----------------
Revenues $ 8,752,202 $ 8,927,500 $ 6,602,650
Less agency commissions (627,219) (588,833) (386,611)
--------------- ---------------- ----------------
Net revenues 8,124,983 8,338,667 6,216,039
--------------- ---------------- ----------------
Operating expenses:
Programming 1,572,305 1,609,415 980,325
Sales and promotion 2,213,329 2,118,918 1,415,164
Engineering 379,988 403,686 264,246
General and administrative 2,877,936 2,827,557 1,680,882
Depreciation and amortization 1,277,833 1,494,636 1,421,198
Corporate administrative expenses 879,652 670,177 746,878
--------------- ---------------- ----------------
Total operating expenses 9,201,043 9,124,389 6,508,693
Operating loss (1,076,060) (785,722) (292,654)
Interest expense (668,504) (695,899) (678,315)
Other expense, net (4,850) (4,850) (43,162)
--------------- ---------------- ----------------
Net loss before accretion (1,749,414) (1,486,471) (1,014,131)
--------------- ---------------- ----------------
Dividends and accretion for redemption on mandatorily
redeemable preferred stock (556,337) (1,154,436) (1,205,275)
--------------- ---------------- ----------------
Net loss available to common shareholders $ (2,305,751) $ (332,035) $ (2,219,406)
=============== ================ ================
Shares used in basic per share calculation 2,567,209 4,973,115 5,202,555
=============== ================ ================
Shares used in diluted per share calculation 2,567,209 4,973,115 5,202,555
=============== ================ ================
Basic net loss per share $ (0.90) $ (0.07) $ (0.43)
=============== ================ ================
Diluted net loss per share $ (0.90) $ (0.07) $ (0.43)
=============== ================ ================
The accompanying notes are an integral part of these financial statements.
F-69
21
THE PARK LANE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
for the years ended December 31, 1997, 1996, and 1995
-------
Series A Class A Class B
Preferred Stock Common Stock Common Stock
------------------------ -------------------- ------------------------
Shares Amount Shares Amount Shares Amount
---------- ----------- ------- --------- --------- -----------
Balances, January 1, 1995 758,944 $ 386,522 1,067,152 $ 477,803
Issuance of class B common stock 1,361,965 631,307
Preferred stock accretion
Preferred stock dividend
Net loss
---------- ----------- ------- --------- --------- -----------
Balances, December 31, 1995 758,944 386,522 2,429,117 1,109,110
Issuance of Class B common stock special delivery
in connection with issuance of Series C stock 809,704 54,502
less $2,177 issuance costs
Issuance of class C common stock
Reclassification of Series A preferred stock to
shareholders deficit due to removal of 5,595,875 $ 5,595,875
redemption requirement
Preferred stock accretion
Preferred stock dividend
Net loss
---------- ----------- ------- --------- --------- -----------
Balances, December 31, 1996 5,595,875 5,595,875 758,944 386,522 3,238,821 1,163,612
Issuance of Class A Common Stock upon exercise of
stock options in exchange for shareholder note 38,281 2,680
Preferred stock accretion
Preferred stock dividend
Net loss
---------- ----------- ------- --------- --------- -----------
Balances, December 31, 1997 5,595,875 $ 5,595,875 797,225 $ 389,202 3,238,821 $1,163,612
========== =========== ======= ========= ========= ===========
Class C Note
Common Stock Receivable
--------------------- from Accumulated
Shares Amount Shareholders Deficit Total
--------- -------- ------------ ------------ ------------
Balances, January 1, 1995 $(6,824,569) $(5,960,244)
Issuance of class B common stock 631,307
Preferred stock accretion (104,662) (104,662)
Preferred stock dividend (451,675) (451,675)
Net loss (1,749,414) (1,749,414)
------------ ------------
Balances, December 31, 1995 (9,130,320) (7,634,688)
Issuance of Class B common stock special delivery
in connection with issuance of Series C stock 54,502
less $2,177 issuance costs
Issuance of class C common stock 1,202,100 $ 80,915 80,915
Reclassification of Series A preferred stock to
shareholders deficit due to removal of 5,595,875
redemption requirement
Preferred stock accretion 1,881,082 1,881,082
Preferred stock dividend (726,646) (726,646)
Net loss (1,486,471) (1,486,471)
--------- -------- ------------ ------------
Balances, December 31, 1996 1,202,100 80,915 (9,462,355) (2,235,431)
Issuance of Class A Common Stock upon exercise of
stock options in exchange for shareholder note $ (2,680) -
Preferred stock accretion (216,650) (216,650)
Preferred stock dividend (988,625) (988,625)
Net loss (1,014,131) (1,014,131)
--------- -------- ---------- ------------ ------------
Balances, December 31, 1997 1,202,100 $ 80,915 $ (2,680) $(11,681,761) $(4,454,837)
========= ======== ========== ============ ============
The accompanying notes are an integral part of these financial statements.
F-70
22
THE PARK LANE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996, and 1995
-------
1995 1996 1997
------------- ------------- ------------
Cash flows from operating activities:
Net loss $(1,749,414) $(1,486,471) $(1,014,131)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 631,113 794,982 779,839
Amortization 646,720 700,955 641,359
Provision for (recovery of) doubtful accounts 158,441 148,959 (16,961)
Deferred interest on convertible note 91,944 101,138 111,027
Accounts receivable (114,738) (135,971) 1,256,495
Prepaid expenses and other assets 133,611 (33,399) 16,727
Accounts payable 46 16,266 (453,162)
Accrued expenses (38,272) 537 30,957
Accrued interest 25,167 (49,829) (24,048)
----------- ----------- -----------
Net cash provided by (used in) operating activities (215,382) 57,167 1,328,102
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of radio stations (3,163,963) -
Purchases of property and equipment (189,079) (211,612) (126,027)
Acquisition of other assets (63,655)
----------- ----------- -----------
Net cash used in investing activities (3,353,042) (211,612) (189,682)
----------- ----------- -----------
Cash flows from financing activities:
(Payments on) borrowings under note payable to bank 179,800 (16,000) (580,274)
Proceeds from issuance of convertible notes 310,000
Proceeds from issuance of Series A stock
Proceeds from issuance of Series B stock 3,318,685 5,920
Proceeds from issuance of Series C stock 862,202
Borrowings under long-term debt and capital leases 3,840,721
Principal payments on long-term debt and capital leases (404,233) (825,926) (4,190,693)
----------- ----------- -----------
Net cash provided by (used in) financing activities 3,404,252 26,196 (930,246)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (164,172) (128,249) 208,174
Cash and cash equivalents, beginning of year 515,713 351,541 223,292
----------- ----------- -----------
Cash and cash equivalents, end of year $ 351,541 $ 223,292 $ 431,466
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING
ACTIVITY
Conversion of deferred interest to convertible note $ 91,944 $ 101,138
Conversion of convertible notes to Series A preferred stock $ 20,000
Conversion of convertible notes to Series B stock $ 310,000
Financing of acquisitions through notes payable $ 1,086,350
DISCLOSURE OF EQUITY ITEMS:
Property and equipment acquired under capital leases $ 307,750 $ 112,131
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid $ 552,629 $ 646,592 $ 590,451
The accompanying notes are an integral part of these financial statements.
F-71
23
THE PARK LANE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
1. Organization and Business:
--------------------------
The Park Lane Group and Subsidiaries (the Company or Park Lane) own and
operate commercial radio stations in California and Arizona. The Company
was formed in 1990 and through December 31, 1997, had acquired 16 stations
in seven markets. The Company's subsidiaries include the following wholly
owned entities: Park Lane Redding Radio, Inc., Park Lane Regency Radio,
Inc., Park Lane Chico, Inc., Park Lane High Desert, Inc., Park Lane
Northern Arizona, Inc.
The Company's primary customers are local retailers and service providers
who purchase advertising time to promote their goods and services. The
Company's stations also receive a portion of their advertising revenues
from regional and national advertisers such as fast food franchisers,
banks, automotive suppliers and grocery chains who have local outlets in
the Company's markets. No one advertiser at any of the Company's stations
represents a material portion of the station's total advertising revenue
or of accounts receivable in 1997, 1996 or 1995.
In August 1997, the Company entered into an arrangement with Regent
Communications, Inc. (Regent) for the acquisition of all of the
outstanding capital stock of the Company (the acquisition). The
transaction is subject to certain conditions before closing. There can be
no assurance that the transaction will close. Effective August 17, 1997,
the Company also entered into an operating agreement with Regent under
which most of the operations of the Company's radio stations are managed
by Regent and the Company receives a monthly fee based on their
performance, subject to a guaranteed minimum.
2. Summary of Significant Accounting Policies:
-------------------------------------------
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements of the Company include the
accounts of the corporate office and of the radio stations KPPL,
KTPI/KVOY, KSHA/KQMS, KAAA/KZZZ, KRLT/KOWL, KZGL, KFMF, KALF, KATJ/KROY
and KVNA A/F. All significant intercompany accounts and transactions
have been eliminated.
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.
Continued
F-72
24
THE PARK LANE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
2. Summary of Significant Accounting Policies, continued:
------------------------------------------
CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost less accumulated
depreciation. These assets are depreciated on a straight-line basis
over their estimated useful lives of three to 25 years. When assets are
retired or otherwise disposed of, the costs and related accumulated
depreciation are removed from the accounts and any gain or loss from
disposal is included in the results of operations. Assets under capital
leases are amortized over the lesser of their useful lives or the term
of the lease.
Maintenance and repairs are charged to expense as incurred. Major
renewals and betterments are charged to the asset accounts.
INTANGIBLE ASSETS:
Included in intangible assets are goodwill, FCC licenses, noncompete
agreements and tower leases. Goodwill, which represents the excess of
cost of purchased assets over their fair value at the date of
acquisition, is amortized over 15 to 30 years. FCC licenses are
amortized over 15 years. Noncompete agreements are amortized over the
terms of the related agreements which range from six months to 10
years. Tower leases are amortized over the period of the related lease
term, which range from seven to 25 years. Intangible assets are
evaluated for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable.
LONG-TERM INDEBTEDNESS:
The fair value of the Company's long-term indebtedness is based upon
estimates using standard pricing models that take into account the
present value of future cash flows.
REVENUE:
Revenue from the sale of air time is recognized at the time the program
or advertisement is broadcast. Income receivable under the operating
agreement with Regent is recognized on an accrual basis.
Continued
F-73
25
THE PARK LANE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
2. Summary of Significant Accounting Policies, continued:
-------------------------------------------
BARTER TRANSACTIONS:
The Company participates in barter transactions in which advertising
time is exchanged for goods or services. These exchanges are recorded
at the fair market value of the goods or services received for the
value of the advertising time provided, whichever is more clearly
determinable. Revenues from barter transactions are recognized as
income when advertisements are broadcast. Expenses are recognized when
goods or services are received. Barter transactions totaled
approximately $1,068,776, $1,088,884 and $741,978 in 1995, 1996, and
1997, respectively.
ADVERTISING COSTS:
Advertising costs are expensed to operations as incurred. Advertising
costs were $371,748, $751,770, and $519,271 for the years ended
December 31, 1995, 1996, and 1997, respectively.
INCOME TAXES:
The Company accounts for income taxes using the liability method to
calculate deferred income taxes. The realization of deferred tax assets
under this method is based on historical tax positions and expectations
about future taxable income. A valuation allowance has been provided
for deferred tax asset amounts in excess of the amount that can be
realized from existing taxable temporary differences.
CONCENTRATIONS OF CREDIT RISK:
The Company maintains its cash and short-term investments in deposits
with one major U.S. bank; these deposits, therefore, bear the credit
risk associated with these financial institutions.
The Company's radio station customer base consists principally of
businesses located in California and Arizona. Collateral, such as
letters of credit and bank guarantees, are not generally required from
customers. The Company maintains an allowance for potential credit
losses associated with its trade accounts receivable.
Continued
F-74
26
THE PARK LANE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
2. Summary of Significant Accounting Policies, continued:
------------------------------------------
CONCENTRATIONS OF CREDIT RISK, continued:
Under the operating agreement with Regent, the Company's sole source of
income since August 17, 1997 is from Regent Communications who are
responsible for most of the operations of the Company's radio stations.
The Company could be adversely affected by a deterioration in the
financial position of Regent.
EMPLOYEE STOCK PLANS:
The Company accounts for its stock option plan in accordance with
provisions of the Accounting Principles Board's Opinion No. 25 (APB
25), "Accounting For Stock Issued to Employees." In 1995, the Financial
Accounting Standards Board released the Statement of Financial
Accounting Standards No. 123 (FAS), "Accounting for Stock-Based
Compensation." FAS 123 provides an alternative to APB 25. As allowed
under FAS 123, the Company continues to account for its employee stock
plan in accordance with the provisions of APB 25.
RECENT PRONOUNCEMENT:
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130 (SFAS), Reporting Comprehensive Income. SFAS 130 establishes
standards of disclosure and financial statement display for reporting
total comprehensive income and its individual components. It is
effective for the Company's fiscal year 1998.
Also in June 1997, the Financial Accounting Standards Board issued
Statement No. 131 (SFAS 131), Disclosures About Segments of an
Enterprise and Related Information. SFAS 131 changes current practice
under SFAS 14 by establishing a new framework on which to base segment
reporting (referred to as the management approach) and also requires
interim reporting of segment information. It is effective for the
Company's fiscal year 1998.
The Company is studying the implications of these new statements and
the impact of their implementation on the financial statements.
Continued
F-75
27
THE PARK LANE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
3. Balance Sheet Detail:
---------------------
Property and equipment consists of the following:
December 31,
-----------------------------------
1996 1997
---------------- ----------------
Land and buildings $ 960,507 $ 975,564
Transmitter equipment 1,332,770 1,359,972
Studio and technical equipment 1,812,033 1,912,017
Tower and antenna systems 415,901 415,901
Office furniture and equipment 720,057 738,106
Other 175,980 141,715
---------------- ----------------
5,417,248 5,543,275
Less accumulated depreciation and amortization (2,260,670) (3,040,509)
---------------- ----------------
$ 3,156,578 $ 2,502,766
================ ================
The Company leases property and equipment under capital lease agreements
(See Note 6). Leased assets included above are as follows:
December 31,
-----------------------------------
1996 1997
---------------- ----------------
Equipment under capital leases $ 647,516 $ 530,135
Less accumulated amortization (388,505) (278,483)
---------------- ----------------
$ 259,011 $ 251,652
================ ================
Intangible assets consists of the following:
December 31,
-----------------------------------
1996 1997
---------------- ----------------
Goodwill and other $ 6,447,237 $ 6,510,892
Noncompete agreements 772,015 772,015
FCC licenses 1,846,950 1,846,950
---------------- ----------------
9,066,202 9,129,857
Less accumulated amortization (2,550,932) (3,192,291)
---------------- ----------------
$ 6,515,270 $ 5,937,566
================ ================
Continued
F-76
28
THE PARK LANE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
4. Note Payable to Bank:
---------------------
The Company has a revolving line of credit with a bank to borrow up to
$800,000 at an annual rate of prime plus 1.50% (payable monthly) based on
a percentage of certain radio stations' eligible receivables. At December
31, 1997, $70,526 was outstanding under the line of credit. The revolving
line of credit is subject to certain affirmative and negative covenants,
including minimum broadcast cash flow requirements on a periodic basis.
5. Long-Term Debt and Notes Payable:
---------------------------------
LONG-TERM DEBT:
Long-term debt consists of the following:
December 31,
----------------------------------
1996 1997
--------------- ---------------
Long-term notes payable $ 4,862,598 $ 4,685,307
9.875% promissory notes 1,124,163 1,235,190
Capital leases (note 6) 423,612 312,070
Other 196,735 135,596
--------------- ---------------
6,607,108 6,368,163
Less current portion (253,809) (760,964)
--------------- ---------------
$ 6,353,299 $ 5,607,199
=============== ===============
Long-term notes payable at December 31, 1997, consist of a term loan
with Michigan National Bank, and three notes payable of original
principal amounts $310,000, $600,000 and $200,000, relating to the
acquisition of radio stations KTPI/KVOY, KALF and KROY/KATJ.
In March 1997, the Company entered into a refinancing arrangement with
Michigan National Bank which facilitated the consolidation of certain
of the Company's debt obligations. Under the arrangement, the Company
borrowed $3,800,000 under a term loan facility. At December 31, 1997,
$3,619,048 was outstanding under the term loan. The loan bears interest
at LIBOR rate plus 2.75% to 3.75% depending on the leverage of the
Company. The term loan is due in 84 monthly installments of $45,238,
final payment due September 30, 2004.
Continued
F-77
29
THE PARK LANE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
5. Long-Term Debt and Notes Payable, continued:
--------------------------------
LONG-TERM DEBT, continued:
The $310,000 note bears interest at 8%, payable monthly. The principal
is payable in monthly installments from July 1997 to June 2002 at the
rate of 1/120 of the principal balance. The balance is due June 2002.
The note is collateralized by substantially all of the assets of
KTPI/KVOY. In connection with the refinancing discussed below, the note
was made subordinate to the new term loan and line of credit received.
At December 31, 1997, $294,819 was outstanding under the note.
The $600,000 note bears interest at 8%, payable quarterly, and is due
in quarterly installments from August 2000 to May 2005 at the rate of
1/40 of the principal balance. The balance is due May 2005. The note is
collateralized by the assets of KALF, but subordinated to all senior
indebtedness (present or future) of the Company.
The $200,000 note bears interest at 8.50% interest, payable monthly,
and is due in quarterly installments from February 1997 to May 2002 at
the rate of 1/28 of the principal balance. The balance is due May 2002.
The note is collateralized by the assets of KROY/KATJ, but subordinated
to all senior indebtedness (present or future) of the Company. At
December 31, 1997, $171,440 was outstanding under the note.
Repayments of long-term debt, excluding capital leases, (Note 6)
required over each of the years following December 31, 1997 consist of:
1998 $ 651,323
1999 1,892,439
2000 664,012
2001 690,976
2002 633,856
Thereafter 1,523,487
---------------
$ 6,056,093
===============
The weighted average interest rate on short term borrowing as of
December 31, 1997 was 8.5%
Continued
F-78
30
THE PARK LANE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
5. Long-Term Debt and Notes Payable, continued:
--------------------------------
SHAREHOLDER NOTES PAYABLE:
In March 1994, the Company issued a 7% subordinated promissory note for
$120,000, due to a shareholder, which is payable upon demand. Subject
to approval of Series B preferred shareholders and certain performance
criteria the noteholder has the option to demand payment of the notes
with accrued interest on some future date to be determined by mutual
agreement of the parties.
In connection with a Series A convertible redeemable preferred stock
issuance in 1993, the Company issued an $800,000, 9.875% subordinated
promissory note. Interest is payable at the maturity date of the note.
Total interest payable at December 31, 1997 was $435,190 included in
the balance due under the note. The note has been treated as though due
in fiscal 1999 since the Company's current projections do not allow for
earlier redemption and as repayment is subject to the mutual agreement
of BancBoston, the shareholders and the Company under the terms of the
Inter-Investor Agreement dated October 3, 1994.
6. Lease Commitments:
------------------
The Company leases various facilities and equipment under noncancelable
operating leases expiring through 2015. Certain operating leases are
renewable at the end of the lease term. Future minimum lease payments
under noncancelable operating leases and capital leases are as follows:
Capital Operating
Leases Leases
---------------- ----------------
1998 $ 131,951 $ 333,837
1999 109,309 237,969
2000 75,124 139,299
2001 34,575 121,963
2002 5,201 108,564
Thereafter 295,652
---------------- ----------------
Total minimum lease payments 356,160 $ 1,237,284
================
Less amount representing future interest (44,090)
----------------
Present value of minimum capital lease payments 312,070
Current portion 109,641
----------------
$ 202,429
================
Continued
F-79
31
THE PARK LANE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
6. Lease Commitments, continued:
-----------------
Rent expense was approximately $394,340, $434,403, and $288,642 for the
years ended December 31, 1995, 1996 and 1997, respectively. In 1997 the
Company entered into an operating agreement with Regent (Note 1) under
which the Company receives reimbursement for certain ongoing rental
expenses.
7. Capital Stock:
--------------
SERIES C FINANCING:
On January 5, 1996, the Company entered into a Securities Purchase
Agreement with Nazem & Company III, L.P. (Nazem), BancBoston Ventures,
Inc. (BancBoston) and certain other investors that provided for up to
$1,363,500 in equity capital. The Company amended its Articles of
Incorporation effective December 22, 1995 to authorize the issuance of
Series C mandatorily redeemable convertible preferred stock and Class C
common stock which are the securities that were sold to the investors
listed above. A Series C unit is comprised of one share of Series C
mandatorily redeemable convertible preferred stock and one hundred
shares of Class C common at a rate of $101 per unit. The Series C
financing also resulted in the Series A class of preferred stock being
reclassified as no longer redeemable at the option of the holder.
Accordingly, amounts previously accreted to the carrying value of the
stock of $2,074,163 were reversed to reduce the Series A preferred
carrying value to the redemption value of the issue in the year ended
December 31, 1996.
Certain terms and conditions of the Series B Securities Purchase
Agreement with BancBoston were also amended. The rights and preferences
of the Series B shares discussed below have been updated to reflect the
amended terms. In addition, under the terms of the BancBoston agreement
809,704 shares of Class B common stock were issued in conjunction with
the first closing of the Series C financing on January 5, 1996 at a
price of $0.01 per share.
COMMON STOCK:
The Class B common stock has special voting rights which provide that
the Company shall not, without first obtaining the approval of a
majority of the then outstanding shares of Class B common stock, (i)
amend or supplement the Articles of Incorporation, (ii) merge,
consolidate, liquidate, or dissolve the Company, (iii) declare a
dividend on Series A convertible preferred, or (iv) purchase the shares
of capital stock of the Company, except in connection with the
Company's 1992 Stock Option Plan and the Series A convertible preferred
agreements.
Continued
F-80
32
THE PARK LANE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
7. Capital Stock, continued:
-------------
COMMON STOCK, continued:
The holders of Class B common stock also have the right to elect that
the Company purchase their shares of common stock, on or after
September 30, 2000 or earlier upon the occurrence of certain events of
default, at a price defined as the greater of fair market value or the
Formula Value per Share (as defined in the Series B Securities Purchase
Agreement). The Company has the right to elect to purchase all the
outstanding shares of Class B common stock, at any one time after
September 30, 2002, at the same price as specified above. The holders
of Class B common stock have the option at any time to convert
outstanding shares into Class A common shares on a one-for-one basis.
At December 31, 1997, 3,238,821 shares of Class A common stock had been
reserved for conversion. The Class B common shareholders also have
certain demand registration rights.
Holders of Class C common - (1) have the right to elect that the
Company purchase their shares of common stock, on or after September
30, 2000, at a price defined as the greater of fair market value or the
Formula Value per Share (as defined in the Series C Securities Purchase
Agreement), and (2) have the right to convert outstanding shares of
Class C common to Class A common on a one-for-one basis. At December
31, 1997, 1,202,100 shares of Class A common stock had been reserved
for conversion.
In connection with the closing of the acquisition of the Company by
Regent only, common stock holders have agreed to waive certain of these
rights.
PREFERRED STOCK:
The Company's preferred stock terms and values at December 31, 1997 are
listed below:
Class A
Common
Reserved
Authorized Outstanding for
Shares Shares Conversion
-------------- -------------- --------------
Series A preferred 6,117,945 5,595,875 5,595,875
Series B preferred 43,000 42,805
Series C preferred 13,500 12,021
-------------- -------------- --------------
6,174,445 5,650,701 5,595,875
============== ============== ==============
Continued
F-81
33
THE PARK LANE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
7. Capital Stock, continued:
-------------
PREFERRED STOCK, continued:
The holders of the Series A convertible preferred stock have certain
demand registration rights commencing six months following the
effective date of an underwritten initial public offering. The Company
is prohibited from issuing any shares of any class of stock, other than
the investor securities to be issued in accordance with the Series C
Securities Purchase Agreement and shares in respect of the outstanding
warrants and the Company's 1992 Stock Option Plan, so long as any
shares of Series B redeemable preferred, or at least 55% of the Class B
common remain outstanding. Once this limitation on issuing capital
stock has been eliminated, the holders of the Series A convertible
preferred stock have rights of first refusal to purchase new
securities. As discussed above, the redemption rights of the Series A
preferred stock were removed in conjunction with the Series C
financing. Other rights are discussed below.
The Series B mandatorily redeemable preferred stockholders have special
voting rights which provide that the Company shall not, without first
obtaining the approval of the majority of the shareholders of the then
outstanding shares of Series B preferred, (i) create any new class of
stock having a preference over Series B preferred, (ii) amend or repeal
the Company's Articles of Incorporation, or (iii) purchase, redeem, or
retire any shares of the capital stock ranking junior to the Series B
redeemable preferred.
The holders of the Series B preferred shares are entitled to receive
dividends at a rate of $15 per share per annum. All dividends are
cumulative and accrue, whether or not declared. When and if no shares
of Series B or Series C preferred remain outstanding, the holders of
the outstanding Series A convertible preferred stock are entitled to
receive noncumulative dividends of $0.08 per share per annum, which are
in preference to any common stock dividends, whenever funds are legally
available and when and if declared by the Board of Directors.
Continued
F-82
34
THE PARK LANE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
7. Capital Stock, continued:
-------------
PREFERRED STOCK, continued:
The holders of Series B preferred shares have a liquidation preference
of an amount equal to $100 per share plus any accrued but unpaid
dividends thereon, before any payment shall be made in respect of the
Series C mandatorily redeemable convertible preferred stock, the Series
A convertible preferred stock or the common stock. After payment to the
holders of Series B and Series C preferred stock, the holders of the
Series A preferred stock have liquidation preferences of an amount
equal to the original issue price of $1.00 per share plus any declared
and unpaid dividends thereon, before any payment shall be made in
respect to the common stock. Upon completion of the distribution
described above, all remaining assets of the Company shall be
distributed to all holders of common stock on a pro rata basis
dependent upon the number of shares of common stock held. In certain
situations specified in the Amended and Restated Articles of
Incorporation, a consolidation or merger of the Company or sale of all
or substantially all of its assets may be deemed to be a liquidation
for purposes of the liquidation preferences.
The Company shall redeem all of the Series B mandatorily redeemable
preferred stock outstanding on September 30, 2001, in the amount of
$100 per share plus any accrued but unpaid dividends thereon. Any time
after September 30, 1999, the Company may at its option redeem all, but
not less than all, of the Series B preferred shares outstanding at the
redemption price stated above.
Holders of Series C mandatorily redeemable convertible preferred stock
- (1) have the right to convert their number of shares held into shares
(or other units) of any subsequent securities as may be issued by the
Company in the first transaction occurring after January 5, 1996, 2)
have special voting rights identical to the rights described below for
the Series B redeemable preferred shares, 3) are entitled to receive
dividends at a rate of $10 per share per annum which are cumulative and
accrue, whether or not declared, 4) have a liquidation preference of an
amount equal to $100 per share plus any accrued but unpaid dividends
thereon, before any payment shall be made in respect of the Series A
convertible preferred stock or the common stock, and 5) have a
mandatory redemption feature which requires the Company to purchase all
of the shares of the Series C preferred stock outstanding on September
30, 2001, in the amount of $100 per share plus any accrued but unpaid
dividends thereon.
The Company is accreting the expected redemption value of Series B and
Series C preferred stock over the period ending when redemption is
estimated to occur.
In connection with the closing of the acquisition of the Company by
Regent only, preferred stock holders have agreed to waive certain of
these rights.
Continued
F-83
35
THE PARK LANE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
7. Capital Stock, continued:
-------------
STOCK OPTIONS, continued:
Under the Company's 1992 Stock Option Plan (the Plan), a total of
1,800,000 shares of Class A common stock have been reserved for
issuance to employees, officers, directors and consultants. Incentive
stock options to purchase shares of the Company's common stock under
the Plan may be granted at not less than 100% of the fair value of the
stock as determined by the Board of Directors, on the date granted. The
options generally have a term of ten years and are generally
exercisable either immediately or over periods of up to four years, as
determined by the Board of Directors.
Activity in the Company's stock option plan consists of the following:
Options
Available Options Exercise
for Grant Outstanding Price Amount
---------- ------------- ------------- ------------
Balances, December 31, 1994 257,882 1,530,000 $0.50-$0.55 $ 810,000
Options granted (140,000) 140,000 $0.50 70,000
Options canceled 150,000 (150,000) $0.50 (75,000)
---------- ------------- ------------
Balances, December 31, 1995 267,882 1,520,000 $0.50-$0.55 805,000
Options granted (822,882) 822,882 $0.07 145,250
Options canceled 717,882 (717,882) $0.07-$0.55 (836,500)
---------- ------------- ------------
Balances, December 31, 1996 162,882 1,625,000 $0.07 113,750
Options canceled 121,719 (121,719) $0.07 (8,520)
Options exercised - (38,281) $0.07 (2,680)
---------- ------------- ------------
Balances, December 31, 1997 284,601 1,465,000 $0.07 $ 102,550
========== ============= ============
The options outstanding and currently exercisable by exercise price at
December 31, 1997 are as follows:
Options Currently
Options Outstanding Exercisable
------------------------------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
---------------------- ------------ ----------- ---------- ------------ ----------
$0.07 1,465,000 6.03 $0.07 1,165,417 $0.07
Continued
F-84
36
THE PARK LANE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
7. Capital Stock, continued:
-------------
PRO FORMA COMPENSATION EXPENSE, continued:
During 1996 and following the dilution to holders of Series A common
stock caused by the Series C financing described above, the Company
repriced all of the outstanding stock options to a revised fair value
of $0.07. All unexercised options were effectively canceled and
regranted. No other terms of the options were altered.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the Plan. Had compensation cost for the Plans been
determined based on the fair value at the grant date for awards in
1997, 1996 and 1995 consistent with the provisions of SFAS No. 123, the
Company's net loss and net loss per share would have been
reduced to the proforma amounts as follows:
Year Ended December 31,
--------------------------------------------------
1995 1996 1997
--------------- --------------- ---------------
Net loss - as reported $ 1,749,414 $ 1,486,471 $ 1,014,131
=============== =============== ===============
Net loss - proforma $ 1,752,908 $ 1,504,018 $ 1,018,631
=============== =============== ===============
Basic and diluted net loss - as reported $ (0.90) $ (0.07) $ (0.43)
=============== =============== ===============
Basic and diluted net loss - proforma $ (0.90) $ (0.07) $ (0.43)
=============== =============== ===============
The fair value of each option grant was estimated on the date of grant
using the minimum value method with the following weighted average
assumptions:
Risk-free interest rate 6.28%
Expected life (years) 4
Expected dividends none
Expected volatility zero
The weighted average expected life was calculated based on the vesting
period and the exercise behavior. The risk-free interest rate was
calculated in accordance with the grant date and expected life
calculated for each subgroup.
Continued
F-85
37
THE PARK LANE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
7. Capital Stock, continued:
-------------
WARRANTS:
The Company has issued warrants to purchase Series A preferred stock at
$1.00 per share as follows:
Number Aggregate Exercise
of Shares Price Period
------------- ------------- -------------------------
63,000 $ 63,000 Through February 1998
42,000 42,000 Through March 1998
22,500 22,500 Through April 1998
240,000 240,000 Through May 1998
75,195 75,195 Through March 1999
45,000 45,000 Through August 1999
34,375 34,375 Through November 2002
------------- -------------
522,070 $ 522,070
============= =============
The holders of these warrants have agreed not to exercise their purchase
rights in conjunction with the acquisition of the Company by Regent only.
Continued
F-86
38
THE PARK LANE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
8. Net income (loss) per share:
----------------------------
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS 128") effective
December 31, 1997. SFAS 128 requires the presentation of basic and diluted
net income (loss) per share. Basic net income (loss) per share is computed
by dividing income (loss) available to common stockholders by the weighted
average number of common shares outstanding for that period. Diluted
income (loss) per share is computed giving effect to all dilutive
potential common shares that were outstanding during the period. Dilutive
potential common shares consist of incremental common shares issuable upon
exercise of stock options and warrants, and conversion of preferred stock
for all periods. All prior period net income (loss) per share amounts have
been restated to comply with SFAS 128.
Year ended December 31,
-----------------------------------------------
1995 1996 1997
----------- ----------- -----------
RECONCILIATION OF NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS USED IN BASIC AND DILUTED PER SHARE
CALCULATIONS:
Net loss before accretion $(1,749,414) $(1,486,471) $(1,014,131)
Dividends and accretion for redemption on mandatorily
redeemable preferred stock (556,337) 1,154,436 (1,205,275)
----------- ----------- -----------
Net loss available to common stockholders for basic and
diluted net loss per share $(2,305,751) $ (332,035) $(2,219,406)
=========== =========== ===========
RECONCILIATION OF SHARES USED IN BASIC AND DILUTED PER
SHARE CALCULATIONS:
Basic net loss per share
Weighted average shares of common stock outstanding 2,567,209 4,973,115 5,202,555
----------- ----------- -----------
Shares used in basic net loss per share calculation 2,567,209 4,973,115 5,202,555
=========== =========== ===========
Basic net loss per share ($0.90) ($0.07) ($0.43)
=========== =========== ===========
Diluted net loss per share
Weighted average shares of common stock outstanding 2,567,209 4,973,115 5,202,555
Dilutive effect of stock options and warrants - - -
Dilutive effect of convertible preferred stock - - -
----------- ----------- -----------
Shares used in diluted net loss per share calculation 2,567,209 4,973,115 5,202,555
=========== =========== ===========
Diluted net loss per share ($0.90) ($0.07) ($0.43)
=========== =========== ===========
F-87
39
THE PARK LANE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
9 Income Taxes:
-------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
1996 1997
------------- -------------
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts $ 25,000 $ 18,000
Net operating loss carryforwards 2,448,000 2,730,000
Accrued liabilities 19,000 35,000
Other 2,000 -
----------- -----------
Total deferred tax assets 2,494,000 2,783,000
Deferred tax liabilities - property, plant and
equipment, principally due to differences in (104,000) (96,000)
depreciation
Valuation allowance (2,390,000) (2,687,000)
----------- -----------
Net deferred taxes $ - $ -
=========== ===========
The change in the valuation allowance was an increase in the allowance of
$543,000, $539,000 and $297,000 in 1995, 1996 and 1997, respectively.
The Company's effective tax rate in 1997 differs from the statutory
federal income tax rate as follows:
1995 1996 1997
--------- --------- --------
Income tax benefit at statutory rate (34.0)% (34.0) % (34.0)%
Net operating loss not benefited 34.0 34.0 34.0
------ ------- ------
Effective tax rate - % - % - %
====== ======= ======
The Company has approximately $7,300,000 and $3,000,000 of federal and
state net operating loss carryforwards available to reduce future taxable
income, respectively. These carryforwards generally expire by 2010 for
federal purposes and 1999 for state purposes, if not utilized, and
represent the losses incurred subsequent to May 1992, the date the Company
began operations as a Subchapter C corporation.
The Tax Reform Act of 1986 substantially changed the rules relative to net
operating loss and tax credit carryforwards in the case of an "ownership
change" of a corporation. Any ownership change, as defined, may restrict
utilization of carryforwards.
F-88
40
INDEPENDENT AUDITORS' REPORT
Alta California Broadcasting, Inc.
We have audited the accompanying consolidated balance sheet of Alta California
Broadcasting, Inc. (a wholly-owned subsidiary of Redwood Broadcasting, Inc.) and
subsidiary as of March 31, 1997 and the related consolidated statements of
operations, stockholder's deficiency and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Alta California Broadcasting, Inc.
and subsidiary as of March 31, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
STOCKMAN KAST RYAN & SCRUGGS, P.C.
Colorado Springs, Colorado
June 25, 1997 (October 10, 1997 as to the matter discussed
in the second and third paragraphs of Note 9)
F-89
41
ALTA CALIFORNIA BROADCASTING, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF REDWOOD BROADCASTING, INC.)
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
1997 1997
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 37,754 $ 11,261
Accounts receivable, net 121,560 212,805
Receivable from related parties (Note 5) 38,286 28,738
Receivable from sale of stations (Note 2) 633,000
Prepaid expenses 10,807 16,113
------------- --------------
Total current assets 841,407 268,917
PROPERTY AND EQUIPMENT, net (Notes 3 and 6) 213,472 208,523
INTANGIBLE ASSETS, net (Note 4) 996,584 935,933
NOTE RECEIVABLE (Note 2) 200,000
OTHER ASSETS 37,963 45,530
------------- --------------
TOTAL $ 2,289,426 $ 1,458,903
============= ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Payable to Redwood Broadcasting, Inc. (Note 5) $ 1,292,025 $ 624,113
Accounts payable 143,500 119,979
Accrued liabilities 194,365 46,617
Payables to related parties (Note 5) 14,500 65,137
Bank borrowings (Note 6) 78,804
Current portion of notes payable (Note 6) 34,517 36,781
Current portion of notes payable to related parties (Note 5) 25,000 25,000
Capital lease obligations (Note 7) 11,994
------------- --------------
Total current liabilities 1,715,901 996,431
NOTES PAYABLE (Note 6) 605,208 577,332
NOTES PAYABLE TO RELATED PARTIES (Note 5) 130,949 26,839
------------- --------------
Total liabilities 2,452,058 1,600,602
------------- --------------
COMMITMENTS (Note 7)
STOCKHOLDER'S EQUITY (DEFICIENCY)
Common stock, no par value; 1,000,000
shares authorized; 30,000 shares issued
and outstanding 225,000 225,000
Accumulated deficit (387,632) (366,699)
------------- --------------
Total stockholder's equity (deficiency) (162,632) (141,699)
------------- --------------
TOTAL $ 2,289,426 $ 1,458,903
============= ==============
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-90
42
ALTA CALIFORNIA BROADCASTING, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF REDWOOD BROADCASTING, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31,
MARCH 31, -----------------------------
1997 1996 1997
(UNAUDITED) (UNAUDITED)
REVENUE
Broadcast revenue $ 545,185 $ 278,902 $ 819,038
Less agency commissions 37,268 22,964 74,739
-------------- ------------- --------------
NET REVENUE 507,917 255,938 744,299
-------------- ------------- --------------
OPERATING EXPENSE
Selling, general and administrative 408,859 217,959 337,262
Broadcasting 339,499 257,457 414,271
Depreciation and amortization 151,544 66,562 99,647
-------------- ------------- --------------
Total 899,902 541,978 851,180
-------------- ------------- --------------
LOSS FROM OPERATIONS (391,985) (286,040) (106,881)
-------------- ------------- --------------
OTHER INCOME (EXPENSE)
Gain on sale of stations (Note 2) 678,206
Loss on sale of land (Note 2) (80,000) (80,000)
Interest expense (104,731) (71,029) (28,213)
Other income - net 59,664 44,873 156,027
-------------- ------------- --------------
Other income (expense), net 553,139 (106,156) 127,814
-------------- ------------- --------------
NET INCOME (LOSS) $ 161,154 $ (392,196) $ 20,933
============== ============= ==============
NET INCOME (LOSS) PER
COMMON SHARE $ 5.37 $ (13.07) $ 0.70
============== ============= ==============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 30,000 30,000 30,000
============== ============= ==============
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-91
43
ALTA CALIFORNIA BROADCASTING, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF REDWOOD BROADCASTING, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIENCY)
- --------------------------------------------------------------------------------
TOTAL
COMMON STOCK STOCKHOLDER'S
-------------------------- ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIENCY)
BALANCES,
APRIL 1, 1996 30,000 $ 225,000 $ (548,786) $ (323,786)
Net income 161,154 161,154
---------- ------------ ------------- ---------------
BALANCES,
MARCH 31, 1997 30,000 225,000 (387,632) (162,632)
Net income (unaudited) 20,933 20,933
---------- ------------ ------------- ---------------
BALANCES,
DECEMBER 31, 1997
(unaudited) 30,000 $ 225,000 $ (366,699) $ (141,699)
========== ============ ============= ===============
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-92
44
ALTA CALIFORNIA BROADCASTING, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF REDWOOD BROADCASTING, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31,
MARCH 31, ----------------------------
1997 1996 1997
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income (loss) $ 161,154 $ (392,196) $ 20,933
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 151,544 66,562 99,647
Gain on sale of stations (678,206)
Loss on sale of land 80,000 80,000
Changes in operating assets and liabilities:
Accounts receivable (46,998) (19,041) (91,245)
Other current assets (3,961) 40,012 (5,306)
Accounts payable and accrued expenses (40,658) (11,193) (171,269)
Other assets 14,854 (78,109) (7,567)
------------- ------------ -----------
Net cash used in operating activities (362,271) (313,965) (154,807)
------------- ------------ -----------
INVESTING ACTIVITIES
Proceeds from sale of stations, net of commissions
paid 588,333
Proceeds from sale of land 370,000 370,000
Purchases of station assets (448,920) (405,159) (34,047)
Increase in receivable from sale of stations (17,000)
Collection of receivable from sale of stations 850,000
------------- ------------ -----------
Net cash provided by (used in) investing activities 509,413 (35,159) 798,953
------------- ------------ -----------
FINANCING ACTIVITIES
Proceeds from borrowings under related party notes 273,675
Proceeds from borrowings under notes 170,000
Borrowings from (repayments to) Redwood Broadcasting, Inc. 651,257 775,516 (767,912)
Principal payments on notes to related parties (529,900) (239,801) (4,110)
Principal payments on notes (445,275) (286,975) (25,612)
Decrease (increase) in net payable to related
parties (215,481) 114,415 60,185
Payments on capital lease obligations (13,664) (10,014) (11,994)
Proceeds from bank borrowings 78,804
------------- ------------ -----------
Net cash provided by (used in) financing
activities (109,388) 353,141 (670,639)
------------- ------------ -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 37,754 4,017 (26,493)
CASH AND CASH EQUIVALENTS,
Beginning of period -- -- 37,754
------------- ------------ -----------
CASH AND CASH EQUIVALENTS,
End of period $ 37,754 $ 4,017 $ 11,261
============= ============ ===========
(continued)
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-93
45
ALTA CALIFORNIA BROADCASTING, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF REDWOOD BROADCASTING, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31,
MARCH 31, ----------------------------
1997 1996 1997
(UNAUDITED) (UNAUDITED)
SUPPLEMENTAL NONCASH INVESTING
AND FINANCING ACTIVITIES
Promissory note received for sale of stations $ 200,000
Receivable for sale of stations 633,000
Assumption of note payable to related party by
Redwood Broadcasting, Inc. (Note 5) $ 100,000
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 103,577 $ 93,320 $ 48,282
(concluded)
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-94
46
ALTA CALIFORNIA BROADCASTING, INC. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF REDWOOD BROADCASTING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS
UNAUDITED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- Alta California Broadcasting, Inc. (Alta) and its
subsidiary, Northern California Broadcasting, Inc. (Northern)
(collectively, the Company), operate in the radio broadcasting
industry. Alta is a wholly-owned subsidiary of Redwood Broadcasting,
Inc. (Redwood) which, in turn, is a majority-owned subsidiary of
Redwood MicroCap Fund, Inc. (MicroCap). Organized for the purpose of
acquiring and/or developing undervalued radio broadcasting properties
located in small to medium sized markets, the Company has embarked upon
an aggressive acquisition and development program and currently
operates radio stations in Northern California.
The accompanying financial statements for the year ended March 31, 1997
only include the operations of radio stations KRDG-FM and KNNN-FM. The
accompanying financial statements for the nine months ended December
31, 1997 include the operations of radio stations KRDG-FM, KNNN-FM,
KNRO-AM and KRRX-FM through October 10, 1997, at which time, Alta
entered into an agreement to sell such stations and a Local Management
Agreement (LMA) with the acquiror. The accompanying financial
statements for the nine months ended December 31, 1996 include the
operations of KRDG-FM and KNNN-FM (beginning in August 1996). See Notes
2 and 9.
INTERIM FINANCIAL STATEMENTS -- The accompanying financial statements
for the nine months ended December 31, 1996 and 1997 are unaudited. In
management's opinion, the financial statements reflect all adjustments
necessary for a fair presentation of the results of these periods, all
adjustments being of a normal and recurring nature.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Alta and its wholly-owned subsidiary, Northern.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
ACCOUNTS RECEIVABLE -- The Company maintains an allowance for doubtful
accounts based upon the expected collectibility of all accounts
receivable. At March 31, 1997, the allowance was $3,200.
PROPERTY AND EQUIPMENT -- Property and equipment are recorded at fair
value as of the date of acquisition of the related station or cost if
purchased subsequently. Depreciation is provided on a straight line
basis over the estimated useful lives of the assets as follow:
buildings and improvements - 10 years; transmitter - 20 years; computer
equipment - 3 years; and technical equipment and furniture and fixtures
- 5 to 7 years. The recoverability of the carrying value of property
and equipment is evaluated periodically in relation to the estimated
value of the radio stations based on their operating performance and
cash flows.
INTANGIBLE ASSETS -- Intangible assets include the radio station
purchase price allocations to license costs and the noncompete
agreement. License costs are amortized over a period of 20 years and
F-95
47
the noncompete agreement is amortized over the three-year period of the
agreement. The recoverability of the carrying value of intangible
assets is evaluated periodically in relation to the estimated value of
the radio stations based on their operating performance and cash flows.
REVENUE RECOGNITION -- The Company's primary source of revenue is the
sale of air time to advertisers. Revenue from the sale of air time is
recorded when the advertisements are broadcast.
BARTER TRANSACTIONS -- Revenue from barter transactions (advertising
provided in exchange for goods and services) is recognized based on the
fair value of the goods or services received when the advertisements
are broadcast. Goods and services received are recognized when used.
INCOME TAXES -- The Company accounts for income taxes using the asset
and liability method. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax bases of
existing assets and liabilities. The effect on deferred taxes of a
change in tax rate is recognized in the period that includes the
enactment date.
PER SHARE AMOUNTS -- Per share amounts are based upon the net income or
loss applicable to common shares and upon the weighted average of
common shares outstanding during the period.
USE OF ESTIMATES -- The preparation of the Company's 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 income and expenses during the reporting period.
Actual results could differ from those estimates.
STATEMENT OF CASH FLOWS -- For purposes of the statement of cash flows,
highly liquid investments, maturing within three months of acquisition,
are considered to be cash equivalents.
CONCENTRATIONS OF RISK -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily
of cash and cash equivalents and receivables. Also, the Company's radio
stations broadcast in Northern California, which results in a risk to
the Company due to the concentration in one geographic area.
2. RADIO STATION ACQUISITIONS AND SALES
The following radio station acquisitions and sales have been completed
by Alta:
KHSL AM/FM -- In 1994, Alta acquired radio stations KHSL-AM/FM licensed
to Chico and Paradise, California, respectively. Subsequent to its
acquisition by Alta, KHSL-AM changed its call letters to KNSN-AM.
In March 1996, Alta entered into separate Asset Sale Agreements to sell
the assets of both KNSN-AM and KHSL-FM, excluding a parcel of land, for
$1,466,333. Simultaneously with signing the Asset Sale Agreements, Alta
entered into a LMA with the purchaser until the sale closed on March
31, 1997, at which time the LMA terminated.
F-96
48
Alta received $633,333 cash and a $200,000 promissory note, bearing
interest at a rate of 7%. As of December 31, 1997, all amounts
receivable from the sale of KHSL-AM/FM had been collected. A gain on
the sale of $678,206 has been recorded in the accompanying statement of
operations for the year ended March 31, 1997.
Management believes that the fair values of its receivables relating to
the sale of the stations are not materially different from their
carrying values.
In April 1996, the parcel of land was sold to an unrelated party for
$370,000. A loss on the sale of $80,000 has been recorded in the
accompanying statement of operations for the year ended March 31, 1997.
KRDG-FM (F/K/A KHZL AND KCFM) -- In March 1995, Alta entered into a LMA
with an option to purchase radio station KCFM-FM licensed to
Shingletown, California, which began commercial broadcasting in August
1995. KCFM-FM primarily serves the Redding, California market. In
September 1995, KCFM-FM changed its call letters to KHZL-FM. In July
1996, Alta completed the acquisition of KHZL-FM, thereby terminating
the LMA. Alta paid $65,000 cash and issued a $155,000 promissory note
as consideration for KHZL-FM (see Note 6). The acquisition was recorded
using the purchase method and the $220,000 purchase price was recorded
as license costs as no other assets of KHZL-FM were acquired. Effective
September 27, 1996, Alta changed KHZL-FM's call letters to KRDG-FM.
KNNN-FM -- In May 1996, Alta entered into an Asset Purchase Agreement
to acquire KNNN-FM licensed to Central Valley, California. The Asset
Purchase Agreement was subsequently assigned to Northern. KNNN-FM
primarily serves the Redding, California market. In August 1996, Alta
began operating KNNN-FM under a LMA pending approval of the transfer of
ownership by the FCC. The purchase price for KNNN-FM was $825,000,
$325,000 of which was paid in cash at closing, and the balance of which
was in the form of a promissory note (see Note 6). Pursuant to the
Asset Purchase Agreement, the seller of KNNN-FM agreed to not compete
in the Redding, California market for a period of three years. The
acquisition was recorded using the purchase method and the purchase
price was allocated to property and equipment, noncompete agreement and
license costs, based on estimated fair values.
KLXR-FM -- In May 1996, Alta entered into an Asset Purchase Agreement
to acquire KLXR-AM, licensed to Redding, California, for a total
purchase price of $100,000. In February 1997, Alta entered into a LMA
with the seller until the purchase is completed, at which time, the LMA
will terminate. The purchase has not yet been completed. Prior to the
closing of the merger (see Note 9), it is anticipated that Alta will
assign its interests in the KLXR agreements to Redwood.
F-97
49
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
MARCH 31, DECEMBER 31,
1997 1997
Buildings and improvements $ 29,437 $ 35,859
Equipment 181,360 208,241
Furniture and fixtures 40,341 40,341
------------ -------------
Total property and equipment 251,138 284,441
Less accumulated depreciation 37,666 75,918
------------ -------------
Property and equipment-- net $ 213,472 $ 208,523
============ =============
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
MARCH 31, DECEMBER 31,
1997 1997
License costs $ 950,489 $ 950,489
Noncompete agreement 100,000 100,000
------------- --------------
Total intangible assets 1,050,489 1,050,489
Less accumulated amortization 53,905 114,556
------------- --------------
Intangible assets-- net $ 996,584 $ 935,933
============= ==============
F-98
50
5. RELATED PARTY TRANSACTIONS
Notes payable to related parties consist of the following:
MARCH 31, DECEMBER 31,
1997 1997
Unsecured note payable to an affiliated entity
controlled by an officer and stockholder of
Redwood (see below) $ 100,000
Unsecured note payable to an affiliated entity
controlled by an officer and stockholder of
Redwood with interest at 12% and principal
and interest due on demand 25,000 $ 25,000
Unsecured notes payable to stockholders of Redwood
with interest at 8% and principal and interest
due on March 31, 1999 30,949 26,839
------------ -------------
Total 155,949 51,839
Less current portion 25,000 25,000
------------ -------------
Total $ 130,949 $ 26,839
============ =============
Management believes that the fair values of its notes payable to
related parties are not materially different from their carrying values
based on the terms and varying characteristics of the notes.
The $100,000 note payable to an affiliated entity was assumed by
Redwood during the nine months ended December 31, 1997, resulting in a
corresponding increase in the Company's payable to Redwood in the
accompanying balance sheet as of such date. The Company has noninterest
bearing payables to Redwood of $1,292,025 and $624,113 as of March 31,
1997 and December 31, 1997, respectively, which have no set repayment
terms. The Company recorded interest expense on the related party notes
of approximately $62,000 for the year ended March 31, 1997.
The Company has receivables from and payables to entities controlled by
an officer and stockholder of Redwood. The receivables and payables
total $38,286 and $14,500, respectively, as of March 31, 1997 and
$28,738 and $65,137, respectively, as of December 31, 1997. Such
balances do not bear interest and have no set repayment terms.
F-99
51
6. NOTES PAYABLE AND BANK BORROWINGS
Notes payable consist of the following:
MARCH 31, DECEMBER 31,
1997 1997
Note payable to seller of KNNN-FM with interest at 8.5%, collateralized
by the common stock of Northern, payable in monthly principal and
interest installments of $6,199 through October 2001 with the
remaining balance due at that date $ 484,725 $ 459,113
Note payable to seller of KRDG-FM with interest at 8.25% and payable
semi-annually, principal payable on July 21, 2004, collateralized
by property and equipment, guaranteed by MicroCap 155,000 155,000
------------ -------------
Total 639,725 614,113
Less current portion 34,517 36,781
------------ -------------
Total $ 605,208 $ 577,332
============ =============
Under the terms of the promissory note agreements, including notes
payable to related parties (see Note 5), future minimum annual
principal payments during the next five fiscal years ending March 31
are as follows: 1998 - $59,517 (including $25,000 note payable on
demand); 1999 - $168,517; 2000 - $40,889; 2001 - $44,503; and 2002 -
$327,248.
As of March 31, 1997 and December 31, 1997, the Company has a $25,000
line of credit agreement with a bank which expires on April 1, 1998.
Bank borrowings under the line of credit agreement bear interest at a
rate of 7.9%, are collateralized by a certificate of deposit of
MicroCap, and are guaranteed by MicroCap. There were no borrowings
under the line of credit agreement as of March 31, 1997. As of December
31, 1997, $25,000 was outstanding under the agreement.
As of December 31, 1997, the Company has a $25,000 line of credit
agreement which expires July 1, 1998. Bank borrowings under the line of
credit agreement bear interest at the prime rate plus 2.5%, are
unsecured and are guaranteed by MicroCap. As of December 31, 1997,
$25,000 was outstanding under the agreement.
As of December 31, 1997, the Company has a note payable to a bank with
a principal balance of $28,804 which is payable in monthly installments
of $900 plus interest through September 2, 2000 when all outstanding
principal and interest is due. The note bears interest at the prime
rate plus 2.5%, is collateralized by equipment and is guaranteed by
Redwood and MicroCap.
Management believes that the fair values of its notes payable are not
materially different from their carrying values based on the terms and
varying characteristics of the notes.
F-100
52
7. LEASE AGREEMENTS
The Company leases land and equipment under operating lease agreements
expiring in various years through 2001 and leases equipment under a
capital lease agreement expiring in 1998. Lease expense under the
operating lease agreements totalled $74,039 for the year ended March
31, 1997.
At March 31, 1997, future minimum lease payments under the lease
agreements are summarized as follows:
CAPITAL OPERATING
LEASE LEASES
Fiscal year ending March 31:
1998 $ 13,858 $ 33,501
1999 16,812
2000 32,944
---------- ----------
Total minimum lease payments 13,858 $ 83,257
==========
Less amount representing interest 1,864
----------
Capital lease obligation $ 11,994
==========
The equipment under capital lease is as follows at March 31, 1997:
Equipment $ 42,416
Less accumulated depreciation 3,361
----------
Net $ 39,055
==========
F-101
53
8. INCOME TAXES
The Company's operations are included in the consolidated federal and
state income tax returns of Redwood. Under Redwood's tax allocation
method, a tax provision is allocated to the Company based upon a
calculation of income taxes as if the Company filed separate income tax
returns.
As of March 31, 1997, Redwood has approximately $375,000 of
consolidated net operating loss carryovers of which approximately
$200,000 were attributable to the Company. The carryovers expire in
various years through 2012 and result in deferred income tax assets of
approximately $68,000. However, because of the uncertainty regarding
future realization of the deferred income tax assets, the Company has
established a valuation allowance of $68,000 as of March 31, 1997. The
valuation allowance decreased by $56,000 during the year ended March
31, 1997.
9. SUBSEQUENT EVENTS
Effective April 1, 1997, the Company acquired an option to purchase
radio stations KNRO-AM and KARZ-FM (KNRO/KARZ) licensed in Redding,
California from Power Surge, Inc. (Power Surge), a wholly-owned
subsidiary of Power Curve, Inc. (Power Curve). Power Surge and Power
Curve are both controlled by Redwood's President. Power Curve acquired
KNRO/KARZ on January 31, 1997 for $480,000 in cash and a $720,000
promissory note. Power Surge operated the stations from February 1,
1997 through March 31, 1997 and received the licenses from Power Curve
on March 31, 1997. Under the terms of the option agreement, the Company
can either (1) purchase KNRO/KARZ for $1,200,000 in cash or (2) issue
1,000,000 shares of its common stock in exchange for all of the issued
and outstanding shares of common stock of Power Surge. The option, as
extended, expires March 31, 1998. Also effective April 1, 1997, the
Company entered into a LMA with Power Surge for a period of one year.
Under the terms of the LMA, the Company is operating KNRO/KARZ and is
obligated to pay Power Surge a monthly fee of $5,000. Effective May 16,
1997, KARZ-FM changed its call letters to KRRX-FM.
On October 10, 1997, Alta entered into an agreement to merge with
Regent Acquisition Corp., a subsidiary of Regent Communications, Inc.
(Regent). Upon closing of the merger, all of the outstanding shares of
common stock of Alta will be redeemed and cancelled. As consideration
for the Alta common stock, Redwood will receive $1,000,000 cash and
200,000 shares of Series E preferred stock in Regent, subject to
certain adjustments at closing. Alta is required to acquire KNRO-AM and
KRRX-FM from Power Surge prior to the closing of the merger. The merger
agreement provides for the formation of a joint venture by Redwood and
Regent to construct an antenna tower which is intended to be leased by
Regent from the joint venture. In the event that these provisions have
not been satisfied prior to closing, the consideration at closing will
be reduced to $975,000 cash and 195,000 shares of stock. If such
provisions are satisfied subsequent to closing, the agreement provides
that Redwood will receive the additional consideration at that time.
- --------------------------------------------------------------------------------
F-102
54
INDEPENDENT AUDITORS' REPORT
KARZ/KNRO (A Division of Merit Broadcasting Corporation)
We have audited the accompanying balance sheet of KARZ/KNRO (A Division of Merit
Broadcasting Corporation) as of December 31, 1996 and the related statements of
operations and of cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of KARZ/KNRO at December 31,1996 and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
STOCKMAN KAST RYAN & SCRUGGS, P.C.
Colorado Springs, Colorado
May 9, 1997
F-103
55
KARZ/KNRO (A Division of Merit Broadcasting Corporation)
BALANCE SHEET
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 4,661
Accounts receivable - net of allowance for
doubtful accounts of $23,074 92,834
Prepaid expenses 10,000
---------
Total 107,495
OPERATING PROPERTY AND EQUIPMENT - Net (Note 3) 70,280
---------
TOTAL $ 177,775
=========
LIABILITIES AND NET LIABILITIES OF DIVISION
CURRENT LIABILITIES
Accounts payable $ 10,178
Accrued liabilities 699
Accrued interest payable to related parties (Note 2) 85,458
Line of credit borrowings (Note 4) 1,617
---------
Total 97,952
DEBT TO RELATED PARTIES (Note 2) 164,297
NET LIABILITIES OF DIVISION (84,474)
---------
TOTAL $ 177,775
=========
See notes to financial statements.
- --------------------------------------------------------------------------------
F-104
56
KARZ/KNRO (A Division of Merit Broadcasting Corporation)
STATEMENT OF OPERATIONS AND NET LIABILITIES OF DIVISION
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
REVENUE
Broadcasting $588,339
Less agency commissions 38,042
--------
Net revenue 550,297
--------
COSTS AND EXPENSES
General and administrative 298,701
Programming and technical 152,611
Sales 104,014
--------
Total 555,326
--------
LOSS FROM OPERATIONS 5,029
INTEREST EXPENSE (Note 2) 17,526
--------
NET LOSS 22,555
TRANSFERS TO OTHER DIVISIONS 8,551
NET LIABILITIES OF DIVISION, Beginning of year 53,368
--------
NET LIABILITIES OF DIVISION, End of year $ 84,474
========
See notes to financial statements.
- --------------------------------------------------------------------------------
F-105
57
KARZ/KNRO (A Division of Merit Broadcasting Corporation)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $(22,555)
Adjustments to reconcile net loss to
net cash provided by activities:
Depreciation 8,887
Changes in operating assets and liabilities:
Accounts receivable 20,256
Accounts payable and accrued liabilities (7,854)
Accrued interest payable to related parties 16,930
--------
Net cash provided by operating activities 15,664
--------
FINANClNG ACTIVITIES
Repayment of line of credit borrowings (17,383)
Transfers to other divisions (8,551)
--------
Net cash used in financing activities (25,934)
--------
NET DECREASE IN CASH (10,270)
CASH, Beginning of year 14,931
--------
CASH, End of year $ 4,661
========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 1,058
========
See notes to financial statements.
- --------------------------------------------------------------------------------
F-106
58
KARZ/KNRO (A Division of Merit Broadcasting Corporation)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - Merit Broadcasting Corporation (the Company) owned and operated
radio stations KARZ-FM and KNRO-AM (together, KARZ/KNRO) in Redding,
California through January 31, 1997, at which time KARZ/KNRO was acquired
by Power Curve, Inc.
The Company owns and operates two other radio stations and accounts for the
activities of the stations as separate divisions. The accompanying
financial statements include only the accounts of the KARZ/KNRO division of
the Company.
Accounts Receivable - Concentrations of credit risk with respect to
receivables are limited due to the large number of customers in diverse
industries and generally short payment terms. Due to these factors, no
additional credit risk beyond amounts provided for collection losses is
believed inherent in the accounts receivable of KARZ/KNRO.
Operating Property and Equipment - Property and equipment is recorded at
cost and is depreciated using accelerated methods over lives as follows:
buildings - 35 years; vehicles - 5 years; towers and improvements - 5 to 10
years; and other equipment - 5 to 7 years. The recoverability of the
carrying value of operating property and equipment is evaluated
periodically in relation to the estimated value of the radio stations based
on their operating performance and non-discounted cash flows.
Income Taxes -- As a division of the Company, KARZ/KNRO is not a taxable
entity. Accordingly, no provision or credit for income taxes has been made
in the accompanying financial statements.
Statement of Cash Flows - For purposes of the statement of cash flows,
highly liquid accounts maturing within three months of acquisition are
considered to be cash equivalents.
Use of Estimates - The preparation of KARZ/KNRO's 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 income and expenses during the reporting period. Actual results
could differ from those estimates.
Geographic Area - KARZ/KNRO broadcasts in Northern California. This results
in a risk to the Company due to the concentration in one geographic area.
F-107
59
2. RELATED PARTY TRANSACTIONS
The Company has debt to its shareholders totalling $164,297 as of December
31, 1996. The debt is unsecured, bears interest at 10% and has no maturity
date. Accrued interest on such debt was $85,458 as of December 31, 1996.
Such debt and the related accrued interest have been recorded in the
accompanying financial statements of KARZ/KNRO as it relates to the
acquisition of assets of KARZ/KNRO.
The Company has debt to a former shareholder totalling $644,825 as of
December 31, 1996. Accrued interest on such debt was $45,867 as of December
31, 1996. Since such debt was incurred for the purchase of treasury stock
of the Company, it has been recorded at the corporate level and has not
been recorded on the accompanying KARZ/KNRO financial statements. Had such
debt been recorded on the accompanying KARZ/KNRO financial statements as of
December 31, 1996, net liabilities would have increased by $690,692 and net
loss would have increased by $29,917.
3. OPERATING PROPERTY AND EQUIPMENT
Operating property and equipment consists of the following at December 31,
1996:
Land $ 23,000
Building 22,644
Towers and improvements 126,099
Equipment 191,856
Vehicles 26,914
--------
Total 390,513
Less accumulated depreciation 320,233
--------
Operating property and equipment -- net $ 70,280
========
4. LINE OF CREDIT
The Company has a $50,000 line of credit agreement with a bank which is
unsecured, bears interest at the bank's index rate plus 1.5% and matured on
February 15, 1997. The Company borrowed $19,000 under the line of credit
agreement in 1995 for the purchase of equipment for KARZ/KNRO. Accordingly,
such borrowings have been recorded on the KARZ/KNRO financial statements.
As of December 31, 1996, the outstanding borrowings under the agreement
totalled $1,617.
5. BUILDING LEASE
KARZ/KNRO leases its offices under a month-to-month operating lease
agreement. Lease expense totalled $19,908 during 1996.
- --------------------------------------------------------------------------------
F-108
60
INDEPENDENT AUDITORS' REPORT
Power Surge, Inc.
We have audited the accompanying balance sheet of Power Surge, Inc. (a
subsidiary of Power Curve, Inc.) as of December 31, 1997 and the related
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Power Surge, Inc. as of December 31, 1997,
and the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
STOCKMAN KAST RYAN & SCRUGGS, P.C.
Colorado Springs, Colorado
March 13, 1998
F-109
61
POWER SURGE, INC.
(A SUBSIDIARY OF POWER CURVE, INC.)
BALANCE SHEET
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 82
Income taxes receivable from Power Curve, Inc. (Note 5) 4,000
Receivable from related party (Note 7) 65,137
-----------
Total current assets 69,219
PROPERTY AND EQUIPMENT, net (Notes 2 and 3) 152,273
INTANGIBLE ASSETS, net (Notes 2 and 4) 953,477
-----------
TOTAL $ 1,174,969
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Payable to related party (Note 7) $ 2,133
Accounts payable 117
-----------
Total current liabilities 2,250
-----------
STOCKHOLDERS' EQUITY
Common stock, no par value; 1,500
shares authorized; 1,250 shares issued
and outstanding 1,202,500
Accumulated deficit (29,781)
-----------
Total stockholders' equity 1,172,719
-----------
TOTAL $ 1,174,969
===========
See notes to financial statements.
- --------------------------------------------------------------------------------
F-110
62
POWER SURGE, INC.
(A SUBSIDIARY OF POWER CURVE, INC.)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
REVENUE
Broadcast revenue $ 74,704
Less agency commissions 5,893
---------
Net revenue 68,811
---------
OPERATING EXPENSE
Selling, general and administrative 66,410
Broadcasting 20,622
Depreciation and amortization 106,314
---------
Total 193,346
---------
LOSS FROM OPERATIONS (124,535)
OTHER INCOME (Notes 7 and 8) 90,754
---------
LOSS BEFORE INCOME TAX BENEFIT (33,781)
INCOME TAX BENEFIT (Note 5) 4,000
---------
NET LOSS $ (29,781)
=========
NET LOSS PER COMMON SHARE $ (23.82)
=========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,250
=========
See notes to financial statements.
- --------------------------------------------------------------------------------
F-111
63
POWER SURGE, INC.
(A SUBSIDIARY OF POWER CURVE, INC.)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
COMMON STOCK TOTAL
-------------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
Issuance of common stock 1,250 $ 2,500 $ 2,500
Contribution of radio station
assets (Note 2) 1,200,000 1,200,000
Net loss for year ended
December 31, 1997 $ (29,781) (29,781)
-------- -------------- ------------- ---------------
BALANCES,
DECEMBER 31, 1997 1,250 $ 1,202,500 $ (29,781) $ 1,172,719
======== ============== ============= ===============
See notes to financial statements.
- --------------------------------------------------------------------------------
F-112
64
POWER SURGE, INC.
(A SUBSIDIARY OF POWER CURVE, INC.)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (29,781)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 106,314
Changes in operating assets and liabilities:
Accounts receivable 9,436
Income taxes receivable (4,000)
Receivable from related party (65,137)
Payable to related party 2,133
Accounts payable and accrued expenses 117
-----------
Net cash provided by operating activities 19,082
INVESTING ACTIVITIES-- Purchase of property and equipment (21,500)
FINANCING ACTIVITIES-- Issuance of common stock 2,500
-----------
NET INCREASE IN CASH 82
CASH, Beginning of year --
-----------
CASH, End of year $ 82
===========
SUPPLEMENTAL NONCASH INVESTING
AND FINANCING ACTIVITY
Contribution of radio station assets (Note 2):
License cost $ 890,564
Property and equipment 150,000
Noncompete agreement 150,000
Accounts receivable 9,436
-----------
Total $ 1,200,000
===========
See notes to financial statements.
- --------------------------------------------------------------------------------
F-113
65
POWER SURGE, INC.
(A SUBSIDIARY OF POWER CURVE, INC.)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- Power Surge, Inc. (the Company), a Delaware
corporation, operates in the radio broadcasting industry. The Company
is 80% owned by Power Curve, Inc. (Power Curve) and 20% owned by
Redwood Broadcasting, Inc. (Redwood Broadcasting) as of December 31,
1997. The Company was incorporated on October 16, 1996, however, the
Company did not have any operations prior to 1997.
PROPERTY AND EQUIPMENT -- Property and equipment are recorded at fair
value as of the date of acquisition of the related station or cost if
purchased subsequently. Depreciation is provided on a straight line
basis over the estimated useful lives of the assets as follow:
buildings and improvements - 10 years; transmitter - 20 years; computer
equipment - 3 years; technical equipment - 7 years; furniture and
fixtures - 5 years; and vehicles - 5 years. The recoverability of the
carrying value of property and equipment is evaluated periodically in
relation to the estimated value of the radio stations based on their
operating performance and cash flows.
INTANGIBLE ASSETS -- Intangible assets include the radio station
purchase price allocations to license costs and the noncompete
agreement. License costs are amortized over a period of 20 years and
the noncompete agreement is amortized over the three-year period of the
agreement. The recoverability of the carrying value of intangible
assets is evaluated periodically in relation to the estimated value of
the radio stations based on their operating performance and cash flows.
REVENUE RECOGNITION -- Revenue from the sale of air time is recorded
when the advertisements are broadcast.
BARTER TRANSACTIONS -- Revenue from barter transactions (advertising
provided in exchange for goods and services) is recognized based on the
fair value of the goods or services received when the advertisements
are broadcast. Goods and services received are recognized when used.
INCOME TAXES -- The Company accounts for income taxes using the asset
and liability method. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax bases of
existing assets and liabilities. The effect on deferred taxes of a
change in tax rate is recognized in the period that includes the
enactment date.
LOSS PER COMMON SHARE -- Loss per common share is based upon the net
loss applicable to common shares and the weighted average of common
shares outstanding during the period.
USE OF ESTIMATES -- The preparation of the Company's 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 income and expenses during the reporting period.
Actual results could differ from those estimates.
F-114
66
STATEMENT OF CASH FLOWS -- For purposes of the statement of cash flows,
highly liquid investments, maturing within three months of acquisition,
are considered to be cash equivalents.
2. RADIO STATION ACQUISITIONS
On January 31, 1997, Power Curve acquired radio stations KNRO-AM (KNRO)
and KARZ-FM (KARZ), licensed in Redding, California, from Merit
Broadcasting Corporation for $480,000 in cash and a $720,000 promissory
note. the Company operated the stations from February 1, 1997 through
March 31, 1997 under a Local Marketing Agreement (LMA) with Power
Curve. On March 31, 1997, the stations were contributed to the Company
by Power Curve. This contribution was recorded as contributed capital
of $1,200,000 and was allocated to accounts receivable, property and
equipment, noncompete agreement and license costs based on their
respective estimated fair values. Since Power Curve is the parent
company of the Company and it was the intention to have the Company own
and operate the stations upon acquisition, the accompanying financial
statements have been prepared as if the Company owned the stations
during the period from February 1, 1997 through March 31, 1997 (the
date of the contribution).
The following represents the unaudited pro forma results of operations
for the year ended December 31, 1997 as if the acquisition of KNRO and
KARZ had occurred on January 1, 1997: net revenue - $106,160; loss from
operations - $151,394; net loss - $56,640; and, net loss per common
share - $45.31.
Effective April 1, 1997, Alta California Broadcasting, Inc. (Alta), a
wholly-owned subsidiary of Redwood Broadcasting, acquired an option to
purchase KNRO and KARZ from the Company. Under the terms of the option
agreement, Alta can either (1) purchase the stations for $1,200,000 in
cash or (2) issue 1,000,000 shares of its common stock in exchange for
all of the issued and outstanding shares of common stock of the
Company. The option terminates on March 31, 1998. Concurrently, Alta
entered into a LMA with the Company for a period of one year. Under the
terms of the LMA, Alta is operating KNRO and KARZ and is obligated to
pay Power Surge a monthly fee of $5,000. Accordingly, the operating
activities of the radio stations from April 1, 1997 through December
31, 1997 are not reflected in the accompanying financial statements.
Effective May 16, 1997, KARZ changed its call letters to KRRX-FM.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Buildings and improvements $ 75,000
Equipment 40,000
Transmitter 30,000
Vehicle 21,500
Furniture and fixtures 5,000
-------------
Total property and equipment 171,500
Less accumulated depreciation 19,227
-------------
Property and equipment-- net $ 152,273
=============
F-115
67
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
License costs $ 890,564
Noncompete agreement 150,000
--------------
Total intangible assets 1,040,564
Less accumulated amortization 87,087
--------------
Intangible assets-- net $ 953,477
==============
5. INCOME TAXES
The Company's operations are included in the consolidated federal and
state income tax returns of Power Curve. Under Power Curve's tax
allocation method, a tax provision is allocated to the Company based
upon a calculation of income taxes as if the Company filed separate
income tax returns.
The tax effects of temporary differences that give rise to deferred
income taxes at December 31, 1997 are as follows:
Deferred income tax asset -- difference between book
and tax basis of intangible assets $ 9,400
Valuation allowance (9,400)
-----------
Net deferred income taxes $ --
===========
The valuation allowance increased by $9,400 during 1997.
The following summary reconciles income taxes computed at the federal
statutory rate with the income tax benefit:
Federal income tax benefit computed at statutory rate $ 11,486
Tax effect of:
State income taxes, net of federal benefit 1,914
Establishment of valuation allowance (9,400)
-----------
Income tax benefit $ 4,000
===========
6. ALTA MERGER AGREEMENT
Effective October 10, 1997, Alta entered into an agreement to merge
with Regent Acquisition Corp., a subsidiary of Regent Communications,
Inc. Alta is required to exercise its option and complete its
acquisition of KNRO and KRRX from the Company prior to the closing of
the merger.
F-116
68
7. RELATED PARTY TRANSACTIONS
The Company has a receivable from Alta and a payable to an entity under
common control of $65,137 and $2,133, respectively, as of December 31,
1997. The Company recorded income under its LMA with Alta (see Note 2)
totalling $45,000 which is included in other income in the accompanying
statement of operations.
8. OTHER INCOME
During 1997, the Company entered into a purchase agreement to acquire
stations KVVQ-AM and KVVQ-FM in Hesperia, California. As the result of
an upset bid for the stations by a third party, the Company waived its
rights under the purchase agreement and received compensation of
$50,000, which has been recorded as other income in the accompanying
statement of operations.
- --------------------------------------------------------------------------------
F-117
69
REPORT of INDEPENDENT ACCOUNTANTS
To the Partners of Continental Radio Broadcasting, L.L.C.
We have audited the accompanying balance sheet of Continental Radio
Broadcasting, L.L.C. ("the Company") as of December 31, 1997 and the related
statement of operations, partner's deficit and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1997, and the results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.
Coopers & Lybrand, L.L.P.
Cincinnati, Ohio
February 10, 1998
F-118
70
CONTINENTAL RADIO BROADCASTING, L.L.C.
BALANCE SHEET
as of December 31, 1997
ASSETS
Current assets:
Cash $ 373
Trade accounts receivable, less allowance for doubtful accounts of $26,000 172,465
Other receivables 7,544
Prepaid expenses 4,125
--------------
Total current assets 184,507
Property, plant and equipment, net 303,560
Intangible assets, net 948,647
Other assets, net 127,527
--------------
Total assets $ 1,564,241
==============
LIABILITIES AND PARTNER'S DEFICIT
Current liabilities:
Accounts payable $ 46,683
Book overdraft 8,950
Accrued expenses 69,066
Current portion of long-term debt 1,670,000
--------------
Total current liabilities 1,794,699
Long-term debt 90,000
--------------
Total liabilities 1,884,699
--------------
Commitments and contingencies
Partner's Deficit:
Capital contributions $ 10,000
Deficit (330,458)
--------------
Total partner's deficit (320,458)
--------------
Total liabilities and partner's deficit $ 1,564,241
==============
The accompanying notes are an integral part of the financial statements.
F-119
71
CONTINENTAL RADIO BROADCASTING, L.L.C.
STATEMENT OF OPERATIONS
for the year ended December 31, 1997
Broadcast revenue $ 1,095,761
Less agency commissions 73,905
-------------
Net revenue 1,021,856
Broadcast operating expenses 438,482
Corporate general and administrative expenses 346,055
Depreciation and amortization 241,744
-------------
Operating loss (4,425)
Interest expense 186,127
Loss on disposal of fixed assets 73,219
-------------
Net loss $ (263,771)
=============
The accompanying notes are an integral part of the financial statements.
F-120
72
CONTINENTAL RADIO BROADCASTING, L.L.C.
STATEMENT OF PARTNER'S DEFICIT
for the year ended December 31, 1997
CAPITAL
CONTRIBUTION DEFICIT TOTAL
--------------- ---------------- ----------------
Balances, December 31, 1996 $ 10,000 $ (66,687) $ (56,687)
Net loss (263,771) (263,771)
--------------- ---------------- ----------------
Balances, December 31, 1997 $ 10,000 $ (330,458) $ (320,458)
=============== ================ ================
The accompanying notes are an integral part of the financial statements.
F-121
73
CONTINENTAL RADIO BROADCASTING, L.L.C.
STATEMENT OF CASH FLOWS
for the year ended December 31, 1997
Cash flows from operating activities:
Net loss $ (263,771)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 141,855
Amortization 99,889
Loss on disposal of fixed assets 73,219
Changes in operating assets and liabilities:
Accounts receivable (51,477)
Other receivables, prepaid expenses and other assets (9,302)
Accounts payable 23,400
Accrued expenses 55,663
-------------
Net cash provided by operating activities 69,476
Cash flows from investing activities:
Capital expenditures (37,480)
Proceeds from sale of equipment 24,500
-------------
Net cash used in investing activities (12,980)
Cash flows from financing activities:
Borrowings of long term debt 30,000
Payments of long term debt (170,000)
Book overdraft 8,950
-------------
Net cash used in financing activities (131,050)
-------------
Net decrease in cash (74,554)
-------------
Cash, beginning of period 74,927
-------------
Cash, end of period $ 373
=============
Cash paid for interest $ 142,589
=============
The accompanying notes are integral part of the financial statements.
F-122
74
CONTINENTAL RADIO BROADCASTING, L.L.C.
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS:
a. ORGANIZATION: Continental Radio Broadcasting, L.L.C. (the Company), an
Arizona corporation, owns and operates radio stations KFLG (FM) and
KFLG (AM) located in Bullhead City, Arizona.
b. BROADCAST REVENUE: Broadcast revenue for commercial broadcasting
advertisements is recognized when the commercial is broadcast.
c. BARTER TRANSACTIONS: Revenue from barter transactions (advertising
provided in exchange for goods and services) is recognized as income
when advertisements are broadcast, and merchandise or services
received are charged to expense when received or used. If merchandise
or services are received prior to the broadcast of the advertising, a
liability (deferred barter revenue) is recorded. If advertising is
broadcast before the receipt of the goods or services, a receivable is
recorded. For the year ended December 31, 1997, barter revenue was
approximately $118,708 and barter expense was approximately $114,545.
d. CONCENTRATIONS OF CREDIT RISK: Financial instruments which potentially
subject the Company to concentrations of credit risk consist
principally of accounts receivable. The credit risk is limited due to
the large number of customers comprising the Company's customer base.
e. PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Depreciation is provided using accelerated methods based upon the
estimated useful lives of the respective assets, ranging from five to
seven years. When assets are retired or otherwise disposed of, the
cost of the asset and the related accumulated depreciation are removed
from their respective accounts and any resulting gain or loss is
recognized.
f. INTANGIBLE ASSETS: Intangible assets are stated at cost and amortized
on the straight line basis over fifteen years. The carrying value of
intangible assets is reviewed by the Company when events or
circumstances indicate that the recoverability of an asset may be
impaired. If this review indicates that goodwill and licenses will not
be recoverable, as determined based on the undiscounted cash flows of
the entity over the remaining amortization period, the carrying value
of the goodwill and licenses will be reduced accordingly.
g. OTHER ASSETS: Other assets consist primarily of a non-compete
agreement, which is being amortized on the straight line method over 5
years. See Note 5.
F-123
75
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS, CONTINUED:
h. 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.
i. INCOME TAXES: Federal and state income taxes are not provided for in
the accompanying financial statements, as the partners are taxed at
federal and state levels individually on their share of earnings.
2. ASSET SALE AGREEMENT:
On December 9, 1997, the Company entered into an agreement to sell
substantially all of the assets of radio stations KFLG (FM) and KFLG (AM)
to Regent Communications, Inc. for approximately $3,600,000 in cash,
subject to adjustment. The closing is conditioned on, among other things,
receipt of FCC and other regulatory approvals.
3. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1997 consisted of the following:
Equipment $ 398,430
Furniture and fixtures 63,597
------------
462,027
Less accumulated depreciation (158,467)
------------
$ 303,560
============
F-124
76
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. INTANGIBLE ASSETS:
Intangible Assets at December 31, 1997 consisted of the following:
Broadcast intangibles $ 662,000
Goodwill 360,500
------------
1,022,500
Less accumulated amortization (73,853)
------------
$ 948,647
============
5. OTHER ASSETS:
Other assets at December 31, 1997 consisted of the following:
Non-compete agreement $ 150,000
Other 11,643
------------
161,643
Less accumulated amortization (34,116)
------------
$ 127,527
============
6. LONG-TERM DEBT:
Long-term debt at December 31, 1997 consisted of the following:
Variable rate term loan (10.5% December 31, 1997),
collateralized by substantially all assets of
the Company $ 1,260,000
Subordinated notes payable (12.0% at December 31, 1997) 380,000
Non-compete obligation 120,000
-------------
1,760,000
Less current maturities (1,670,000)
-------------
Long-term debt $ 90,000
=============
F-125
77
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. LONG-TERM DEBT:, CONTINUED
Borrowings under the variable rate term loan bear interest at the bank's
prime rate plus the Floating Rate Spread, as defined in the agreement
(ranging from 1.5% to 5%) and the loan matures on December 31, 2003 and
has been personally guaranteed by a partner in the Company. The credit
agreement requires mandatory repayment of up to 50% of Excess Cash Flow,
as defined, within 120 days after the Company's year end. The Company may
prepay the note, in whole or in part, subject to a premium ranging from
1% to 3% prior to December 31, 2000. Subsequent prepayments may be made
without premium or penalty. The Credit Agreement contains certain
restrictive covenants which, among other things, requires the Company to
meet certain financial tests. During 1997, the Company was not in
compliance with certain covenants included in its Credit Agreement. As a
result, the outstanding principal balance has been classified as a
current liability at December 31, 1997 in the accompanying Balance Sheet.
The subordinated promissory notes bear interest at 12% and mature on
September 30, 2004. Interest is payable annually to the extent of Net
Cash Available, as defined. The Company may prepay the notes at any time
without premium or penalty. All principal and interest related to the
notes becomes due and payable in the event of the sale of the assets of
the Company. As discussed in Note 2, the Company entered into an Asset
Sale Agreement on December 9, 1997, which is expected to close prior to
May 1998. As a result, the outstanding principal and interest due under
the subordinated notes has been classified as a current liability at
December 31, 1997.
In connection with the acquisition of radio stations KFLG (FM) and (AM)
on December 1, 1996, the Company entered into a non-compete agreement
with the former owner of the stations, which requires the Company to pay
the former owner $30,000 per year for five years beginning on December 1,
1997.
7. LEASES:
The Company leases certain equipment and facilities used in their
operations. Future minimum rentals under all noncancelable operating
leases as of December 31, 1997 are payable as follows:
1998 $ 36,820
1999 31,774
2000 24,200
2001 24,200
2002 24,200
Rental expense was approximately $34,000 for the year ended December 31, 1997.
8. RELATED PARTY TRANSACTIONS:
During 1996, the Company issued $350,000 of subordinated promissory
notes to a partner in the Company.
During 1997, the Company issued a $30,000 subordinated promissory
note to a partner in the Company.
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78
REPORT OF INDEPENDENT ACCOUNTANTS
To Ruby Broadcasting, Inc.
We have audited the accompanying Statement of Revenues and Direct Expenses of
Radio Station KZXY (FM)("KZXY") for the years ended December 31, 1997 and 1996.
This Statement of Revenues and Direct Expenses is the responsibility of KZXY's
management. Our responsibility is to express an opinion on the Statement of
Revenues and Direct Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Revenues and Direct Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the Statement
of Revenues and Direct Expenses. We believe that our audits provide a reasonable
basis for our opinion.
The accompanying statement was prepared to present the Revenue and Direct
Expenses of KZXY and is not intended to be a complete presentation of KZXY's
results of operations.
In our opinion, the accompanying Statement of Revenues and Direct Expenses
presents fairly, in all material respects, the revenues and direct expenses of
KZXY for the years ended December 31, 1997 and 1996, in conformity with
generally accepted accounting principles.
Coopers & Lybrand, L.L.P.
Cincinnati, Ohio
January 9, 1998
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79
RADIO STATION KZXY(FM)
STATEMENT OF REVENUES AND DIRECT EXPENSES
for the years ended December 31, 1997 and 1996
1997 1996
----------- -----------
Broadcast revenue $ 1,235,560 $ 1,278,968
Less agency commissions (43,974) (63,662)
----------- -----------
Net revenue 1,191,586 1,215,306
Broadcast operating expenses 500,486 475,917
Depreciation and amortization 26,467 26,467
General and administrative expenses 345,175 332,019
----------- -----------
Total direct expenses 872,128 834,403
----------- -----------
Excess of revenues over direct expenses $ 319,458 $ 380,903
=========== ===========
The accompanying notes are an integral part of this financial statement.
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80
RADIO STATION KZXY(FM)
NOTES TO STATEMENT OF REVENUES AND DIRECT EXPENSES
1. ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS:
A. BASIS OF PRESENTATION AND ORGANIZATION: KZXY(FM), a radio station
located in Apple Valley, California, is owned and operated by Ruby
Broadcasting, Inc. ("Ruby"), a Delaware corporation. The Statement
of Revenues and Direct Expenses includes certain costs shared with
other stations under common ownership. These amounts primarily
cover administrative and production support, facility costs,
repairs and supplies. These costs have generally been allocated
among the affiliated stations based on estimated time spent, space
or volume of use. Management believes that these allocation
methods are reasonable. As a result of the allocations, however,
the financial statements presented may not be indicative of the
results achieved had the Company operated as a nonaffiliated
entity.
In December 1997, Ruby entered into an agreement to sell the FCC
license and related operating assets of this station and radio
station KIXW(AM) to Regent Communications, Inc. for $6,000,000 in
cash, subject to adjustment. The closing is conditioned on, among
other things, receipt of FCC and other regulatory approvals.
Additionally, on January 1, 1998, Ruby entered into a time
brokerage agreement with Regent Communications, Inc. related to
radio stations KZXY(FM) and KIXW(AM).
A statement of net assets acquired for radio station KZXY (FM) has
not been presented because not all of the required financial
information is available. The assets to be acquired consist
primarily of prepaid expenses, radio station operating assets, and
related intangible assets.
B. BROADCAST REVENUE: Broadcast revenue for commercial broadcasting
advertisements is recognized when the commercial is broadcast.
C. BARTER TRANSACTIONS: Barter transactions (advertising provided in
exchange for goods and services) are reported at the estimated
fair value of the product or services received. Revenue from
barter transactions is recognized when advertisements are
broadcast and merchandise or services received are charged to
expense when received or used. For the years ended December 31,
1997 and 1996, barter revenue was approximately $109,000 and
$116,000, respectively, and barter expense was approximately
$115,000 and $100,000, respectively.
D. DEPRECIATION: Depreciation is provided using accelerated methods
based upon the estimated useful lives of the respective assets as
follows:
Leasehold improvements 7 to 31 years
Furniture and fixtures 5 to 7 years
Broadcast equipment 5 to 15 years
Depreciation expense for the years ended December 31, 1997 and
1996 was approximately $16,500.
E. AMORTIZATION: Intangible assets are amortized on the straight line
method over 2 to 40 years. Amortization expense for the years
ended December 31, 1997 and 1996 was approximately $10,000.
F. 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 to revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
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