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1989, WMG was contemplating a public offering to facilitate its
entry into new areas of business; i.e., it was considering
publishing and broadcasting (radio and television) activities.
WMG decided to acquire an AM radio station, KXDC-AM, in Monterey,
California, and an FM radio station, KXDC-FM, in Carmel,
California, for an aggregate cost of $2.65 million. The
acquisition of KXDC was proposed to petitioner by William
Retzlaff, who informed petitioner that WMG required a “bridge
loan” in order to purchase KXDC. Petitioner and WMG expected
that any loans made by petitioner would be repaid from the
proceeds of a public offering. Petitioner made a “very extensive
examination” of KXDC; he had a consulting engineer; and he met
with a reputable sales manager who agreed to work as general
manager of KXDC. He also met with certain media people,
advertisers, and radio station operators in the Monterey area to
confirm the value of the property and the marketplace. He
determined that the value of KXDC was $2.7 million.
To facilitate WMG’s acquisition of KXDC, petitioner entered
into a loan agreement with Natwest on April 19, 1989. The
agreement called for a loan or loans of up to $3 million due on
the earlier of April 30, 1990, or the sale of 4.5 million units
of WMG in a public offering. Petitioner entered into a
contemporaneous agreement with WMG in which he agreed to lend WMG
up to the aggregate principal sum of $3 million. This loan
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